Note 5 - Warrant Liability

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 5. WARRANT LIABILITY

The Company re-reviewed the provisions on all of its outstanding warrants issued originally in 2009 and amended in 2010 and determined that because such warrants could potentially be settled in cash upon a Fundamental Transaction (as defined in the applicable warrant agreement), they should have been accounted for as a derivative liability at fair value with changes in fair value reflected in operating results. Cumulatively since the date of issuance to December 31, 2012, the fair value of these warrants decreased by $68,000 to a December 31, 2012 fair value of $33,000. The Company recorded a fourth quarter 2012 adjustment for all of its prior accounting treatment for these warrants. No periods since issuance through December 31, 2012 were materially impacted by the previous accounting.

At issuance and each balance sheet date, the Company estimates the fair value of these warrants using the Black-Scholes option pricing model. Changes in fair value are recorded as a non-cash valuation adjustment in the Company's statement of operations. The Black-Scholes valuation model inputs for year ended December 31, 2012 are as follows:

Risk free interest rates	0.95	%
Expected dividend yield	0.0	%
Expected stock volatility	195.0	%
Expected term of warrants in years	6.4

Expected volatility is based upon the observed historical trades of the Company’s common stock. The expected term of the warrants is based on the remaining terms of the warrants. The risk-free rate of return is based on the U.S. Treasury security rates for maturities consistent with the expected term of the warrants.

Potential future increases in the estimated fair value of these warrants will result in losses being recognized in our statement of operations in future periods. Conversely, potential future declines in the estimated fair value of these warrants will result in gains being recognized in our statement of operations in future periods. Neither of these potential gains or losses will have any impact on our cash balance, liquidity or cash flows from operations.

The following table sets forth the changes in the Company's derivative warrant liability for the year ended December 31, 2012:

Date	Description	Number of Warrants		Warrant Liability, in thousands

December 31, 2011	Balance of warrant liability at December 31, 2011		-	$	-
	Fair value of warrants reclassified to warrant liability during 2012		1,686,510		101
	Change in fair value of warrant liability for the year ended December 31, 2012		-		(68	)
December 31, 2012	Balance of warrant liability at December 31, 2012		1,686,510	$	33

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

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+ Details

Znomics, Inc. 10-K