UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT 0F 1934
FOR THE PERIOD ENDED: JUNE 30, 2004
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 0-30432
----------------
ZIM CORPORATION
(Exact name of small business issuer as specified in its charter)
CANADA N/A
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20 COLONNADE ROAD, SUITE 200, OTTAWA, ONTARIO, CANADA K2E 7M6
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, including Area Code: (613) 727-1397
------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
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|_|
Indicate the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date.
- --------------------------------------------------------------------------------
CLASS OUTSTANDING AT AUGUST 11, 2004
- --------------------------------------------------------------------------------
Common shares 58,414,792
- --------------------------------------------------------------------------------
Transitional Small Business Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended June 30, 2004 and June 30, 2003.............................2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended June 30, 2004 and June 30, 2003.............................3
Condensed Consolidated Balance Sheets as at June 30, 2004 (Unaudited)
and March 31, 2004.............................................................4
Notes to Condensed Consolidated Financial Statements (Unaudited)...............5
Item 2. Management's Discussion and Analysis or Plan of Operation............12
Item 3. Controls and Procedures..............................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................21
Item 2. Changes in Securities................................................21
Item 3. Defaults upon Senior Securities......................................21
Item 4. Submission of Matters to a Vote of Security Holders..................21
Item 5. Other Information....................................................21
Item 6. Exhibits and Reports on Form 8-K.....................................21
Signatures....................................................................23
Exhibits
1
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ZIM Corporation
Condensed Consolidated Statements of Operations
(Expressed in US dollars)
Three months ended Three,months ended
June 30, 2004 June 30, 2003
----------------------------------------
(Unaudited) (Unaudited)
$ $
Revenue 1,478,716 443,357
------------------- -------------------
Expenses
Cost of revenue 1,281,615 75,868
Selling, general and administrative 1,038,495 745,100
Research and development 173,480 180,111
Amortization of intangible assets 67,396 5,472
------------------- -------------------
Total operating expenses 2,560,986 1,006,551
------------------- -------------------
Operating loss before income taxes and interest (1,082,270) (563,194)
Interest 1,617 26,540
------------------- -------------------
Operating loss before income taxes (1,083,887) (589,734)
Income taxes recoverable (91,684) (73,973)
------------------- -------------------
Net loss (992,203) (515,761)
=================== ===================
Basic and fully diluted loss per share (0.018) (0.013)
=================== ===================
Weighted average number of shares outstanding 55,311,138 38,914,634
=================== ===================
===============================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ZIM Corporation
Condensed Consolidated Statements of Cash Flows
(Expressed in US dollars)
Three months Three months
ended June 30, ended June 30,
2004 2003
--------------- ----------------
(Unaudited) (Unaudited)
$ $
OPERATING ACTIVITIES
Net loss (992,203) (515,761)
Items not involving cash:
Depreciation of property and equipment 78,757 49,730
Amortization of intangible assets 132,576 5,472
Compensation expense 257,679 -
Changes in operating working capital (325,563) 43,111
-------------- ---------------
Cash flows used in operating activities (848,754) (417,448)
-------------- ---------------
INVESTING ACTIVITIES
Purchase of property and equipment (36,015) (41,319)
-------------- ---------------
Cash flows used in investing activities (36,015) (41,319)
-------------- ---------------
FINANCING ACTIVITIES
Repayment of capital lease obligations - (15,109)
Proceeds from the exercise of options 46,600 -
Proceeds from shares issued through a private placement 381,536 -
Net proceeds from related parties - 535,210
-------------- ---------------
Cash flows provided by financing activities 428,136 520,101
-------------- ---------------
Effect of changes in exchange rates on cash (22,188) (85,496)
-------------- ---------------
Decrease in cash (478,821) (24,162)
Cash, beginning of period 870,520 442,925
-------------- ---------------
Cash, end of period 391,699 418,763
============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
- -------------------------------------------------------------------------------------------
3
ZIM Corporation
Condensed Consolidated Balance Sheets
(Expressed in US dollars)
June 30, March 31
2004 2004
--------------- ---------------
(Unaudited) (Audited)
$ $
ASSETS
Current assets
Cash 391,699 870,520
Accounts receivable, net 1,008,381 1,022,626
Investment tax credits receivable 401,523 350,780
Prepaid expenses 41,820 60,430
--------------- ---------------
1,843,423 2,304,356
Property and equipment, net 550,997 601,523
Intangible assets, net 1,283,238 1,442,666
Goodwill 2,357,062 2,397,620
--------------- ---------------
6,034,720 6,746,165
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 498,576 491,053
Accrued liabilities 591,807 876,007
Deferred revenue 327,128 369,077
--------------- ---------------
1,417,511 1,736,137
--------------- ---------------
Shareholders' Equity
Preferred shares, no par value, non-cumulative dividend
at a rate to be determined by the Board of Directors
redeemable for CDN $1 per share. Authorized unlimited
shares; issued and outstanding NIL shares at June 30,
2004 and March 31, 2004.
