U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 000-28519
ZANN CORP.
(Name of small business issuer in its charter)
Nevada | 76-0510754 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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1403 US Highway 27 South, Clermont, Florida | 34714 |
| (Address of principal executive offices) | (Zip Code) |
(352) 394-6629
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 1, 2006, the issuer had 33,945,359 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No x
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| CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 | |
| CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 | |
| CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 | |
| CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 | |
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
| | | March 31, 2006 | |
ASSETS | | | |
| Current Assets | | | |
| Total Current Assets | | $ | - | |
| Total Assets | | $ | - | |
| | | | | |
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY | | | | |
| Current Liabilities | | | | |
| Accounts payable and accrued liabilities (Note D) | | $ | 1,070,926 | |
| Accounts payable - related party (Note K) | | | 258,634 | |
| Accrued liability- officer | | | 333,250 | |
| Notes payable - others (Note E) | | | 125,456 | |
| Total Current Liabilities | | | 1,788,266 | |
| Total Liabilities | | | 1,788,266 | |
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| | | | | |
| Deficiency in Stockholders' Equity (Note F) | | | | |
| Common stock, $.001 par value, 4,000,000,000 shares authorized 33,945,359 issued and outstanding | | | 33,945 | |
| Preferred stock, | | | | |
| Series A, 2,647,700 shares issued and outstanding | | | 2,648 | |
| Series B, 472,011 shares issued and outstanding | | | 472 | |
| Series C, 10,000,000 issued and outstanding | | | 10,000 | |
| Series A to be issued for Services | | | 9,100 | |
| Additional paid-in-capital | | | 37,606,709 | |
| Accumulated deficit | | | (39,451,140 | ) |
| Total Deficiency in Stockholders' Equity | | | (1,788,266 | ) |
| Total Liabilities and Deficiency in Stockholders' Equity | | $ | - | |
See accompanying notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
| | | For the three months ended March 31, | |
| | | 2006 | | 2005 | |
| REVENUES | | | | | |
| Sales, net | | $ | - | | $ | 345 | |
| Cost of goods sold | | | | | | (439 | ) |
| Gross (Loss) | | | - | | | (94 | ) |
| OPERATING EXPENSES | | | | | | | |
| Selling, general and administrative | | | 328,507 | | | 941,086 | |
| LOSS FROM OPERATIONS | | | 328,507 | | | 941,180 | |
| | | | | | | | |
| OTHER INCOME (EXPENSES) | | | | | | | |
| Interest (expense) | | | (3,081 | ) | | (1,945 | ) |
| Total Other (expenses) | | | (3,081 | ) | | (1,945 | ) |
| | | | | | | | |
| NET (LOSS) BEFORE PROVISION FOR INCOME TAX AND DISCONTINUANCE OF OPERATIONS | | | (331,588 | ) | | (943,125 | ) |
| PROVISION FOR INCOME TAX | | | - | | | - | |
| | | | | | | | |
| NET (LOSS) BEFORE PROVISION FOR DISCONTINUANCE OF OPERATIONS | | | (331,588 | ) | | (943,125 | ) |
| DISCONTINUANCE OF OPERATIONS (Note B) | | | (63,000 | ) | | - | |
| NET (LOSS) | | $ | (394,588 | ) | $ | (943,125 | ) |
| Loss per share (basic and fully diluted) | | $ | (0.01 | ) | $ | (0.15 | ) |
| Loss per share -discontinued operations (basic and fully diluted) | | $ | - | | $ | - | |
| Loss per share -continued operations (basic and fully diluted) | | $ | (0.01 | ) | $ | (0.15 | ) |
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| Basic and diluted weighted average number of shares outstanding as restated for reverse and forward stock splits | | | 33,330,915 | | | 6,333,018 | |
See accompanying notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
| | | For the three months ended March 31, | |
| | | 2006 | | 2005 | |
| Cash Flows Used in Operating Activities | | | | | |
| Net loss | | $ | (394,588 | ) | $ | (943,125 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | |
| Discontinued operations | | | 63,000 | | | - | |
| Common stock issued for services | | | 37,650 | | | 196,300 | |
| Preferred series A issued for services | | | 60,000 | | | 900 | |
| Preferred series B issued for dividend | | | 981 | | | - | |
| Employee stock option expense | | | - | | | 385,664 | |
| Changes in: | | | | | | | |
| Accounts payable and accrued expenses | | | 58,418 | | | 11,684 | |
| Prepaid expenses | | | 126 | | | 2,058 | |
| Accounts payable - related | | | 175,432 | | | - | |
| Net Cash provided by (used in) Operating Activities | | | 1,019 | | | (346,519 | ) |
| Cash Flows from Financing Activities: | | | | | | | |
| Proceeds from sale of preferred stock | | | 30,500 | | | - | |
| Proceeds from convertible debenture | | | - | | | 100,000 | |
| Payments for convertible debenture | | | (365 | ) | | (1,055 | ) |
| Payments for notes payable | | | (31,500 | ) | | - | |
| Proceeds from sale of common stock | | | - | | | 289,652 | |
| Net Cash provided by (used) in Financing Activities | | | (1,365 | ) | | 388,597 | |
| Net change in cash | | | (346 | ) | | 42,078 | |
| Cash at beginning of period | | | 346 | | | 39,890 | |
| Cash at end of period | | $ | - | | $ | 81,968 | |
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| Supplemental Disclosures of Cash Flow Information: | | | | | | | |
| Cash paid during the period for interest | | $ | 3,081 | | $ | 1,345 | |
| Cash paid during the period for taxes | | $ | - | | $ | - | |
| Common stock issued in exchange for services rendered | | $ | 37,650 | | $ | 196,300 | |
| Non-Cash Investing and Financing Activities: | | | | | | | |
| Preferred shares issued for services | | $ | 60,000 | | $ | 900 | |
| Preferred shares issued for dividends | | $ | 981 | | $ | - | |
| Employee stock option expense | | $ | - | | $ | 385,644 | |
| Write off of related party accounts | | $ | 30,500 | | $ | 87,198 | |
See accompanying notes to unaudited condensed consolidated Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
NOTE A - SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three-month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2005 financial statements and footnotes thereto included in the Company's SEC Form 10-KSB.
