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EX-32 - EXHIBIT 32.1 - Znomics, Inc.exh_321.htm
EX-31 - EXHIBIT 31.2 - Znomics, Inc.exh_312.htm
EX-31 - EXHIBIT 31.1 - Znomics, Inc.exh_311.htm
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
 
FORM 10-K
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934        
 
For the fiscal year ended December 31, 2010
 
Or
 
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________________ 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
(I.R.S. Employer
incorporation or organization)
Identification Number)
   
301 Carlson Parkway, Suite 103
 
Minneapolis, MN
55305
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (952) 253-6032
 
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes [   ]   No [X]
 
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
 
Yes [   ]   No [X]
 
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has 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 registrant 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements
 
 
 

 
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
 
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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   [   ]
 
Accelerated filer                    [   ]
Non-accelerated filer     [   ]
(Do not check if a smaller reporting company)
Smaller reporting company  [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [X]   No [  ]
 
The aggregate market value of the voting common stock held by non-affiliates of the Registrant (assuming officers, directors and 10% shareholders are affiliates), based on the last sale price for such stock on June 30, 2010: $164,000. The Registrant has no non-voting common stock.
 
As of February 15, 2011, there were 52,519,896 shares of the Registrant's common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
 
 

 
ZNOMICS, INC.
 
FORM 10-K
 Year Ended December 31, 2010
 
TABLE OF CONTENTS
 
   
Page
     
PART I  
     
     
PART II  
     
     
PART III  
     
 
PART IV
     
 
 
 

 
PART I
 
ITEM 1.           BUSINESS.
 
Our Company

We were originally incorporated on March 20, 2006 in Nevada, as Pacific Syndicated Resources, Inc. We were an exploration stage company that was set up to engage in the exploration of mineral properties. On November 5, 2007, we completed a reverse merger (the "Merger") with a private Delaware corporation, Znomics, Inc. ("Znomics Delaware"), originally incorporated in 2000 and operational in 2001. As a result of that transaction, we changed our name to Znomics, Inc. (“the Company”) and began to pursue drug discovery and medical research as our sole business.

During 2009, the Company determined that given the current financing environment it was unable to attract sufficient capital to continue operations.  As a result, on April 13, 2009, the Company’s board of directors determined that it was in the Company’s and its shareholders’ best interests to terminate its operations and pursue the sale of its assets and the sale of the Company’s corporate shell to an entity interested in merging with a public company.  On May 1, 2009, after obtaining shareholder approval, the Company sold substantially all of the Company’s assets and announced that it intended to pursue the sale of the Company to an entity interested in merging with a public company.

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 or $0.0031 per share, 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.

The Company continues to focus its efforts on seeking a business opportunity. The Company intends to 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 company whose securities are qualified for trading in the United States secondary market.

Description of Business

We have had no material business operations since April 13, 2009. We are currently seeking and investigating potential assets, property or businesses to acquire, and intend to commence operations in the future through the acquisition of a "going concern." These types of transactions are customarily referred to as "reverse" reorganizations or mergers in which the acquired company's shareholders become controlling shareholders in the acquiring company and the acquiring company becomes the successor to the business operations of the acquired company. We are unable to predict the time as to when and if we may actually participate in any specific business endeavor, and will be unable to do so until we determine the particular industries in which we may engage.

We are not currently engaged in any substantive business activity except the search for potential assets, property or businesses to acquire, and we have no current plans to engage in any other activity in the foreseeable future unless and until we complete any such acquisition. We do not intend to restrict our search for business opportunities to any particular business or industry, and the areas in which we will seek out business opportunities or acquisitions, reorganizations or mergers may include, but will not be limited to, the fields of high technology, adult for profit education, manufacturing, service, communications, transportation, and all medically related fields, among others. We recognize that the number of suitable potential business ventures that may be available to us may be extremely limited, and may be restricted as to acquisitions, reorganizations and mergers with businesses or entities that desire to avoid what such entities may deem to be the adverse factors related to an initial public offering ("IPO") as a method of going public. The most prevalent of these factors include substantial time requirements, legal and accounting costs, the inability to obtain necessary financing or an underwriter who is willing to publicly offer and sell shares, the lack of or the inability to obtain the required financial statements for such an undertaking, state limitations on the amount of dilution to public investors in comparison to the stockholders of any such entities, along with other conditions or requirements imposed by various federal and state securities laws, rules and regulations and federal and state agencies that implement such laws, rules and regulations.

The Securities and Exchange Commission (the "SEC") requires shell companies to file a Form 8-K upon completion of mergers or other change of control transactions, in order to disclose all information about an acquired company that would have been required to have been filed had any such company filed a Form 10 or 10-SB Registration Statement with the SEC, along with required audited, interim and proforma financial statements, within four business days of the closing of any such transaction (Items 2.01(f) and 5.01(a)(8) of Form 8-K); and amendments to Rule 144 adopted by the SEC that were effective on February 15, 2008, limit the resale of most securities of shell companies, including those that the Company would issue in any acquisition, reorganization or merger, until one year after the filing of such information.  These factors may eliminate many of the perceived advantages of these types of going
 
 
1

 
public transactions. Regulations governing shell companies also deny the use of “short form” registration statements, such as Form S-3 and Form S-8 and limit the use of these Forms to a reorganized shell company until the expiration of certain time periods after such entity is no longer considered to be a shell company. These prohibitions could further restrict opportunities for us to acquire companies that may already have registration rights agreements or stock option plans in place. If a potential target has numerous employees who would receive Company securities in a business combination, there may be no exemption from registration for the issuance of such securities, thereby necessitating the filing of a registration statement with the SEC to complete any such reorganization, and incurring the time and expense that are normally avoided by reverse reorganizations or mergers.

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.

Management intends to consider a number of factors prior to making any decision as to whether to participate in any specific business endeavor, none of which may be determinative or provide any assurance of success. These may include, but will not be limited to, as applicable: an analysis of the quality of the particular business or entity's management and personnel; the anticipated acceptability of any new products or marketing concepts that any such business or company may have; the merits of any such business' or company's technological changes; the present financial condition, projected growth potential and available technical, financial and managerial resources of any such business or company; working capital, history of operations and future prospects; the nature of present and expected competition; the quality and experience of any such business' or company's management services and the depth of management; the business' or the company's potential for further research, development or exploration; risk factors specifically related to the business' or company's operations; the potential for growth, expansion and profit of the business or company; the perceived public recognition or acceptance of the company's or the business' products, services, trademarks and name identification; and numerous other factors which are difficult, if not impossible, to properly or accurately quantify or analyze, let alone describe or identify, without referring to specific objective criteria of an identified business or company.

Regardless, the results of operations of any specific entity may not necessarily be indicative of what may occur in the future, by reason of changing market strategies, plant or product expansion, changes in product emphasis, future management personnel and changes in innumerable other factors.

Management will attempt to meet personally with management and key personnel of the entity providing any potential business opportunity afforded to us, visit and inspect material facilities, obtain independent analysis or verification of information provided and gathered, check references of management and key personnel and conduct other reasonably prudent measures calculated to ensure a reasonably thorough review of any particular business opportunity; however, due to time constraints of management, these activities may be limited.

We are unable to predict the time as to when and if we may actually participate in any specific business endeavor. We anticipate that proposed business ventures will be made available to us through personal contacts of directors, executive officers and principal stockholders, professional advisors, broker dealers in securities, venture capital personnel and others who may present unsolicited proposals. In certain cases, we may agree to pay a finder's fee or to otherwise compensate the persons who submit a potential business endeavor in which we eventually participate. Such persons may include our directors, executive officers and beneficial owners of our securities or their affiliates. In this event, such fees may become a factor in negotiations regarding any potential venture and, accordingly, may present a conflict of interest for such individuals. Management does not presently intend to acquire or merge with any business enterprise in which any current officer or director has a prior ownership interest.

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 under the February 10, 2010 Stock Purchase Agreement. Messrs. Christianson and Stofer, who are directors of the Company and serve as Chairman and Chief Executive Officer, respectively, together own 100% of the equity of Cherry Tree & Associates. David G. Latzke, who is the 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.