Special shares, no par value, non-voting, participating,
convertible into common shares on a one-for-one basis at
any time at the option of the holder and automatically
on the earlier of (i) the fifth day following the date
of issuance of a receipt for a final prospectus
qualifying the common shares issuable upon conversion of
the special shares; (ii) June 1, 2004. Authorized
unlimited shares; issued and outstanding NIL shares at
June 30, 2004 and NIL at March 31, 2004. All special
shares were converted into common shares on June 1,
2003.
Common Shares, no par value, 16,457,906 16,029,770
authorized unlimited shares issued and outstanding
56,310,581 shares at June 30, 2004 and 55,180,026 shares
at March 31, 2004.
Additional paid-in capital (Note 6) 1,798,638 1,540,959
Accumulated deficit (13,241,777) (12,249,573)
Accumulated other comprehensive loss (397,558) (311,128)
--------------- ---------------
4,617,209 5,010,028
--------------- ---------------
6,034,720 6,746,165
=============== ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
=================================================================================================
4
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of ZIM
Corporation ("ZIM" or the "Corporation") and its subsidiaries have been prepared
pursuant to the rules and regulations of the United States Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP") have
been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the latest transitional
report on Form 10-KSB. These statements have been prepared on the same basis as
the audited consolidated financial statements for the ten months ended March 31,
2004 and, in the opinion of management, include all adjustments considered
necessary for a fair presentation of financial position, results of operations
and cash flows of the Corporation. The results of operations for the three
months ended June 30, 2004 are not necessarily indicative of the results to be
expected for the full year.
2 - NATURE OF OPERATIONS AND LIQUIDITY
The Corporation was incorporated under the Canada Business Corporations Act on
October 17, 2002. The Corporation has built upon its core database technology to
create an innovative solution to provide wireless data services and systems that
enable people to engage in remote or mobile decision-making based on real-time
interactive data communications and transactions. On April 1, 2004 the
Corporation and one of its wholly owned subsidiaries, ZIM Technologies
International Inc. amalgamated into ZIM Corporation.
These financial statements have been prepared on a going concern basis which
assumes that the Corporation will realize the carrying value of its assets and
satisfy its obligations as they become due in the normal course of operations.
As at June 30, 2004 the Corporation has incurred a loss of $992,203 for the
three months then ended and has incurred losses during each of the last five
years. In addition, the Corporation generated negative cash flows from
operations of $848,754 for the three months ended June 30, 2004 and has
generated negative cash flows from operations during each of the last five
years.
The Corporation's management team has focused the direction of the Corporation
from a mature database and application development technology player to a
provider of interactive mobile messaging. To establish the interactive mobile
messaging, the Corporation needs substantial funds for marketing and business
development.
All of the factors above raise substantial doubt about the Corporation's ability
to continue as a going concern. Management's plans to address these issues
include continuing to raise capital through the placement of equity, obtaining
additional advances from related parties and, if necessary, renegotiating the
repayment terms of accounts payable and accrued liabilities. The Corporation's
ability to continue as a going concern is subject to management's ability to
successfully implement the above plans. Failure to implement these plans could
have a material adverse effect on the Corporation's position and/or results of
5
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
operations and may necessitate a reduction in operating activities. The
consolidated financial statements do not include adjustments that may be
required if the assets are not realized and the liabilities settled in the
normal course of operations.