BUSINESS AND BASIS OF PRESENTATION
The Company was incorporated in Florida on March 4, 1999 as Investra Enterprises Inc. On March 6, 2000, we completed a Share Purchase Agreement in which Pathobiotek Diagnostics, Inc. a Texas Corporation, acquired all of our issued and outstanding shares for $150,000 for the purpose of completing a merger of Pathobiotek Diagnostics, Inc. and Investra Enterprises. Pathobiotek Diagnostics, Inc., a Texas corporation, was the surviving entity.
Effective September 7, 2001, we implemented a reverse split of our common stock at the ratio of one post-consolidation share for each 40 pre-consolidation shares, except that no shareholder was reduced to less than 10 shares.
On October 16, 2001, we completed the Plan and Agreement of Reorganization by and between Pathobiotek Diagnostics Inc., ATNG Acquisition, Inc., a Texas corporation, and ATNG, Inc., a Nevada corporation under which Pathobiotek Diagnostics Inc. issued 27,836,186 shares of its common stock as consideration for its wholly owned subsidiary, ATNG Acquisition, Inc. to acquire 100 percent of the issued and outstanding stock of ATNG, Inc., a Nevada corporation.
Following the October 16, 2001 reorganization, ATNG Acquisition, Inc. and ATNG, Inc. merged. On October 17, 2001, we changed our name to ATNG, Inc. On September 6, 2003 we changed our domicile from Texas to Nevada.
On August 10, 2004, the Company acquired Blue Kiwi, Inc., a Michigan Corporation engaged in the marketing and sale of nutritional supplements. Blue Kiwi, Inc. is not currently marketing any products.
In November 2004, the shareholders and directors of the Company approved a change in the name of the Company from ATNG, Inc. to Zann Corp., amended its Articles of Incorporation, increasing the number of authorized shares to 4,000,000,000 and authorized a reverse stock split effective December 3, 2004 of one post consolidation share for every 900 pre-consolidation shares.
Effective March 10, 2005, we effected a reverse split of our authorized, issued and outstanding common stock on the basis of one post-consolidation share for every 350 pre-consolidation shares.
On April 19, 2005 the Sole Director approved a forward stock split of three shares for every one share held as of May 3, 2005. On May 9, 2005, the shareholders and directors of the Company amended its Articles of Incorporation to increase the authorized Common Stock to 4,000,000,000 and the authorized Preferred Stock to 350,000,000.
The accompanying financial statements reflect all of these changes. Accordingly, all historical weighted average share and per share amounts have been restated to reflect all reverse and forward stock splits described above.
On June 27, 2005 the Company entered into an agreement to acquire approximately 42.6% of the Common and 6.52% of the Convertible Preferred Second Series of Sartam Industries, Inc., a Florida Corporation engaged in the manufacturing and sale of automatic riveting machines and the re-supply of riveting belts. Negotiations of the acquisition were terminated in December and all agreements to acquire Sartam Industries, Inc. were terminated as of December 31, 2005. The Company incurred a loss in the acquisition of $35,090 which has been charged to operations during the year ended December 31, 2005.
On March 31, 2006, the Company and Sartam Industries (“Sartam”) terminated the Exclusive Licensing Agreement dated August 22, 2005 (the "Agreement") entered into by and between Sartam and the Company. The Agreement provided the Company an exclusive right to manufacture, market, distribute and sell patented Sartam products within the United States, Europe, and any other countries that fall under the jurisdiction of the Patent Cooperation Treaty. Sartam also agreed to transfer specific expertise related to the business in order to facilitate production. In exchange, Zann agreed to pay certain royalty rates on sales, finance Sartam’s operations and use utmost efforts to manufacture market and sell the licensed products. As a result of unexpected costs of the business relationship that resulted in the earlier termination of the Stock Purchase Agreement between Sartam and the Company, both parties believe there is no financial or business justification for continuing the Agreement under its current terms. The Company and Sartam mutually determined that it was in each company’s best interest to terminate the Agreement. The Company does not expect to incur material early termination penalties as a result of the termination of the Agreement.
The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiary, Blue Kiwi, Inc. Significant intercompany transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recognized in the period that services are provided. For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN UNAUDITED FINANCIAL STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred until the trusses are built and shipped to customers. There was no deferred revenue for the years ended December 31, 2005 and 2004.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company's consolidated financial position and results of operations was not significant.
USE OF ESTIMATES
The preparation of unaudited financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents and short-term borrowings, as reflected in the balance sheet, approximate fair value because of the short-term maturity of these instruments.
STOCK BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R) (revised 2004), "Share-Based Payment" which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement 123(R) supersedes APB opinion No. 25, "Accounting for Stock Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash Flows". Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123(R). This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” On April 14, 2005, the SEC amended the effective date of the provisions of this statement. The effect of this amendment by the SEC is that the Company had to comply with Statement 123(R) and use the Fair Value based method of accounting no later than the first quarter of 2006. The Company implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective method. The fair value of each option grant issued after January 1, 2006 will be determined as of grant date, utilizing the Black-Scholes option pricing model. The amortization of each option grant will be over the remainder of the vesting period of each option grant.
As more fully described in finacial statements in included in Form 10-KB for the year ended December 31, 2005, the Company did not grant stock options to employees of the Company and as of December 31, 2005, no stock options were outstanding and exercisable. The Company did not grant any stock options to employees during the quarter ended March 31, 2006 and 2005. The Company did not recognize any compensation expense related to employees stock options in the quarter ended March 31, 2006 and 2005. The impact on earnings for the remainder of Fiscal 2006 for stock based compensation will depend on future stock option issuances.