Management may actively negotiate or otherwise consent to the purchase of all or any portion of their shares of common stock as a condition to, or in connection with, a proposed reorganization, merger or acquisition. It is not anticipated that any such opportunity will be afforded to other stockholders or that such other stockholders will be afforded the opportunity to approve or consent to any particular stock buy-out transaction. In the event that the purchase of common stock held by management is a factor in negotiations regarding any potential acquisition or merger by us, it may also present a conflict of interest for such individuals. We have no present arrangements or understandings respecting any of these types of opportunities.
 
 
2

 
Status of Products and Services
 
None; not applicable. 

Competitive Business Conditions and Smaller Reporting Company's Competitive Position in the Industry and Methods of Competition
 
Management believes that there are numerous shell companies engaged in endeavors similar to those engaged in by us; many of these companies have substantial current assets and cash reserves. Competitors also include thousands of other publicly-held companies whose business operations have proven unsuccessful, and whose only viable business opportunity is that of providing a publicly-held vehicle through which a private entity may have access to the public capital markets via a reverse reorganization or merger. There is no reasonable way to predict our competitive position or that of any other entity in these endeavors; however, we, having limited assets and no cash reserves, will no doubt be at a competitive disadvantage in competing with entities that have significant cash resources.

Sources and Availability of Raw Materials and Names of Principal Suppliers
 
None; not applicable.

Dependence on One or a Few Major Customers
 
None; not applicable.

Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, including Duration
 
None; not applicable.

Governmental Regulations and Approvals
 
We currently have no business operations and produce no products nor provide any services and therefore, we are not presently subject to any governmental regulation or approval requirements. However, in the event that we complete a reorganization, merger or acquisition transaction with an entity that is engaged in business operations or provides products or services, we will become subject to all governmental regulations and approval requirements to which the reorganized, merged or acquired entity is subject or may become subject.

Research and Development
 
None; not applicable.

Smaller Reporting Company
 
We are subject to the reporting requirements of Section 13 of the Exchange Act, and we are subject to the disclosure requirements of Regulation S-K of the SEC, as a "smaller reporting company." That designation will relieve us of some of the informational requirements of Regulation S-K.

Sarbanes/Oxley Act
 
We are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members' appointment, compensation and oversight of the work of public companies' auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act requires significant legal and accounting expenditures.  Our current market capitalization is less than $75 million; therefore we are not subject to having our independent accountants audit our conclusions about internal controls.

Exchange Act Reporting Requirements
 
We are required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Securities Exchange Commission on a regular basis, and are required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
 
 
3

 
Cost and Effects of Compliance with Environmental Laws
 
Our current business operations are not subject to any material environmental laws, rules or regulations that would have an adverse material effect on our business operations or financial condition or result in a material compliance cost; however, we will become subject to all such governmental requirements to which the reorganized, merged or acquired entity is subject or may become subject.

 Employees
 
As of December 31, 2010, we have no paid employees.
 
ITEM 1A.       RISK FACTORS.
 
As a smaller reporting company, we are not required to provide the information required by this item.
 
ITEM 1B.       UNRESOLVED STAFF COMMENTS.
 
As a smaller reporting company, we are not required to provide the information required by this item.
 
ITEM 2.          PROPERTIES.
 
On February 12, 2010, we terminated our office lease agreement in Portland, OR and presently have no assets or property.  Our principal executive office address and telephone number are the business office address and telephone number of our Chairman and Chief Executive Officer, and are currently provided at no cost.
 
ITEM 3.          LEGAL PROCEEDINGS.
 
We are not party to any outstanding or pending legal proceedings and are not aware of any threatened material litigation involving us.
 
ITEM 4.          (REMOVED AND RESERVED).
 
For information about our directors and executive officers please see Item 10, “Directors, Executive Officers and Corporate Governance.”
 
 
PART II
 
ITEM 5.           MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
As of December 31, 2010, our authorized capital stock consisted of 90,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares, $0.001 par value per share preferred stock. There was no preferred stock outstanding as of December 31, 2010.
 
There is currently no established public trading market for our stock.  Our common stock has traded on the OTC Bulletin Board under the symbol of "ZNOM.OB." The following are the range of high and low sales price information for the common stock by quarter as reported by the OTC Bulletin Board since January 1, 2009. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.  In addition, the quotations are not reflective of regular trading on an established public trading market.
 
 
4

 
Year Ended December 31, 2009
 
   
High
   
Low
 
Quarter ended March 31
 
$
.24
   
$
.03
 
Quarter ended June 30
 
$
.09
   
$
.03
 
Quarter ended September 30
 
$
.05
   
$
.02
 
Quarter ended December 31
 
$
.05
   
$
.03
 
 
Year Ended December 31, 2010
 
               
Quarter ended March 31
 
$
.04
   
$
.01
 
Quarter ended June 30
 
$
.02
   
$
.01
 
Quarter ended September 30
 
$
.22
   
$
.01
 
Quarter ended December 31
 
$
.24
   
$
.01
 

Holders of Our Common Stock
 
As of December 31, 2010, 52,519,896 shares of our common stock were issued and outstanding, and were held by 91 shareholders of record.
 
Dividends
 
We have not declared, or paid, any cash dividends since inception and do not anticipate declaring or paying a cash dividend for the foreseeable future.
 
Nevada law prohibits our board from declaring or paying a dividend where, after giving effect to such a dividend, (i) we would not be able to pay our debts as they came due in the ordinary course of our business, or (ii) our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of distribution, to satisfy the rights of any creditors or preferred stockholders.
 
Securities Authorized for Issuance Under Equity Compensation Plans

For information about securities authorized for issuance under our equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
Transactions Involving the Unregistered Issuance of our Equity Securities
 
No sales of unregistered securities have occurred during the fourth quarter of 2010, the period covered by this report.

Rule 144

The following is a summary of the current requirements of Rule 144:

         
   
Affiliate or Person Selling on Behalf of an Affiliate
 
Non-Affiliate (and has not been an Affiliate During the Prior Three Months)
         
Restricted Securities of Reporting Issuers
 
During six-month holding period - no resales under Rule 144 Permitted.
 
After six-month holding period - may resell in accordance with all Rule 144 requirements including:
 
- Current public information,
- Volume limitations,
- Manner of sale requirements for equity securities, and
- Filing of Form 144.
 
During six- month holding period - no resales under Rule 144 permitted.
 
After six-month holding period but before one year - unlimited public resales under Rule 144 except that the current public information requirement still applies.
 
After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.
         
Restricted Securities of Non-Reporting Issuers
 
During one-year holding period - no resales under Rule 144 permitted.
 
After one-year holding period - may resell in accordance with all Rule 144 requirements including:
 
- Current public information,
- Volume limitations,
- Manner of sale requirements for equity securities, and
- Filing of Form 144.
 
During one-year holding period - no resales under Rule 144 permitted.
 
After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.  
 
 
5

 
Shell Companies

The following is an excerpt from Rule 144(i) regarding resales of securities of shell companies:

(i) Unavailability to securities of issuers with no or nominal operations and no or nominal non-cash assets.

(1) This section is not available for the resale of securities initially issued by an issuer defined below:

(i) An issuer, other than a business combination related shell company, as defined in ss. 230.405, or an asset-backed issuer, as defined in Item 1101(b) of Regulation AB (ss. 229.1101(b) of this chapter), that has:

(A) No or nominal operations; and

(B) Either :

(1) No or nominal assets;

(2) Assets consisting solely of cash and cash equivalents; or

(3) Assets consisting of any amount of cash and cash equivalents and nominal other assets; or

(ii) An issuer that has been at any time previously an issuer described in paragraph (i)(1)(i).

(2) Notwithstanding paragraph (i)(1), if the issuer of the securities previously had been an issuer described in paragraph (i)(1)(i) but has ceased to be an issuer described in paragraph (i)(1)(i); is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act; has filed all reports and other materials required to be filed by section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months (or for such shorter period that the issue was required to file such reports and materials), other than Form 8-K reports (ss.249.308 of this chapter); and has filed current "Form 10 information" with the Commission reflecting its status as an entity that is no longer an issuer described in paragraph (i)(1)(i), then those securities may be sold subject to the requirements of this section after one year has elapsed from the date that the issuer filed "Form 10 information" with the Commission.

(3) The term "Form 10 information" means the information that is required by Form 10 or Form 20-F (ss.249.220f of this chapter), as applicable to the issuer of the securities, to register under the Exchange Act each class of securities being sold under this rule. The issuer may provide the Form 10 information in any filing of the issuer with the Commission. The Form 10 information is deemed filed when the initial filing is made with the Commission."

Securities of a shell company cannot be publicly sold under Rule 144 in the absence of compliance with this subparagraph, though the SEC has implied that these restrictions would not be enforced respecting securities issued by a shell company while it was not determined to be a shell company.

Section 4(1) of the Securities Act

Since we are a shell company as defined in subparagraph (i) of Rule 144, our shares of common stock cannot be publicly resold under Rule 144 until we comply with the requirements outlined above under the heading "Shell Companies." Until those requirements have been satisfied, any resales of our shares of common stock must be made in compliance with the provisions of the exemption from registration under the Securities Act provided in Section 4(1) thereof, applicable to persons other than "an issuer, underwriter or a dealer." That will require that such shares of common stock be sold in "routine trading transactions," which would include compliance with substantially all of the requirements of Rule 144, regardless of its availability; and such resales may be limited to our non-affiliates. It is the position of the SEC that the Section 4(1) exemption is not available for the resale of any securities of an issuer that is or was a shell company, by directors, executive officers, promoters or founders or their transferees. See NASD Regulation, Inc., CCH Federal Securities Law Reporter, 1990-2000 Decisions, Paragraph No. 77,681, the so-called "Worm-Wulff Letter."


ITEM 6.           SELECTED FINANCIAL DATA.
 
As a smaller reporting company, we are not required to provide the information required by this item
 
ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                         RESULTS OF OPERATIONS.
 
 
6

 
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 broad array of industries in which we may seek a merger candidate; (iii) the factors management may consider in deciding whether to participate in any business endeavor; (iv) management’s intent to meet personally with management and key personnel of potential merger candidates, and to visit facilities, obtain analysis of the information gathered, and other methods that management may use to review potential merger candidates; (v) the anticipated means by which we may identify potential merger candidates and the expected costs associated therewith; (vi) our current intent not to compensate management; (vii) our intent not to declare dividends; (viii) our expectations with respect to results of operations in the 2011 fiscal year; and (ix) our beliefs with respect to cash requirements and the adequacy of cash. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. 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. 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 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 have not determined any business or industry in which our operations will be commenced, and we have not identified any prospective venture as of the date of this Annual Report, it is impossible to predict the amount of any such loan.
 
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.

Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.  We believe the following are our primary critical accounting policies and estimates.
 
     Fair Value of Financial Instruments
          
The Company's financial instruments consist of cash and cash equivalents, money market funds, trade receivables, 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.
 
 
7

 
       Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments purchased with an original maturity of three months of less to be cash equivalents.  These investments include money market funds.  At December 31, 2009, the Company’s cash equivalents held in a money market fund at US Bank were $1,000.
 
     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 December 31, 2010 and 2009.  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
 
The Company recognizes the cost of stock-based compensation plans and awards in operations on a straight-line basis over the 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. This option pricing model involves 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.
 
 Results of Operations

     Operating Expenses
 
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.
 
Research and Development Expenses. Research and development expense historically consisted of costs associated with research activities as well as costs associated with our product development efforts. These expenses included external research and development expenses incurred pursuant to agreements with third party service organizations, technology access and licensing fees related to the use of proprietary third party technologies, employee expenses, including salaries, stock-based compensation expense, third party supplier expenses and facility costs. Our research and development expenses decreased to $0 in the 2010 fiscal year due to the discontinuance of all scientific and drug discovery activities in the Spring of 2009.
 
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.
 
Financing Activities
 
We have incurred substantial losses since our inception. As of December 31, 2010, our accumulated deficit was approximately $6.6 million. Financial results for 2010 reflect a consolidated net loss from operations of $155,000. 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 on February 10, 2010, as well as potential future advances from the Purchasers under the Discretionary Notes 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 December 31, 2010 and advances expected from the Purchasers under the Discretionary Notes, will allow us to fund operations for at least the next 12 months, and through the date a target company merges into the Company.
 
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
 
 
8

 
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.

Fiscal Years Ended December 31, 2010 and 2009
 
     Revenue
 
Sales and revenue decreased from $40,000 to $0, from 2009 to 2010.  The decrease was the result of the Company’s decision to terminate its operations in April 2009.
 
     Operating Expenses
 
Operating expenses decreased from $1.1 million to $155,000 from 2009 to 2010.  This decrease was the result of the Company’s decision to terminate its operations in April 2009.
 
Selling, general and administrative expense decreased from $836,000 in 2009 to $155,000 in 2010, due to the Company’s decision to terminate its operations in April 2009.
 
Research and development expense decreased from $176,000 in 2009 to $0 in 2010, also related to the decision to terminate operations.
 
     Income Taxes
 
No income tax provision is recorded for 2010 or 2009, due to net operating losses and a full valuation allowance preventing the recognition of deferred tax benefits.
          
Liquidity and Capital Resources

     Cash Flows from Operating Activities
 
The $142,000 of cash used by operations in 2010 represented a $736,000 decrease in cash used from the $878,000 of cash used in operations in 2009. In 2010, we recorded a net cash outflow of $155,000 from our loss from operations, net of a non-cash adjustment of $3,000 from stock based compensation. This adjustment was further offset by a decrease in operating assets and liabilities of $10,000. The $878,000 of cash used by operations in 2009 was determined as follows: a net cash outflow of $679,000 from our loss from operations, net of non-cash adjustments as follows: (1) ($369,000) from a gain on sale of property and equipment; (2) $49,000 from asset impairment; (3) $55,000 from depreciation; (4) $11,000 from stock based compensation; (5) $101,000 from stock warrant expense; (6) $29,000 from issuance of stock for licensing and services and (7) $37,000 from certain shareholders to settle specific expenses.  These adjustments were further offset by the change in operating assets and liabilities of ($112,000).
 
     Cash Flows from Investing Activities
 
We received $4,000 of cash from selling our remaining assets during the first quarter of 2010.  We sold substantially all of our assets in the second quarter of 2009, after the decision was made to cease operations, generating proceeds of approximately $460,000.
 
We do not anticipate any significant capital expenditures in 2011.
 
     Cash Flows from Financing Activities
 
We received $125,000 of cash from the sale of common stock during 2010.  We had no net cash used in or provided by financing activities during the year ended December 31, 2009.
 
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.  Any cash needs 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.
 
Off Balance Sheet Arrangements
 
As of December 31, 2010, we did not have any off balance sheet arrangements.
 
ITEM 7A.       QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
As a smaller reporting company, we are not required to provide the information required by this item.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Index to Financial Statements:
 
 
 
9

 
REPORT OF INDEPENDENT REGISTERED
 PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Znomics, Inc.
Minneapolis, Minnesota

We have audited the accompanying balance sheets of Znomics, Inc. (a development stage enterprise) as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2010 and 2009, and for the period from September 13, 2001 (inception) through December 31, 2010.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Znomics, Inc. (a development stage enterprise) as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, and for the period from September 13, 2001 (inception) through December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company had net losses for the years ended December 31, 2010 and 2009 and had an accumulated deficit at December 31, 2010.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Moquist Thorvilson Kaufmann Kennedy & Pieper LLC
Edina, Minnesota
March 4, 2011
 
 
10

 
ZNOMICS, INC.
 (A Development Stage Enterprise)
 
Balance Sheets (in thousands except per share data)
 December 31
 
   
2010
   
2009
 
Assets
           
Current assets:
           
Cash
 
$
38
   
$
51
 
Prepaid expenses
   
4
     
58
 
                 
Total current assets
   
42
     
109
 
                 
Property and equipment, net of accumulated depreciation
   
--
     
4
 
Total assets
 
$
42
   
$
113
 
                 
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable
 
$
2
   
$
16
 
Accrued liabilities
   
         38
     
68
 
                 
Total current liabilities
   
40
     
84
 
Total liabilities
   
40
     
84
 
                 
Stockholders' equity:
               
Common stock, $0.001 par value, 90,000,000 shares authorized 52,519,896 and
               
     11,695,060 shares issued and outstanding at December 31, 2010 and 2009, respectively
   
53
     
12
 
  
               
Additional paid-in capital
   
6,499
     
6,412
 
Deficit accumulated during the development stage
   
(6,550
)
   
(6,395
)
                 
Total stockholders' equity
   
2
     
29
 
Total liabilities and stockholders' equity
 
$
42
   
$
113
 
 
The accompanying notes are an integral part of these financial statements.
 