In prior years, the Company applied the intrinsic-value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for the issuance of stock options to employees and accordingly compensation expense related to employees’ stock options were recognized in the prior year financial statements to the extent options granted under stock incentive plans had an exercise price less than the market value of the underlying common stock on the date of grant.
Had compensation costs for the Company's stock options been determined based on the fair value at the grant dates for the awards, the Company's net loss and loss per share would have been as follows:
| | | For the three months ended March 31, 2005 | |
| | | | |
| Net loss attributable to common stockholders -as reported | | $ | (943,125 | ) |
| Add. Total stock based employee compensation expense as reported under intrinsic value method (APB No. 25) | | | - | |
| Deduct Total stock based employee compensation expense as reported under fair value based method (SFAS No. 123) | | | - | |
| Net loss -Pro Forma | | $ | (943,125 | ) |
| Net loss attributable to common stockholders - Pro forma | | $ | (943,125 | ) |
| Basic (and assuming dilution) loss per share -as reported | | $ | (0.15 | ) |
| Basic (and assuming dilution) loss per share - Pro forma | | $ | (0.15 | ) |
In determining the compensation cost of stock options granted to employees during the three months ended March 31, 2005, as specified by SFAS No. 123, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model and the weighted average assumptions used in these calculations are summarized as follows:
| | Three Months Ended March 31, 2005 |
| Risk-free interest rate | n/a |
| Expected life of options Granted | n/a |
| Expected Volatility | n/a % |
| Expected dividend yield | 0% |
| | (a) | The expected option life is based on contractual expiration dates. |
LIQUIDITY
As shown in the accompanying unaudited financial statements, the Company incurred net losses of $394,588 and $943,125 for the three months ended March 31, 2006 and 2005, respectively. As of March 31, 2006 the Company's current liabilities exceeded its current assets by $1,788,267.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143", which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. The Company is required to adopt the provisions of FIN 47 no later than its last quarter of fiscal 2006. The Company does not expect the adoption of this Interpretation to have a material impact on its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' unaudited financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its consolidated financial position, results of operations or cash flows.
On February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company does not expect its adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.
In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The Company does not expect its adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made in prior year's unaudited financial statements to conform to classifications used in the current year.
NOTE B - ACQUISITIONS
Sartam Acquisition and Discontinued Operations:
On June 27, 2005 the Company acquired approximately 42.6% of the Common and 6.52% of the Convertible Preferred Second Series of Sartam Industries, Inc. for $200,000 in cash and $4,480,000 in Promissory Notes. The acquisition of Sartam was accounted for using the purchase method in accordance with SFAS 141, "Business Combinations".
The Company elected to not complete the acquisition of Sartam. The Company and Sartam agreed to rescind the acquisition effective December 31, 2005 whereby the Company's control was relinquished and $4,480,000 note payable was extinguished in full.
On March 31, 2006, the Company and Sartam Industries ("Sartam") terminated the Exclusive Licensing Agreement date August 22, 2005 (the "Agreement") entered into by and between Sartam and the Company. The Agreement provided the Company an exclusive right to manufacture, market, distribute and sell patented Sartam products within the United States, Europe, and any other countries that fall under the jurisdiction of the Patent Cooperation Treaty. Sartam also agreed to transfer specific expertise related to the business in order to facilitate production. In exchange, Zann agreed to pay certain royalty rates on sales, finance Sartam's operations and use utmost efforts to manufacture market and sell the licensed products. As a result of unexpected costs of the business relationship that resulted in the earlier termination of the Stock Purchase Agreement between Sartam and the Company, both parties believe there is no financial or business justification for continuing the Agreement under its current terms. The Company and Sartam mutually determined that it was each company's best interest to terminate Agreement. The Company does not expect to incur material early termination penalties as a result of the termination of Agreement. During the period ended March 31, 2006 the Company incurred $63,000 of costs in terminating the Agreement. Such costs have been included in operations for the period ended March 31, 2006.
NOTE C - INVENTORIES
Inventories are stated at the lower of cost or market determined by the first-in, first-out (FIFO) method. Inventories consist of pre-packaged available for sale to customers. There were no inventories as of March 31, 2006.
NOTE D - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts Payable and Accrued Liabilities at March 31, 2006 consists of the following:
| Accounts payable | | $ | 713,042 | |
| Accrued salaries | | | 122,955 | |
| Payroll taxes | | | 234,930 | |
| Total | | $ | 1,070,927 | |
NOTE E - NOTES PAYABLE
| Convertible Debenture, due January 1, 2006, interest 10%, payable $1,000 per month, convertible into 15,000 preferred shares-Series A on a basis of $.663 cents for each share converted including accrued interest of $1,271. At March 31, 2006, the Company was in default under the terms of the Convertible Debenture. The Debenture holder has agreed to payment in full by April 12, 2006 | | $ | 98,998 | |
| Promissory Note, interest 10%, due December 31, 2005. Including accrued interest of $1,483. At March 31, 2006, the Company was in default under the terms of the Promissory Note. The Note holder agreed to a month to month extension until paid | | | 26,458 | |
| | | | 125,456 | |
| | | | | |
| Less: current portion | | | (125,456 | ) |
| Note payable-long -term | | $ | - | |
During the period ended March 31, 2006 the Company paid a previously issued and outstanding promissory note of $31,500.
NOTE F - CAPITAL STOCK
In November, 2004, the Shareholders and Directors of the Company approved a change in the name of the Company from ATNG, Inc. to Zann Corp., amended its Articles of Incorporation, increasing the number of authorized shares to 4,000,000,000, and authorized a reverse stock split effective December 3, 2004 of one post consolidation share for every 900 pre-consolidation shares.
Effective March 10, 2005, we effected a reverse split of our authorized, issued and outstanding common stock on the basis of one post-consolidation share for each 350 pre-consolidation shares.