 
11

 
ZNOMICS, INC.
 (A Development Stage Enterprise)
 
Statements of Operations (in thousands except per share data)
 For the Years Ended December 31, 2010 and 2009
 and the Period from September 13, 2001 (Date of Inception) to December 31, 2010
 
               
September 13,
 
   
Year Ended
   
Year Ended
   
2001(Inception)
 
   
December 31,
   
December 31,
   
to December 31,
 
   
2010
   
2009
   
2010
 
Sales related to products and services
 
$
--
   
$
40
   
$
1,015
 
Grant revenue
   
     
     
2,006
 
Total sales and revenue
   
--
     
40
     
3,021
 
                         
Operating expenses:
                       
Cost of products and services
   
     
--
     
2,434
 
Grant expense
   
     
     
2,006
 
Selling, general and administrative
   
155
     
836
     
3,743
 
Asset impairment
   
--
     
            49
     
49
 
Research and development
   
--
     
176
     
1,702
 
Total operating expenses
   
155
     
           1,061
     
9,934
 
Loss from operations
   
(155
)
   
(1,021
)
   
(6,913
)
                         
Other income (expense):
                       
     Gain from sale of assets related to discontinued operations
   
--
     
369
     
369
 
     Investment income
   
--
     
1
     
112
 
     Interest expense
   
--
     
             (28
)    
(81
)
     Other expense, net
   
     
--
     
(37
)
Total other income
   
--
     
342
     
363
 
Loss before income taxes
   
(155
)
   
(679
)
   
(6,550
)
Income tax expense
   
     
     
 
Net loss
 
$
(155
)
 
$
(679
)
 
$
(6,550
)
                         
Net Loss per share - Basic and diluted
 
$
(0.00
)
 
$
(0.06
)
       
Weighted average common shares outstanding:
                       
     Basic and diluted
   
47,710,395
     
11,559,717
         
 
The accompanying notes are an integral part of these financial statements.
 
 
12

 
ZNOMICS, INC.
 (A Development Stage Enterprise)
 
Statement of Stockholders' Equity (in thousands)
 For the Period from September 13, 2001 (Date of Inception) to December 31, 2010
 
                                             
Deficit
       
                                             
Accumulated
       
   
Series A convertible
   
Series B convertible
               
Additional
   
during
       
   
preferred stock
   
preferred stock
   
Common stock
   
paid-in
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
stage
   
Total
 
                                                       
Balance at September 13, 2001
       
$
         
$
         
$
   
$
   
$
   
$
 
Issuance of common stock to
founders  - September 13,  2001
                               
1,500
     
15
                     
15
 
Issuance of Series A convertible preferred stock  - January 30, 2002
   
657
     
7
                                   
650
             
657
 
Issuance of Series B convertible preferred stock  - April 13, 2005
                   
127
     
1
                     
253
             
254
 
Contribution of laboratory equipment
                                                   
23
             
23
 
Net loss from September 13, 2001 to December 31, 2005
                                                           
(863
)
   
(863
)
Balance at December 31, 2005
   
657
     
7
     
127
     
1
     
1,500
     
15
     
926
     
(863
)
   
86
 
Net loss
                                                           
(129
)
   
(129
)
Balance at December 31, 2006
   
657
     
7
     
127
     
1
     
1,500
     
15
     
926
     
(992
)
   
(43
)
Cancellation of preferred and common stock on merger
   
(657
)
   
(7
)
   
(127
)
   
(1
)
   
(1,500
)
   
(15
)
                   
(23
)
Issuance of common stock on merger
                                   
11,073
     
11
     
4,198
             
4,209
 
Issuance of stock warrants
                                                   
207
             
207
 
Stock option compensation
                                                   
294
             
294
 
Net loss
                                                           
(1,192
)
   
(1,192
)
Balance at December 31, 2007
   
     
     
     
     
11,073
     
11
     
5,625
     
(2,184
)
   
3,452
 
Issuance of common stock
                                   
297
     
     
439
             
439
 
Stock option compensation
                                                   
171
             
171
 
Net loss
                                                           
(3,532
)
   
(3,532
)
Balance at December 31, 2008
   
     
     
     
     
11,370
     
11
     
6,235
     
(5,716
)
   
530
 
Issuance of common stock
                                   
325
     
1
     
28
             
29
 
Stock option and warrant compensation
                                                   
112
             
112
 
Contribution by certain shareholders to settle specific expenses
                                                   
37
             
37
 
Net loss
                                                           
(679
)
   
(679
)
Balance at December 31, 2009
   
   
$
     
   
$
     
11,695
   
$
12
   
$
6,412
   
$
(6,395
)
 
$
29
 
Issuance of common stock
                                   
40,812
     
41
     
84
             
125
 
Issuance of common stock for services
                                   
8
                                 
Issuance of common stock to cancel warrants
                                   
5
                                 
Stock option compensation
                                                   
3
             
3
 
Net loss
                                                           
(155
   
(155
)
Balance at December 31, 2010
     
-
 
$
 
-
     
-
$
   
-
   
52,520
     
53
     
6,499
     
(6,550
)    
2
 
 
The accompanying notes are an integral part of these financial statements.
 
 
13

 
ZNOMICS, INC .
 (A Development Stage Enterprise)
 
Statements of Cash Flows (in thousands)
 For the Years Ended December 31, 2010 and 2009
 and the Period from September 13, 2001 (Date of Inception) to December 31, 2010
 
               
September 13,
2001
 
   
Year Ended
   
Year Ended
   
(Inception) to
 
   
December 31,
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
 
Cash flows from operating activities:
                 
Net loss
 
$
(155
)
 
$
(679
)
 
$
(6,550
)
Adjustments to reconcile net loss to net cash from operations:
                       
(Gain) loss on sale of property and equipment
           
(369
   
(366
)
Asset impairment
           
49
     
49
 
Depreciation and amortization
           
55
     
465
 
Stock-based compensation charges
   
3
     
11
     
479
 
Stock warrant expense
           
           101
     
138
 
Issuance of stock for licensing and services
           
29
     
414
 
Non-cash contribution by certain shareholders to settle specific expenses
           
37
     
37
 
Changes in operating assets and liabilities:
                       
Accounts receivable
           
43
     
 
Prepaid and other expenses
   
54
     
102
     
67
 
Accounts payable
   
(14
)    
(221
)    
2
 
Accrued liabilities
   
(30
)    
4
     
38
 
Deferred revenue
           
(40
)    
212
 
Net cash used by operating activities
   
(142
   
(878
)
   
(5,015
)
                         
Cash flows from investing activities:
                       
Capital expenditures
   
     
--
     
(884
)
Proceeds from sale of equipment and other assets
   
4
     
           460
     
546
 
Net cash (used) provided by investing activities
   
4
     
460
     
(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
           
              225
     
865
 
Principal payments, capital leases and notes payable
           
(225
)
   
(865
)
Net cash provided by financing activities
   
              125
     
--
     
5,391
 
Net (decrease) increase in cash and cash equivalents
   
(13
)
   
(418
)
   
38
 
Cash at beginning of period
   
51
     
469
     
 
Cash at end of period
 
$
38
   
$
51
   
$
38
 
                         
Supplemental disclosures:
                       
Cash paid for interest
 
$
--
   
$
28
   
$
58
 
Issuance of common stock for prepaid consulting fees
 
$
   
$
--
   
$
70
 
Sale of ZeneMark library copy as offset to deferred revenue
 
$
--
     
                 212
   
$
212
 
 
The accompanying notes are an integral part of these financial statements.
 
 
14

 
ZNOMICS, INC.
 (A Development Stage Company)
 
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. 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 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 December 31, 2010.
 
As required for development stage companies, cumulative statements of operations and cash flows from September 13, 2001 (date of inception) through December 31, 2010 have been presented along with the statements of operations and cash flows for the years ended December 31, 2010 and 2009.
 
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, trade receivables, 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.

Cash and Cash Equivalents
 
The Company considers all highly liquid debt instruments purchased with an original maturity of three months of less to be cash equivalents.  These investments include money market funds. 


Revenue Recognition
 
The Company had derived revenues from the sales of reagent mutant fish, collaborations with pharmaceutical companies and research grants. We discontinued sales of reagent mutant fish lines to researchers in December 2008.
 
Revenues were realized and earned from collaborations when all of the following criteria were met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the Company's price to the buyer is fixed; and (iv) collectability is reasonably assured.
 
Revenues from the sale of reagent mutant fish were recognized when title passed to the customer or significant attempts had been made to obtain a reagent mutant fish line. Customers initially paid for one-half the order up-front. Deferred revenue was recorded
 
 
15

 
upon receipt of the cash until the title passed to the customer or significant attempts had been made to obtain a reagent mutant fish line.
 
Customers were allowed to return reagent mutant fish only for warranty reasons within seven days of shipment. If we were unable to replace a reagent mutant fish line returned under warranty, a credit for a warranty return was issued.
 
Revenues from grant sponsors were recognized when earned according to the contract. Grant expenses were identified and classified to each specific grant and recorded when incurred.


Property and Equipment

Property and equipment is recorded at cost. Donated equipment, for which a fair value is readily determinable, is recorded at its fair value. Depreciation is computed using the straight-line method over the estimated useful life from two to ten years. Repairs and maintenance costs are expensed as incurred. At the time of retirement or other disposal of equipment, the cost and related accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in operations.

Impairment of Long-Lived Assets
 
Long-lived assets, such as property, plant, equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined by reference to market prices or through discounted cash flow analysis, depending on the asset.  After selling substantially all of the Company’s fixed assets, an impairment loss against the remaining assets was recorded totaling $49,000 for the year ended December 31, 2009.
 
       Research and Development
 
Research and development costs were charged to expense as incurred.
 
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 December 31, 2010 and 2009.  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 of 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. This option pricing model involves 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
 
 
16

 
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 years ended December 31, 2010 and 2009, options, share based payments and warrants exercisable representing convertible securities were excluded from the calculation of the diluted net loss per share as their effect would have been anti-dilutive.
 
Recent Accounting Pronouncements

In January 2010, the FASB issued Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. This guidance is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The adoption of this guidance did not have a material impact on our financial statements.

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.
 
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 which had a fair value of $15.

Also February 10, 2010, four of the Company’s current and 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) agreed to transfer an aggregate of 300,000 shares of Company common stock to Cascade, 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 Company had recorded its $25,000 obligation as a liability at December 31, 2009 and the stockholders obligation totaling $37,000 (future cash payments of $25,000 and the stock valued at $12,000) as a contribution to capital.  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, which had a total fair value of $24.

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 December 31, 2010.

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 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.

 
 
17

 
NOTE 4. SALE OF ASSETS

On January 5, 2009, the Company and the President and Fellows of Harvard College (“Harvard”) entered into a Biological Material Agreement pursuant to which frozen zebrafish sperm samples and copies of the Company’s ZeneMark library and genetic databases (together, the “Materials”), were transferred to Harvard. Dr. Alex Schier, who is the principal investigator at Harvard for the project related to the Materials (the “Recipient Scientist”). The agreement grants Harvard a non-exclusive right, title and interest in the Materials for the limited purpose of its, or the Recipient Scientist’s, research programs and precludes Harvard and the Recipient Scientist from providing the Materials to a for-profit entity for commercial use. The agreement provided for total consideration of $242,000 comprised of, among other things, (i) an aggregate of $30,000 in cash, payable by the Recipient Scientist to the Company, and (ii) Harvard’s forfeiture of any rights, refunds and/or credits owed to it by the Company under the terms of 2006 biological material transfer and collaborative research agreement, which was terminated effective January 5, 2009. The 2006 biological material transfer agreement had remaining deferred revenue totaling $212,000 on the termination date. As a result of such agreement, the Company recognized $212,000 in deferred revenue and received $30,000 in cash. In addition, Harvard granted the Company, until December 15, 2011 (i) a paid-up, royalty free, worldwide, non-exclusive license to use any invention by the Recipient Scientist using the Materials for internal research purposes and (ii) an exclusive option to negotiate, subject to certain limitations and restrictions set forth in the Agreement, a royalty-bearing, exclusive, worldwide license under Harvard’s rights and interests in any invention derived from the Materials.
 
On May 1, 2009, after obtaining shareholder approval, the Company sold its remaining copy of its ZeneMark® library of mutant fish reagents and all related support equipment, materials, customer lists, and commercial rights to Vanderbilt University Medical Center, which represents substantially all of the Company’s assets, for $300,000. As a result of the sale of the ZeneMark® library, the Company ceased to have an operating business. Payment from Vanderbilt was received on May 12, 2009.
 
In addition, the Company sold microscopes, balances, spectrophotometers and other lab and computer equipment to various purchasers for $130,000 during the nine months ended September 30, 2009.

NOTE 5. PREPAIDS AND OTHER EXPENSES
 
Prepaid expenses consist of the following, in thousands:
 
   
December 31
 
   
2010
   
2009
 
Various insurance policies
 
$
4
   
$
58
 
 
NOTE 6. PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following, in thousands:
 
 
December 31,
 
 
Useful Lives
 
2010
   
2009
 
                   
Office equipment
2-3 years
  $
--
    $
8
 
Less accumulated depreciation
     
--
     
(4
)
Property and equipment, net
   
$
--
   
$
4
 
 
Depreciation expense was $0 and $55,000 for the years ended December 31, 2010 and 2009, respectively.  For 2009, the $55,000 of depreciation expense was recorded in the statement of operations as selling, general and administration expense.
 
 
18

 
NOTE 7. ACCRUED LIABILITIES
 
Accrued liabilities consist of the following, in thousands:
 
   
December 31
 
   
2010
   
2009
 
Payroll liabilities
 
$
--
   
$
11
 
Rent – disputed
   
27
     
27
 
Cascade Settlement
   
--
     
25
 
Legal and Accounting
    11      
4
 
Other
   
--
     
1
 
   
$
38
   
$
68
 
 
NOTE 8. LONG TERM DEBT
 
As of December 31, 2010, the Company had no outstanding long term debt.
 
In connection with the Company’s decision to cease operations, on April 7, 2009, the Company repaid an aggregate of $234,000 in principal and interest to the holders of its senior secured promissory notes issued in March 2009, the issuance of which were intended to serve as bridge financing until the consummation of a more permanent financing, which never materialized.
 
On May 12, 2009, the Company repaid $76,000 in principal and interest to the holder of a subordinated secured promissory note issued in March 2009. This note was issued in satisfaction of an outstanding vendor accounts payable in connection with legal services.
 
NOTE 9. OPERATING LEASE
 
The Company leased office and laboratory facilities under an operating lease. Rent expense for the years ended December 31, 2010 and 2009 was $0 and $29,000, respectively.  The lease was terminated in February 2010.
 
NOTE 10. STOCKHOLDERS' EQUITY
 
     Authorized Shares
 
Preferred stock, $0.001 par value; 10,000,000 shares authorized. Shares of Company preferred stock may be issued in one or more series from time to time by the Board of Directors of the Company. The Board of Directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of preferred stock. Subject to the determination of the Board of Directors, preferred stock would generally have preferences over common stock with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding up of the Company.
 
Common stock, $0.001 par value; 90,000,000 shares authorized. The holders of Company common stock are entitled to receive such dividends or distributions as are lawfully declared on the common stock, to have notice of any authorized meeting of stockholders, and to exercise one vote for each share of common stock on all matters which are properly submitted to a vote of the
 
 
19

 
Company's stockholders. As a Nevada corporation, the Company is subject to statutory limitations on the declaration and payment of dividends. In the event of a liquidation, dissolution or winding up of the Company, holders of common stock have the right to a ratable portion of assets remaining after satisfaction in full of the prior rights of creditors, including holders of the Company's indebtedness, all liabilities and the aggregate liquidation preferences of any outstanding shares of preferred stock. The holders of common stock have no conversion, redemption, preemptive or cumulative voting rights.
  