On April 19, 2005 the Sole Director approved a forward stock split of three shares for every one share held as of May 3, 2005. On May 9, 2005, the shareholders and directors of the Company amended its Articles of Incorporation to increase the authorized Common Stock to 4,000,000,000 and the authorized Preferred Stock to 350,000,000.
The accompanying unaudited financial statements reflect these changes. Accordingly, all historical weighted average share and per share amounts have been restated to reflect the reverse and forward stock splits.
COMMON STOCK
The Company is authorized to issue 4,000,000,000 shares of common stock, with $0.001 par value per share. As of March 31, 2006 the Company has issued and outstanding 33,945,359 and shares of common stock with par value of $0.001 per share.
During the period ended March 31, 2006 the Company had the following common stock transactions:
| Description | | Shares | | Amount | |
| Issued for Services | | | 1,300,000 | | $ | 37,650 | |
The Company valued the shares issued at approximately $0.03 per share for a total of $ 37,650, which represents the fair value of the services received which did not differ materially from the value of the stock issued.
On December 8, 2005 the Company entered into a Standby Equity Distribution Agreement (Note K). The agreement provides for, among other things, the issuance of 4,000,000 warrants to purchase Common stock. The warrants are exercisable until December 8, 2009 at a price of $.0388 per share. The warrants were valued using the Black Scholes formula and the fair value of warrants of $111,324 was included in Selling, General, and Administrative Expense for the year ended December 31, 2005.
PREFERRED STOCK
SERIES A
Series A shares are convertible into 10 shares of common stock. The Series A preferred stock will have one vote per share on all matters submitted to a vote of the holders of common stock, including, without limitation, the election of directors. At March 31, 2006, there were 2,647,700 shares issued and outstanding.
During the period ended March 31, 2006, the Company issued an aggregate of 200,000 shares of series A preferred stock in exchange services valued at $60,000. The Company valued the shares issued at approximately $0.15 per share for a total of $ 60,000, which represents the fair value of the services received which did not differ materially from the value of the common stock underlying the shares of preferred stock issued.
At March 31, 2006 the Company is obligated to issue an additional 15,000 shares of Preferred Series A at a value of $9,100 as shares to be issued in connection with the employment agreement of one of the Officers/Director.
SERIES B
Series B Preferred Stock is convertible into 1 share of common stock. The Series B Preferred Stock will have one vote per share on all matters submitted to a vote of the holders of common stock, including, without limitation, the election of directors. At March 31, 2006 there were 472,011 shares issued and outstanding. During the period ended March 31, 2006 the Company issued 79,510 shares of Series B Preferred Stock as follows:
| Description | | Shares | | Amount | |
| Shares for cash | | | 40,260 | | $ | 30,500 | |
| Shares as dividend | | | 39,250 | | | 981 | |
| Total | | | 79,510 | | $ | 31,481 | |
Effective January 31, 2006, pursuant to the Certificate of Designation of our Series B Preferred Stock, our board of directors declared a dividend of shares of Series B Preferred Stock to holders of shares of Series B Preferred Stock outstanding as of December 31, 2005. Pursuant to such Certificate of Designation, each such holder of Series B Preferred Stock received a dividend consisting of such number of shares of Series B Preferred Stock equal to 10 percent of the aggregate number of shares of Series B Preferred Stock held by such holder as of December 31, 2005. An aggregate of 39,250 shares of Series B Preferred Stock was issued by the Company pursuant to the dividend.
SERIES C
Series C Preferred Stock is not convertible into shares of common stock. The Series C preferred stock has voting rights equal to 500 votes per share on all matters submitted to a vote of the holders of common stock, including, without limitation, the election of directors. At March 31, 2006 there were 10,000,000 shares issued and outstanding.
On February 17, 2006 the Chief Executive Officer, Dr. Robert Simpson, executed an agreement to sell 10,000,000 shares of Class C Preferred Stock for $500,000 payable $50,000 in cash and a promissory note bearing interest at 5% per annum with four equal principal payments of $112,500 due on May 3, 2006, August 3, 2006, November 3, 2006 and February 3, 2007 to David N. Weiker Sr. (“Purchaser”). This agreement effectively transfers voting control to the Purchaser as the Class C Preferred Stock are entitled to vote 500 shares of common for each share of Class C held.
The Agreement provides, among other things, that the Purchaser shall assure that the Company will discharge the liabilities of the Company existing on February 3, 2006 as they mature and not allow the liabilities to become delinquent or accrue penalties thereon.
NOTE G - NON-QUALIFIED STOCK COMPENSATION PLAN
In May 2005, the Company authorized the Non-Employee Directors and Consultants Retainer Plan (“NDCRP”) for the Year 2005. The purpose of the NDRCP is to attract non-employee directors and consultants who are capable of improving the success of the Company by providing a direct economic interest to Company performance. Under the terms of the plan, non-employee directors or consultants may be compensated through the issuance of Company stock at Market Value on the date of issuance. The plan is administered by the Company’s Board of Directors.
NOTE H - WARRANTS
The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock issued to non-employees of the Company. These warrants were granted in lieu of cash compensation for services performed:
| Warrants Outstanding | | Warrants Exercisable | |
| ExercisePrice | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Price | | Number Exercisable | | Weighted Average Life (Years) | |
| $ | 7.20 | | | 100,000 | | | 0.5 | | $ | 7.20 | | | 100,000 | | | 0.25 | |
| $ | 0.0388 | | | 4,000,000 | | | 4.0 | | $ | 0.0388 | | | 4,000,000 | | | 3.75 | |
Transactions involving warrants are summarized as follows:
| | | Weighted Average | |
| | Number of Shares | | Price Per Share | |
| Outstanding, December 31, 2005 | | | 4,100,000 | | $ | 0.2135 | |
| Granted | | | - | | | - | |
| Exercised | | | - | | | - | |
| Outstanding, March 31, 2006 | | | 4,100,000 | | $ | 0.2135 | |
NOTE I - COMMITMENTS AND CONTINGENCIES
On January 21, 2005, plaintiff Investrend Communications, Inc. d/b/a Investrend Research commenced an action via Verified Complaint in the Supreme Court of the State of New York, County of Queens, against the Company. The complaint, through three causes of action, essentially alleged a breach of contract. The parties have executed an agreement to settle the matter for the total amount of $7,500, to be paid in six (6) installments. As of March 30, 2006 there have been five payments made totaling $6,250 and the balance due is included in accounts payable at March 31, 2006..