Issuances During 2010

As discussed in Note 3, pursuant to the Stock Purchase Agreement, on February 10, 2010, the Company issued 40,811,886 shares of common stock for total consideration of $125,000, paid in cash upon issuance of the Shares.

As consideration for services rendered, the Company issued 8,000 shares of its common stock to two former consultants.  In addition, in exchange for cancelling certain warrants (see Note 11), the Company issued an aggregate of 4,950 shares of common stock to the two warrant holders.  The total fair value of these issuances was $37.
 
 
Issuances During 2009
 
In connection with a debt financing in March 2009, on April 9, 2009, the Company issued 300,000 shares of its common stock to the senior secured lenders.  The stock had a value of $18,000 on the date of issue.  The Company repaid the debt in April 2009.
 
As consideration for services rendered, the Company issued 25,000 shares of its common stock to an investor relations firm.  The stock had a value of $11,000 on the date of the agreement, November 5, 2008.  The shares were issued on July 23, 2009.

NOTE 11. STOCK OPTIONS AND WARRANTS
 
          Stock Options
 
The Company has a Stock Incentive Plan to promote the Company's long-term growth and profitability by awarding incentives to employees, officers, directors and consultants. The plan permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards or other stock-based awards. The Board of Directors has authorized up to 2,193,258 shares to be issued under the stock option plan. To date, grants have consisted primarily of incentive stock options (ISOs) and non-employees have received non-qualified options.
 
The options expire on the last business day prior to the tenth anniversary of the grant award date, currently 2015 to 2018, unless fully exercised or terminated earlier. The options primarily vest and become exercisable either; 25% on the award date and 25% ratably thereafter, or, vest ratably commencing one year from the award date. The options vest over periods ranging from immediately to five years.
 
          Stock Warrants
 
The Company has warrants outstanding which are exercisable into common stock.
 
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 canceling 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 current and former officers agreed to amend their 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.
 
Stock warrant expense was $0 in 2010 and $101,000 in 2009.
 
The following schedules present stock options and warrants awarded and unexercised for the years ended December 31, 2010 and 2009:
 
 
20

 
                       
Aggregate
   
Number of
   
Exercise Price
     
Intrinsic
   
Options
   
Warrants
   
per Share
     
Value
                               
Outstanding at December 31, 2008
   
1,795,621
     
237,495
    $
0.92 – 2.80
       
Granted
   
     
1,686,510
     
.03
       
                               
Forfeited
   
(1,685,121
)
   
     
0.92 – 2.75
       
                               
Outstanding at December 31, 2009
   
110,500
     
1,924,005
   
$
.03 – 2.80
       
Forfeited
   
(8,000
   
(237,495
)    
1.50 – 2.55
       
Outstanding at December 31, 2010
 
 
102,500
     
1,686,510
    $
0.03 – 2.80
    $
      0.00
Exercisable at end of year
   
96,117
     
1,686,510
   
$
0.03 – 2.80
       
           
The following table summarizes information about stock options outstanding as of December 31, 2010:
 
   
Options Outstanding
 
Options Exercisable
         
Weighted
         
Weighted
       
         
Average
 Weighted
       
Average
   
Weighted
 
Range of
       
Remaining
 Average
       
Remaining
   
Average
 
Exercise
Prices
 
Number
   
Contractual Life
(Years)
 Exercise
Price
 
Number
   
Contractual Life
(Years)
   
Exercisable
Price
 
$1.00 - $2.80
 
102,500
   
5.6
 $2.25
 
96,117
   
5.6
   
$2.24
 
 
The table below summarizes the stock-based compensation expense, in thousands:
 
   
Year Ended
   
Year Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
 
General and administrative
  $
3
    $
11
 
Total stock-based compensation expense included in loss from operations
 
$
3
   
$
11
 
 
No stock options or warrants have been exercised to date.
 
 
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There remains approximately $6,000 of total unrecognized stock option compensation expense, which is expected to be recognized over future periods, approximately 2 years.
 
NOTE 12. INCOME TAXES
 
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to pretax income as a result of the following differences, in thousands:
 
   
December 31
 
   
2010
   
2009
 
Tax benefit computed at the federal statutory rate of 34%
 
$
(53
)
 
$
(231
)
State income tax benefit, net of federal benefit
   
(11
)
   
(39
)
Stock-based compensation
   
     
37
 
Permanent differences and other
   
(47
   
52
 
Change in valuation allowance
   
111
     
181
 
Income tax provision
 
$
   
$
 
 
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Significant components of the deferred tax assets are as follows, in thousands:
 
   
December 31
 
   
2010
   
2009
 
Deferred tax assets:
           
Accrued expenses and other
 
$
36    
$
36
 
Fixed assets
   
     
     26
 
Net operating loss carryforwards
    2,323      
2,186
 
Valuation allowance
   
(2,359
)
   
(2,248
)
Net deferred tax assets, net of valuation allowance
   
     
--
 
 
A valuation allowance of $2,359,000 and $2,248,000 at December 31, 2010 and 2009, respectively, has been recorded to offset net deferred tax assets as the Company is unable to conclude that it is more likely than not that such deferred tax assets will be realized.
 
At December 31, 2010, the Company has federal, state, and local net operating loss carryforwards of approximately $5.7 million, $5.7 million and $5.0 million, respectively, which begin to expire in 2021, 2016, and 2012, respectively.
 
Utilization of net operating losses, credit carryforwards, and certain deductions may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The tax benefits related to future utilization of federal and state net operating losses, tax credit carryforwards, and other deferred tax assets may be limited or lost entirely if cumulative changes in ownership exceeds 50% within any three-year period which most likely occurred with the Company’s stock issuance on February 10, 2010. Additional limitations on the use of these tax attributes could occur in the event of possible disputes arising in examinations from various taxing authorities.

At December 31, 2010, the Company has no unrecognized tax benefits or associated interest and penalties.  The Company does not expect any significant increases or decreases in its unrecognized tax benefits within the next twelve months of this reporting date.

The Company is subject to U.S. Federal and Oregon state income taxes.  The Company is no longer subject to U.S. Federal or Oregon income tax examinations for years before 2007.  However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating loss or credit carryforward amount.

The Company is not currently under Internal Revenue Service ("IRS") or Oregon tax examinations.
 
NOTE 13. EARNINGS (LOSS) PER SHARE
  
The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings
 
 
22

 
per share for the years ended December 31, 2010 and 2009:
 
   
2010
   
2009
 
Basic earnings (loss) per share calculation:
           
Net income (loss) to common shareholders
 
$
(155,000
)
 
$
(679,000
)
Weighted average of common shares outstanding
   
47,710,395
     
11,559,717
 
Basic net earnings (loss) per share
 
$
(0.00
)
 
$
(0.06
)
                 
Diluted earnings (loss) per share calculation:
               
Net income (loss) to common shareholders
 
$
(155,000
)
 
$
(679,000
)
Weighted average of common shares outstanding
   
47,710,395
     
11,559,717
 
           Stock Options (1)
   
-
     
-
 
           Warrants (2)
   
-
     
-
 
Diluted weighted average common shares
               
Outstanding
   
47,710,395
     
11,599,717
 
Diluted net income (loss) per share
 
$
(0.00
)
 
$
(0.06
)
 
(1)
At December 31, 2010, there were common stock equivalents attributable to outstanding stock options of 102,500 common shares and 110,500 common shares at December 31, 2009. The stock options are anti-dilutive at December 31, 2010 and 2009 and therefore have been excluded from diluted earnings per share.
 
(2)
At December 31, 2010, there were common stock equivalents attributable to warrants of 1,686,510 common shares and 1,924,005 common shares at December 31, 2009.  The warrants are anti-dilutive for the years ended December 31, 2010 and 2009 and therefore have been excluded from diluted earnings per share.

ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                        FINANCIAL DISCLOSURE.
 
Not applicable.
 