On March 31, 2006, Zann Corp. and Sartam Industries terminated the Exclusive Licensing Agreement dated August 22, 2005 entered into by and between Sartam and Zann Corp. The Agreement provided the Company an exclusive right to manufacture, market, distribute and sell patented Sartam products within the United States, Europe, and any other countries that fall under the jurisdiction of the Patent Cooperation Treaty. Sartam also agreed to transfer specific expertise related to the business in order to facilitate production. In exchange, Zann agreed to pay certain royalty rates on sales, finance Sartam’s operations and use utmost efforts to manufacture, market and sell the licensed products. As a result of unexpected costs of the business relationship that resulted in the earlier termination of the Stock Purchase Agreement between Sartam and Zann Corp., both parties believe there is no financial or business justification for continuing the Agreement under its current terms. Zann Corp. and Sartam mutually determined that it was in each company’s best interest to terminate the Agreement.
Securities Act Violations
During the year ended December 31, 2004, the Company filed a series of Registration Statements on SEC Form S-8 registering shares of the Company's common stock. The Company failed to include the required consents from its auditors as required under the Securities Act of 1933 in connection with the filings resulting in the issuance of approximately 497,000,000 registered shares in violation of Section 5 of the Securities Act and state securities laws. As a result, the Company may have violated federal and state securities laws in connection with the issuance of those shares.
In the event that any of the exemptions from registration with respect to the issuance of the Company's common stock under federal and applicable state securities laws were not available, the Company may be subject to claims by federal and state regulators for any such violations. In addition, if any purchaser of the Company's common stock were to prevail in a suit resulting from a violation of federal or applicable state securities laws with respect to the unavailability of such exemption, the Company could be liable to return the amount paid for such securities with interest thereon, less the amount of any income received thereon, upon tender of such securities, or for damages if the purchaser no longer owns the securities. As of the date of these unaudited financial statements, the Company is not aware of any alleged specific violation or the likelihood of any claim. There can be no assurance that litigation asserting such claims will not be initiated, or that the Company would prevail in any such litigation.
The Company is unable to predict the extent of its ultimate liability with respect to any and all future securities matters. The costs and other effects of any future litigation, government investigations, legal and administrative cases and proceedings, settlements, judgments and investigations, claims and changes in this matter could have a material adverse effect on the Company's financial condition and operating results.
The Company is subject to other legal proceedings and claims, which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.
NOTE J- SIGNIFICANT TRANSACTIONS
On December 8, 2005, the Company entered into a Standby Equity Distribution Agreement (the "AGREEMENT") with Cornell Capital Partners, LP ("CORNELL"). Under the Agreement, Cornell has committed to provide to us up to $5 million in cash to be drawn down over a 24-month period at our discretion, subject to certain conditions including without limitation, our filing and maintenance of an effective registration statement with the Securities and Exchange Commission covering the sale of the shares issued to Cornell in connection with the transactions contemplated in the Agreement. In connection with the execution of the Agreement, we also (a) paid a structuring fee of $12,500 in cash to an affiliate of Cornell, (b) paid a due diligence fee of $5,000 in cash to Cornell, and (c) issued 1,142,857 shares of common stock to Cornell as a commitment fee. The shares were issued to Cornell on November 30, 2005 and valued at $0.0388 per share. The total value of $44,286 has been included in Selling, General and Administrative expense for the year ended December 31, 2005. In addition, Robert Simpson, our sole officer and director entered into a lock-up agreement pursuant to which Mr. Simpson agreed, among other things, not to sell any of the Company’s securities without the prior written consent of Cornell during the 24-month term of the Agreement, except in accordance with Rule 144(e) promulgated under the Securities Act of 1933, as amended.
The maximum amount of any drawdown under the Agreement is $250,000, and there must be at least five (5) trading days between each drawdown. In consideration for each drawdown, the Company will issue to Cornell such number of shares of common stock equal to the amount of the drawdown divided by 95% of the 5-day trailing average closing bid price per share following the date of each drawdown request. In connection with each drawdown, we will also pay (a) a structuring fee of $500 in cash to an affiliate of Cornell, and (b) a commitment fee in cash of 5% of the amount of each drawdown to Cornell.
Pursuant to the Agreement, the Company also issued to Cornell a Warrant to purchase up to 4,000,000 shares of common stock at an exercise price per share equal to $0.0388. The warrant is exercisable by Cornell until December 8, 2009.
Pursuant to the Agreement, we also entered into a Registration Rights Agreement with Cornell pursuant to which we agreed to prepare and file a registration statement covering the shares issued in connection with the Agreement.
In connection with the Agreement, the Company also entered into a Placement Agent Agreement on December 8, 2005 with Monitor Capital, Inc. ("MONITOR"), a registered broker-dealer, pursuant to which among other things, Monitor acted as placement agent in connection with the transactions contemplated by the Agreement. The Company issued to Monitor 285,714 shares of common stock as a fee under the Placement Agent Agreement. Monitor was granted piggy-back registration rights with respect to such shares.
NOTE K - RELATED PARTY TRANSACTIONS
The Company advances funds to related entities for business development or reimbursement of expenses. During the periods ended March 31, 2006 and 2005, the Company has reimbursed $30,500 and $87,198 to related parties respectively.