ITEM 9A.       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 December 31, 2010, 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) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our management has concluded, as discussed below, that a material weakness existed in our internal control over financial reporting as of December 31, 2010 and as a result, our disclosure controls and procedures were not effective.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. We have designed our internal controls to provide reasonable, but not absolute, assurance that our financial statements are prepared in accordance with U.S. GAAP. We assess the effectiveness of our internal controls based on the criteria set forth in the Internal Control — Integrated Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission. In performing the assessment for 2010, our management identified a continuation of a material weakness in internal control over financial reporting that was identified in 2009.  Specifically, a lack of segregation of duties in the financial reporting process.
 
Due to this material weakness, management has concluded that our internal control over financial reporting was not effective as of December 31, 2010.  However, management believes, at this time the costs of remediation outweigh the benefits given the limited operations of the Company. Notwithstanding the material weaknesses that existed as of December 31, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position, results of operations and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America ("GAAP").

Changes in Internal Controls
 
During the fiscal quarter ended December 31, 2010, 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.
 
 
23

 
Inherent Limitation on the Effectiveness of Internal Controls
 
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.

Attestation Report

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
  
ITEM 9B.       OTHER INFORMATION.
 
All information required to be reported in a report on Form 8-K during the fourth quarter of the year covered by this report has been reported.
 
PART III
 
ITEM 10.        DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The following information sets forth the names of our current directors and executive officers, their ages as of March 4, 2011 and their present positions.
 
                                       Name
 
Age
 
                                         Position Held with the Company
Tony J. Christianson
 
58
 
Chairman of the Board of Directors
Gordon F. Stofer
 
63
 
Director, Chief Executive Officer
David G. Latzke
 
51
 
Chief Financial Officer and Secretary
John C. Bergstrom
 
50
 
Director
Kerry D. Rea
 
52
 
Director
 
Set forth below is a brief description of the background and business experience of our significant executive officers and directors.

Tony J. Christianson, 58, became a director of Znomics, Inc. on February 10, 2010.  Mr. Christianson co-founded the Cherry Tree family of companies, an affiliated group of investment banking, venture capital and asset management firms in Minneapolis (collectively, “Cherry Tree”), in 1981 and currently serves as the Chairman of Cherry Tree Companies, LLC. Affiliates of Cherry Tree Companies act as the general partner of Adam Smith Fund, LLC and Adam Smith Growth Partners, L.P.  Mr. Christianson also serves as a director of each of The Dolan Company (NYSE:DM), an information services provider; Peoples Educational Holdings, Inc. (NASDAQ: PEDH), an educational materials publisher; AmeriPride Services, Inc., a provider of customized apparel for companies; Titan Machinery, Inc. (NASDAQ: TITN), a provider of new and used farm  and construction equipment and Arctic Cat, Inc. (NASDAQ:ACAT), a manufacturer of snowmobiles and related equipment.  Mr. Christianson also served as a director of Capella Education Company (NYSE: CPLA) from 1993 to 2006 and Fair Isaac Corporation (NYSE:FICO) from 1999 to 2009.  Mr. Christianson is a graduate of Saint John’s University in Collegeville, Minnesota, B.S., and Harvard Business School, M.B.A. Mr. Christianson offers invaluable insight in mergers and acquisitions, business and capital strategy, investor relations, and corporate governance through his experience managing Cherry Tree Companies and his service on the boards of a number of public companies.

Gordon F. Stofer, 63, became a director of Znomics, Inc. on February 10, 2010.  Mr. Stofer co-founded Cherry Tree in 1981 and currently serves as the Chief Executive Officer of Cherry Tree Companies, LLC. Mr. Stofer has also served as a director of Insignia Systems, Inc. (NASDAQ: ISIG), an in-store display provider, since February 1990. Mr. Stofer has been a director of numerous public and private companies over the past 30 years. Mr. Stofer is a graduate of Cornell University, B.S., and Harvard Business School, M.B.A. Mr. Stofer offers invaluable insight in mergers and acquisitions, operational management, investor relations and corporate governance through his experience managing Cherry Tree Companies and his service on the boards of a number of public companies.

David G. Latzke, 51, has served as Chief Financial Officer and Secretary of Znomics, Inc. since February 10, 2010.   Mr.
 
 
24

 
Latzke has been a Managing Director of Cherry Tree Companies, LLC since January 2007.  Prior to joining Cherry Tree, Mr. Latzke was the Senior Vice President, Chief Financial Officer and Secretary of SoftBrands, Inc., a publicly held software company, from August 2001 through June 2006.  Mr. Latzke joined Fourth Shift Corporation, a publicly held software company in 1993 and was its chief financial officer until it was acquired by AremisSoft, the former parent of SoftBrands, in April 2001. Mr. Latzke served as a Divisional CFO from April 2001 until August 2001. Prior to his tenure at Fourth Shift, Mr. Latzke was an eleven-year veteran of Arthur Andersen, in its audit and business advisory group. Mr. Latzke is a graduate of the University of Northern Iowa, B.A.

John C. Bergstrom, 50, became a director of Znomics, Inc. on February 10, 2010.  Mr. Bergstrom has served as a partner with RiverPoint Investments, a St. Paul, Minnesota-based business and financial advisory firm, since June 1995. Mr. Bergstrom is also a director of The Dolan Company (NYSE: DM) an information services provider, and Peoples Educational Holdings, Inc. (NASDAQ: PEDH), an educational materials publisher.   Mr.  Bergstrom also served as a director of Make Music, Inc. ( NASDAQ:MMUS)  (2004- 2006). Mr. Bergstrom also serves as a director for several private companies including Tecmark, Inc., a provider of business services focused on loyalty marketing programs; Instrumental, Inc., a provider of technology services to the government sector; Creative Publishing Solutions, Inc., a specialty marketing publisher; Cramer, LLC, an office furniture supplier; and JobDig, Inc., a provider of employment advertising services.   Mr. Bergstrom is a graduate of Gustavus Adolphus College, B.A., and the University of Minnesota, M.B.A.  Mr. Bergstrom has built his career advising companies and he is a skilled adviser to us in the areas of mergers and acquisitions, corporate governance, executive compensation and other organizational management matters.

Kerry D. Rea, 52, became a director of Znomics, Inc. on February 10, 2010.  Mr. Rea served as Chief Financial Officer of the Company from November 2007 until February 10, 2010. Since February 15, 2010, Mr. Rea has served as the Chief Financial Officer for Solar Nation.  Mr. Rea was a consultant from 2006 to November 2007. From 2004 to 2006 he served as Vice-President and Controller of AccessLine Communications, and served in various consulting roles from 2003 to 2004. From 1997 to 2002 he was Vice President of Finance and Vice President and Controller for Electric Lightwave. Mr. Rea is a graduate of Oregon State University, B.S.B.A. and Portland State University, M. Tax.  Mr. Rea has significant experience serving as an officer in several companies across several industries, including Chief Financial Officer of Znomics.  This experience will be valuable to the Company in the areas of mergers and acquisitions, operational management and historical perspective on Znomics.

Each of Messrs. Christianson, Stofer, and Bergstrom were elected as directors by the Company’s former directors pursuant to a non-binding understanding among the Purchasers and the Company that the Purchasers would control a majority of the Board of Directors following the issuance of the Shares under the February 10, 2010 Stock Purchase Agreement. The appointment of the Company’s current executive officers was approved by the current Board of Directors upon the issuance of the Shares and was also the result of a non-binding understanding among the Purchasers and the Company that the Purchasers would serve as executive officers following the issuance of the Shares.

Nominations for directors are made by the Board of Directors. There have been no material changes to the procedures by which security holders may recommend nominees to the registrant's board of directors, which procedures are set forth in our Bylaws.
    
Code of Ethics

The Board has a Code of Ethics and Business Conduct (“Code of Ethics”) that applies to all of our employees, directors, and officers, including our principal executive officers, principal financial officer, and controller. The Code of Ethics addresses such topics as protection and proper use of our assets, compliance with applicable laws and regulations, accuracy and preservation of records, accounting and financial reporting, and conflicts of interest.  We have adopted a Code of Ethics, a copy of which is attached as an Exhibit 14.1 to this report.

Audit Committee

During fiscal 2009, the Board of Directors had an audit committee comprised of Dwight Sangrey, as Chair, and Steven Kurtz, as member, and did not have an “audit committee financial expert,” as defined by the SEC. Following completion of the transactions contemplated February 10, 2010 Stock Purchase Agreement, the Board of Directors determined that it would not designate an audit committee because the Company has no operations and limited need for decision making with respect to the responsibilities that would normally be delegated to an audit committee. Consequently, the Company does not have an “audit committee financial expert,” as defined by the SEC.

Compliance with Section 16(a) of the Exchange Act

Not applicable.

 ITEM 11.      EXECUTIVE COMPENSATION.
 
Summary Compensation Table
 
For the 2010 fiscal year, our “named executive officers” (as defined in Item 402 of Regulation S-K) were Gordon F. Stofer, Chief Executive Officer, and Dwight Sangrey, who served as Chief Executive Officer until February 10, 2010.  We had no other named executive officers and did not pay any compensation to our named executive officers in 2010, or, with respect to Mr. Sangrey, in 2009.  Our named executive officers for the 2009 fiscal year were Dwight Sangrey, Mark Philip, and Kelly Rea.
 
The table below summarizes all compensation awarded to, earned by, or paid to our named executive officers for all services rendered in all capacities to us for our fiscal years ended December 31, 2010 and 2009.
               
 
25

 
SUMMARY COMPENSATION TABLE
Name and
 principal
 position
 
 
Year
 
 
 
Salary
($)
 
 
 
Bonus
($)
 
Stock
 Awards
($)
 
Option
 Awards(5)
($)
 
Nonequity
 Incentive
Plan
 Compensation
($)
Nonqualified
 Deferred
 Compensation
Earnings
($)
 
 
 
All
other
 Compensation
($)
   
 
 
Total
($)
 
Gordon F. Stofer(1) 2010                             $ --  
                                     
Chief Executive Officer 2009                             $ --  
                                     
Dwight Sangrey(2)
2010
                            $ --  
 
                                   
President And Chief
2009
                              $ --  
 
                                     
Executive Officer
                                     
 
                                     
Mark Philip(3)
2010
                          $ 500     $ 500  
 
                                         
President And Chief
2009
  $ 81,386         $ 37,503         $ 1,680     $ 120,569  
 
                                         
Executive Officer
                                         
 
                                         
Kerry Rea(4)
2010
  $ 25,975                             $ 25,975  
 
                                         
Chief Financial Officer
2009
  $ 95,205         $ 14,584         $ 1,565     $ 111,354  
 
(1)
Mr. Stofer become chief executive officer on February 10, 2010.
 
(2)
Mr. Sangrey was elected president and chief executive officer on October 18, 2009 and served in that role until February 10, 2010.
 
(3)
Dr. Philip was hired as our president and chief executive officer on August 14, 2008.  He resigned on October 18, 2009. “All other Compensation” for Dr. Philip consists of $500 for a release agreement signed in 2010 and $1,680 in 2009 for company match to the 401(k) plan.
 
(4)
Mr. Rea was hired as our chief financial officer on November 12, 2007 and served in that role until February 10, 2010.  “All other Compensation” for Mr. Rea consisted of company match to the 401(k) plan of $1,565 in 2009.
 
(5)
Amounts reflect the expense recognized for accounting purposes calculated in accordance with FASB ASC Topic 718.
 
 
Assumptions used in calculating expense as required by FASB ASC Topic 718 are described in Note 11 to our Financial Statements included elsewhere in this report. Additional details regarding the terms of awards under the Stock Option Plan are described in the table "Outstanding Equity Awards at Fiscal Year-End," included in Item 12 of this report.
 
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. This option pricing model 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.

Narrative Disclosure to the Summary Compensation Table
 
     Gordon Stofer, Chief Executive Officer
 
Mr. Stofer has served as our Chief Executive Officer since February 10, 2010.  Mr. Stofer is not being paid for his services.
 
     Dwight Sangrey, Former President and Chief Executive Officer
 
Mr. Dwight Sangrey served as our President and Chief Executive Officer from October 18, 2009 until February 10, 2010.  Prior to his appointment as our President and Chief Executive Officer, Mr. Sangrey served as a member of our Board of Directors.  Mr. Sangrey was not paid for his services as President and Chief Executive Officer.
 
     Mark Philip, Former President and Chief Executive Officer
 
Dr. Mark Philip served as our President and Chief Executive Officer from August 14, 2008 until October 18, 2009. Prior to his hiring as our President and Chief Executive Officer, we had engaged Dr. Philip as a consultant.
 
We paid Mr. Philip a base salary of $81,386 in 2009.  In May 2009, we granted Dr. Philip a warrant to purchase 625,780 shares of common stock for $0.03 per share, in exchange for cancellation of all outstanding options previously granted to him. As previously disclosed, Dr. Philip resigned as President and Chief Executive Officer in October 2009, but agreed to continue to provide consulting services to the Company for $250 per hour.

On February 10, 2010, the Company obtained a letter agreement from Mark Philip (the “Philip Letter Agreement”). Pursuant to the Philip Letter Agreement, Dr. Philip acknowledged that his agreements with the Company, including the Employment Agreement dated August 14, 2008 and the Letter Agreement dated December 4, 2008, have been terminated and that no further compensation or benefits are owed to him thereunder. The Consulting Agreement dated October 20, 2009 between Dr. Philip and the Company and Dr. Philip’s Common Stock Purchase Warrant dated May 26, 2009, will remain in effect. As consideration for Dr. Philip’s release of claims and his agreement to amend his 2009 Warrant, the Company agreed to pay Dr. Philip a total of $500.
 
 
26

 
     Kerry Rea, Former Chief Financial Officer
 
We paid Mr. Rea a base salary of $92,205 in 2009.  In May 2009, we granted Mr. Rea a warrant to purchase 243,350 shares of common stock for $0.03 per share, in exchange for cancellation of all outstanding options previously granted to him.  Mr. Rea resigned as chief financial officer on February 10, 2010 but continues to serve as a director.  Mr. Rea received $25,975 for service as principal financial officer in 2010.
 
Stock Option Grants
          
We adopted a stock incentive plan in 2002 (the "Plan") to promote our long-term growth and profitability by incentivizing employees, officers, directors and consultants. The Plan, which is our only equity compensation plan, permits the grant of stock options, stock appreciation rights, restricted or unrestricted stock awards or other stock-based awards. The board of directors has authorized up to 2,193,258 shares to be issued under the Plan. As of December 31, 2010, there were 102,500 options outstanding pursuant to the Plan. No awards were made under the Plan in 2010.  We do not intend to grant additional awards under the Plan, unless grants are made in connection with a future business combination with an operating company.
         
Outstanding Equity Awards at Fiscal Year-End
 
The table below summarizes all unexercised options and warrants, stock that has not vested, and equity incentive plan awards for each named executive officer as of December 31, 2010.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
 
                                           
   
Option Awards
   
Stock Awards
 
                                         
                                     
Equity
 
                                     
Incentive
 
                                     
Plan
 
                                 
Equity
 
Awards:
 
                                 
Incentive
 
Market or
 
           
Equity
                   
Plan
 
Payout
 
           
Incentive
                   
Awards:
 
Value of
 
           
Plan
                   
Number of
 
Unearned
 
           
Awards:
               
Market
 
Unearned
 
Shares,
 
   
Number of
 
Number of
 
Number of
           
Number of
 
Value of
 
Shares,
 
Units or
 
   
Securities
 
Securities
 
Securities
           
Shares or
 
Shares or
 
Units or
 
Other
 
   
Underlying
 
Underlying
 
Underlying
           
Units of
 
Units of
 
Other
 
Rights
 
   
Unexercised
 
Unexercised
 
Unexercised
 
Option/Warrant
 
Option/ Warrant
   
Stock that
 
Stock that
 
Rights that
 
that have
 
   
Options/ Warrants (1)
 
Options/ Warrants
 
Unearned
 
Exercise
 
Expiration
   
have Not
 
have Not
 
Have Not
 
Not
 
Name
 
(#) Exercisable
 
(#) Unexercisable
 
Options/Warrants (#)
 
Price ($)
 
Date
   
Vested (#)
 
Vested ($)
 
Vested (#)
 
Vested ($)
 
Dwight Sangrey
 
25,000