The Company provides management and consulting services under agreements with entities controlled by the Company's President. The Company's management has determined that the collectibility and length of time to collect the amount due from these entities can not be reasonably assured. Accordingly, revenues are recognized as collected in connection with the services rendered. During the three months ended March 31, 2006 and 2005, the Company did not receive nor recognize revenues in connection with providing these services.
At March 31, 2006 the Company had accounts payable to the following related parties:
| Advances from Officer/ Director for expenses | | $ | 147,434 | |
| Advances from Series C shareholder for expenses | | | 111,200 | |
| Total | | $ | 258,634 | |
During the three months ended March 31, 2006 and 2005 the employees of the Company were paid through entities owned by the Company's President. These entities are responsible for payroll, all payroll taxes, health insurance plans and all other employee benefits. During the periods ended March 31, 2006 and 2005 the Company paid these entities approximately $51,166 and $185,936 respectively, which has been charged to operations.
NOTE L - INTELLECTUAL PROPERTY
During the year ended December 31, 2005 the Company acquired the following patents by assignment. The assignment fees of $120 and legal fees of $3,257 were paid by the Company and charged to expense.
| | § | Compression Technology, Patent Number US 6,724,326 B1, original filing date January 16, 2003, Date Patent Issued April 20, 2004, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 10/345,834; |
| | § | Human Blood Bacterium, Patent Number US 6,255,467 B1, original filing date November 2, 1998, Date Patent Issued July 3, 2001, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 09/187,946; and |
| | § | Human and Marmoset Activating Viruses, Patent Number US 6,177,081 B1, original filing date July 28, 1997, Date Patent Issued January 23, 2001, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 08/901,128. |
Each of these patents are for a term of 20 years from the original date filed. Maintenance fees are due in years 4, 8 and 12 from the original issue date.
The company executed a Letter of Intent on January 13, 2006 to assign the US Patent No. 6,225,467 for Human Blood Bacterium and the US Patent No. 6,177,081 for Human & Marmoset Activating Viruses to Palmera Holdings, Inc. for a cash payment of $15,000 and 100,000 shares of Palmera Holdings, Inc. The LOI provides for, among other things, that the Company and Palmera will execute definitive contracts to complete the payments and assignments. As of March 30, 2006, the stock has not been received by Zann Corp., and the Patents have not been been re-assigned.
NOTE M- SUBSEQUENT EVENTS
On April 10, 2006, the Board appointed David N. Weiker II and John J. Laskos as Directors. On April 10, 2006, Robert C. Simpson resigned as Director and Vice President of the Company. On April 21, 2006 the Company signed a Separation and Release Agreement with Robert Simpson. The Agreement provides for, among other things, that Mr. Simpson will forego all salary and bonus arrangements provided by his employment contract and will receive his normal salary and COBRA payments for four months from April 10, 2006 the effective date of the Agreement.
NOTE N- GOING CONCERN
The accompanying statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the unaudited condensed consolidated financial statements during the periods ended March 31, 2006 and 2005 the Company incurred losses of $394,588 and $943,125 respectively. The Company’s current liabilities exceeded its current assets by $1,788,267 as of March 31, 2006. These factors among others may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. Management anticipates the Company will attain profitable status and improve its liquidity through the continued developing, marketing and selling of its products and additional equity investment in the Company. The accompanying unaudited financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
In order to improve the Company's liquidity, the Company is actively pursing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. |
FORWARD-LOOKING INFORMATION
Much of the discussion in this Item is “forward looking” as that term is used in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Actual operations and results may materially differ from present plans and projections due to changes in economic conditions, new business opportunities, changed business conditions, and other developments. Other factors that could cause results to differ materially are described in our filings with the Securities and Exchange Commission.
There are several factors that could cause actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial and business conditions, changes in and compliance
with governmental laws and regulations, including various state and federal environmental regulations, our ability to obtain additional financing from outside investors and/or bank and mezzanine lenders and our ability to generate sufficient revenues to cover operating losses and position us to achieve positive cash flow.
Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-QSB to be accurate as of the date hereof. Changes may occur after that date. We will not update that information except as required by law in the normal course of its public disclosure practices.
Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part I of this Form 10-QSB, as well as the financial statements in Item 7 of Part II of our Form 10-KSB for the fiscal year ended, December 31, 2005.
MANAGEMENT’S PLAN OF OPERATIONS
GENERAL OVERVIEW
Since the appointment of new management in March 2006, the Company has been exploring strategic alternatives and potential business opportunities. The Company intends to comply with all SEC reporting requirements in order to maintain its status as a public company.
The Board of Directors feels that the Company does not meet the criteria of a development stage company (as defined in SFAS 7 "Accounting and Reporting by Development Stage Enterprises"). However, the Company is currently seeking a business opportunity to merge with or acquire.
There is no assurance that the Company will be successful in finding any business opportunity to merge with or acquire.
Under the Standby Equity Distribution Agreement entered into with Cornell Capital Partners, LP on December 8, 2005, Cornell has committed to provide to us up to $5 million in cash to be drawn down over a 24-month period at our discretion, subject to certain conditions including without limitation, our filing and maintenance of an effective registration statement with the Securities and Exchange Commission.
RECENT CHANGES IN OUR CORPORATE STRUCTURE
Effective March 10, 2005, we implemented a one-for-350 reverse split of our authorized, issued and outstanding shares of common stock by filing a Certificate of Change with the Secretary of State of Nevada (the “Reverse Split”). Following the Reverse Split, the number of authorized shares of our common stock was reduced to 11,428,572 in accordance with the one for 350 split ratio. The number of our authorized preferred shares remained at 350,000,000, and the par value of our common and preferred stock remained at $0.001 per share following the Reverse Split.
All fractional shares which would otherwise be held by our stockholders following the Reverse Split were rounded up to one whole share. We issued one new share of common stock for up to each 350 shares of common stock held as of March 9, 2005.
Effective May 3, 2005, we implemented a three for one forward split of authorized, issued and outstanding shares of common stock by filing a Certificate of Change with the Secretary of State of Nevada (the “Forward Split”). Following the Forward Split, the number of authorized shares of common stock was increased to 34,285,716 in accordance with the three for one split ratio. The number of authorized preferred shares remained at 350,000,000, and the par value of common and preferred stock remained at $0.001 per share following the Forward Split.
The Forward Split was a mandatory exchange. Our stockholders were required to surrender stock certificates representing their shares of our common stock in order to receive stock certificates representing their post-Forward Split shares of the Registrant’s common stock.
Effective May 9, 2005, we increased the number of authorized common shares from 34,285,716 to 4,000,000,000 by filing Articles of Amendment to our Articles of Incorporation with the Secretary of State of Nevada. The number of authorized preferred shares remained at 350,000,000, and the par value of common and preferred stock remained at $0.001 per share following the increase in the number of authorized common shares.
TECHNOLOGY AND PATENTS
The following patents are currently assigned to Zann Corp:
| | · | Compression Technology, Patent Number US 6,724,326 B1, original filing date January 16, 2003, Date Patent Issued April 20, 2004, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 10/345,834; |
| | · | Human Blood Bacterium, Patent Number US 6,255,467 B1, original filing date November 2, 1998, Date Patent Issued July 3, 2001, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 09/187,946; and |
| | · | Human and Marmoset Activating Viruses, Patent Number US 6,177,081 B1, original filing date July 28, 1997, Date Patent Issued January 23, 2001, patent re-assigned to ZANN Corp. on February 21, 2005, serial number 08/901,128. |
Each of these patents are for a term of 20 years from the original date filed. Maintenance fees are due in years 4, 8 and 12 from the original issue date.
The company executed a Letter of Intent on January 13, 2006 to assign the US Patent No. 6,225,467 for Human Blood Bacterium and the US Patent No. 6,177,081 for Human & Marmoset Activating Viruses to Palmera Holdings, Inc. for a cash payment of $15,000 and 100,000 shares of Palmera Holdings, Inc. The LOI provides for, among other things, that the Company and Palmera will execute definitive contracts to complete the payments and assignments. As of March 30, 2006, the stock has not been received by Zann Corp., and the Patents have not been re-assigned.
OVERVIEW
Zann Corp. currently has no active products or services.
Since December 31, 2005 when all agreements to acquire Sartam Industries, Inc. were terminated, the Company has returned all associated records and properties to Sartam and has no further plans regarding the semi-automatic riveting business.
Our wholly owned subsidiary, Blue Kiwi Inc. is not currently operating or marketing its products.
The Company’s strategic alliance with Statewide Residential Lending to originate residential mortgages throughout the State of Michigan has been abandoned in view of rising interest rates and other factors.
The Company is currently considering strategic alternatives and potential opportunities for its business and operations.
RESULTS OF OPERATIONS
REVENUE
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2005.
Total net sales and revenues were $0 for the three months ended March 31, 2006 compared to $345 for the period ended March 31, 2005, a decrease of 100 percent.
Our gross profit (loss) for the three months ended March 31, 2006 compared to 2005 decreased to $0 from $(94). Gross (loss) as a percentage of sales increased to (0) percent in 2006 from (27) percent in 2005.
Total operating expenses for the three months ended March 31, 2006 compared to 2005 decreased by $612,579 to $328,507 from $941,086 in the prior period.
Operating loss decreased from a loss of $941,180 to a loss of $328,507 for the three months ended March 31, 2006 compared to the period ended March 31, 2005.
Interest expense, net for the three months ended March 31, 2006 was $3,081 as compared to $1,945 for the same period of 2005.
Net loss from continuing operations for the three months ended March 31, 2006 decreased to a loss of $331,588 from a loss of $943,125 compared to the same period 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, we had a deficiency in working capital of $1,788,267.
During the three months ended March 31, 2006 we raised the following amounts for working capital:
| | · | sold 30,500 shares of Preferred Series B for $30,500 |
While we have raised capital to meet our working capital and financing needs in the past, additional financing is required within the next 12 months in order to meet our current and projected cash flow deficits from operations and development. We have sufficient funds to conduct our operations for several months, but not for 12 months or more. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
AUDITOR’S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A "GOING CONCERN"
The independent auditors report on our December 31, 2005 financial statements included in the Company’s Annual Report states that the Company’s historical losses and the lack of revenues raise substantial doubts about the Company’s ability to continue as a going concern. If we are unable to develop our business, we have to discontinue operations or cease to exist, which would be detrimental to the value of the Company’s common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements, we believe the following critical accounting policy involve the most complex, difficult and subjective estimates and judgments.
STOCK-BASED COMPENSATION
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R) (revised 2004), "Share-Based Payment" which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation". Statement 123(R) supersedes APB opinion No. 25, "Accounting for Stock Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash Flows". Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123(R). This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” On April 14, 2005, the SEC amended the effective date of the provisions of this statement. The effect of this amendment by the SEC is that the Company had to comply with Statement 123(R) and use the Fair Value based method of accounting no later than the first quarter of 2006. The Company implemented SFAS No. 123(R) on January 1, 2006 using the modified prospective method. The fair value of each option grant issued after January 1, 2006 will be determined as of grant date, utilizing the Black-Scholes option pricing model. The amortization of each option grant will be over the remainder of the vesting period of each option grant.
As more fully described in finacial statements in included in Form 10-KB for the year ended December 31, 2005, the Company did not grant stock options to employees of the Company and as of December 31, 2005, no stock options were outstanding and exercisable. The Company did not grant any stock options to employees during the quarter ended March 31, 2006 and 2005. The Company did not recognize any compensation expense related to employees stock options in the quarter ended March 31, 2006 and 2005. The impact on earnings for the remainder of Fiscal 2006 for stock based compensation will depend on future stock option issuances.
In prior years, the Company applied the intrinsic-value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for the issuance of stock options to employees and accordingly compensation expense related to employees’ stock options were recognized in the prior year financial statements to the extent options granted under stock incentive plans had an exercise price less than the market value of the underlying common stock on the date of grant.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
INFLATION
In the opinion of management, inflation has not had a material effect on the operations of the Company.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officers and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(d), the Company’s Chairman and Chief Financial Officer, also conducted an evaluation of the Company’s internal controls over financial reporting to determine whether any changes occurred during the first fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There were no significant changes in the Company's internal controls or in other factors that could materially affected or are reasonable likely to materially affect, the Company's internal controls subsequent to the date of the most recent evaluation.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
None.
| UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
Between January 1, 2006 and March 31, 2006, the Company executed Subscription Agreements pursuant to which several private investors received a total of 40,260 shares of Zann Corp. Preferred Series B stock in exchange for $30,500. The $30,500 was loaned to AutoFast Inc., a related Company to the former Chairman and CEO. The amount has been included in expense for the period ended March 31, 2006.
Each share of the Series B preferred stock is convertible into one share of our common stock. On all matters submitted to a vote of the holders of our common stock, including, without limitation, the election of directors, a holder of shares of the Series B preferred stock is entitled to the number of votes on such matters equal to the number of shares of the Series B preferred stock held by such holder. The shares of the Series B preferred stock rank superior to the shares of our common stock, and to the shares of all other series of our preferred stock. The shares of the Series B Preferred stock were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act. All of the investors took their securities for investment purposes without a view to distribution and had access to information concerning Zann Corp. and our business prospects, as required by the Securities Act.
In addition, there was no general solicitation or advertising for the purchase of our shares. Our securities were sold only to persons with whom we had a direct personal preexisting relationship, and after a thorough discussion. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.
| DEFAULTS UPON SENIOR SECURITIES |
None.
| SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None
None.
Exhibit No. | Identification of Exhibits |
| | |
| 2.1 (1) | Articles of Merger of Investra Enterprises, Inc. into Pathobiotek Diagnostics, Inc., a Texas corporation dated March 6, 2000. |
| 2.2 (1) | Agreement and Plan of Reorganization by and among Pathobiotek Diagnostics Inc., a Texas corporation, and ATNG Inc., a Nevada corporation, dated August 24, 2001. |
| 2.2 (2) | Plan and Agreement of Merger between ATNG, Inc. (TX) and ATNG of Nevada, Inc., dated September 6, 2003. |
| 2.3 (3) | Blue Kiwi Acquisition Agreement between Blue Kiwi, Inc., a Michigan corporation, and the Registrant dated August 10, 2004, as amended. |
| 2.4 (4) | Series C Common Stock Purchase Agreement between David N. Weiker, Sr. and Robert Simpson, an individual, dated February 3, 2006. |
| 3.1 (5) | Certificate of Amendment to Articles of Incorporation of the Registrant, effective May 3, 2005. |
| 3.2 (6) | Bylaws of the Registrant, as amended September 6, 2003. |
| 4.1 (1) | Certificate of Designation establishing the Registrant’s Series A Preferred Stock, effective August 24, 2004. |
| 4.2 (1) | Certificate of Designation establishing the Registrant’s Series B Preferred Stock, effective March 8, 2005. |
| 4.3 (1) | Certificate of Designation establishing the Registrant’s Series C Preferred Stock, effective March 21, 2005, as amended. |
| 10.1 (7) | Standby Equity Distribution Agreement between Cornell Capital Partners, LP and the Registrant dated December 8, 2005. |
| 10.2 (8) | Form of Indemnification Agreement |
| 10.3 (9) | Settlement Agreement and Release between Robert C. Simpson and the Registrant and Charles Duke and Jonathon Derek Seltzer, the significant stockholders of Sartam Industries, Inc., dated December 31, 2005. |
| Certification of David N. Weiker, Sr., Chief Executive Officer, Chairman of the Board of Directors and Treasurer of Zann Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.302 of the Sarbanes-Oxley Act of 2002. |
| Certification of George E. Betts, Chief Financial Officer of Zann Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.302 of the Sarbanes-Oxley Act of 2002. |
| Certification of David N. Weiker, Sr., Chief Executive Officer, Chairman of the Board of Directors and Treasurer of Zann Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of 2002. |
| Certification of George E. Betts, Chief Financial Officer of Zann Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of 2002. |
| (1) | Incorporated by reference to the Registrant’s Form 10-KSB as filed with the SEC on April 18, 2005. |
| (2) | Incorporated by reference to the Registrant’s Form 14-A as filed with the SEC on August 18, 2003. |
| (3) | Incorporated by reference to the Registrant’s Form 8-K/A as filed with the SEC on May 3, 2005. |
| (4) | Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on February 8, 2006. |
| (5) | Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on June 22, 2005. |
| (6) | Incorporated by reference to the Registrant’s Form 10-QSB as filed with the SEC on November 21, 2005. |
| (7) | Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on December 8, 2005. |
| (8) | Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on March 10, 2006. |
| (9) | Incorporated by reference to the Registrant’s Form 8-K as filed with the SEC on March 3, 2006. |
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Zann Corp. |
| Dated: May 11, 2006 | |
| | By /s/ David N. Weiker Sr. |
| | David N. Weiker, Sr., Chairman of the Board of Directors, Chief Executive Officer, Treasurer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| | | |
| /s/ David N. Weiker, Sr. | Chairman, CEO, Treasurer | May 11, 2006 |
| David N. Weiker Sr. | | |
| | | |
| /s/ George E. Betts | Chief Financial Officer | May 11, 2006 |
| George E. Betts | | |
| | | |
| /s/ David N. Weiker II | Chief Operating Officer | May 11, 2006 |
| David N. Weiker II | | |
| | | |
| /s/ Thomas L. Fogarty | Director | May 11, 2006 |
| Thomas L. Fogarty | | |