In the longer term, the Corporation has to generate the level of sales which
would result in cash self sufficiency and it may need to continue to raise
capital by selling additional equity or by obtaining credit facilities. The
Corporation's future capital requirements will depend on many factors,
including, but not limited to, the market acceptance of its software, the level
of its promotional activities and advertising required to support its software.
No assurance can be given that any such additional funding will be available or
that, if available, it can be obtained on terms favorable to the Corporation.
3 - RELATED PARTY TRANSACTIONS
On June 25, 2004, the Corporation's Chief Executive Officer and majority
shareholder, a corporation owned by the spouse of the Corporation's Chief
Executive Officer and the spouse of the Corporation's Chief Executive Officer
participated in a private placement of the Corporation's common shares whereby
they purchased 775,789 units. The shares issued in the private placement were
priced at $0.38 per unit, the market price on June 8, 2004, with each unit
consisting of one common share and two warrants to purchase common shares for
$0.38 per share.
4 - SIGNIFICANT ACCOUNTING POLICIES
COST OF REVENUE
Cost of revenue includes all variable costs that are directly related to the SMS
and software revenues. The prior period amounts have been reclassified to
conform to the current period presentation.
STOCK OPTIONS AND WARRANTS
Stock option grants are accounted for in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations including Financial Accounting
Standards Board Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation." As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price or in connection with the modification to outstanding awards
and/or changes in grantee status. No employee stock option compensation expense
is reflected in our results of operations, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
Compensation expense related to stock options granted to non-employees is
accounted for under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) which requires entities to
recognize an expense based on the fair value of the related awards.
We are not required, and we currently do not intend to transition to use a fair
value method of accounting for stock-based employee compensation. The following
table illustrates the effect on net loss and basic and diluted net loss per
share as if we had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation.
6
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Warrants issued to investors in private placements have been valued using the
fair value of the equity instrument issued, as this was more readily
determinable. As these warrants were issued as a cost associated with raising
capital through the private placements, no entry was recorded to additional
paid-in capital.
Three months Three months
ended June 30, ended June 30,
2004 2003
------------------ -------------------
(Unaudited) (Unaudited)
$ $
Net loss, as reported (992,203) (515,761)
Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,048,147) (1,106,573)
------------------ -------------------
Net loss, pro forma (2,040,350) (1,622,334)
================== ===================
Basic and diluted net loss per share:
As reported, basic and diluted (0.018) (0.013)
================== ===================
Net loss, pro forma per share (0.037) (0.042)
================== ===================
Total options granted during the three months ended June 30, 2004 and 2003, were
5,657,500 and 3,602,572 respectively. Options granted to employees during the
three months ended June 30, 2004 and 2003, were 4,647,500 and 3,502,572
respectively. The fair value of options granted to employees and stock purchased
under our employee stock purchase plan (ESOP) at date of grant was estimated
using the Black-Scholes pricing model with an expected life of 18 months, and
expected volatility of 80%, a risk free rate of 3.00% and dividend yield of NIL.
Options granted to non-employees during the three months ended June 30, 2004
were 1,010,000. The fair value of stock options issued to non-employees at date
of grant was estimated using the Black-Scholes pricing model with an expected
life of 18 months, and expected volatility of 80%, a risk free rate of 3.00% and
dividend yield of NIL.
Compensation expense of $257,679 was recognized in the three months ended June
30, 2004 based on the fair value of these options.
7
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
5 - LOSS PER SHARE
For the purposes of the loss per share computation, the weighted average number
of common shares outstanding has been used. Had the treasury stock method been
applied to the unexercised share options, the effect on the loss per share would
be anti-dilutive.
The following securities have exercise prices below the market value at the
quarter end and as a result could potentially dilute basic earnings per share in
the future. They have not been included in diluted earnings per share because
their effect was anti-dilutive:
June 30, 2004 June 30, 2003
------------------- ---------------------
Stock options 3,823,502 14,800,000
Warrants 2,021,110
Total options outstanding at June 30, 2004 and 2003 were 22,737,571 and
18,465,904 respectively. Total warrants outstanding at June 30, 2004 and 2003
were 3,171,116 and NIL respectively.
6 - SHAREHOLDERS' EQUITY
The Corporation issued 120,000 common shares during the three months ended June
30, 2004 and NIL for the three months ended June 30, 2003 through the exercise
of stock options by employees.
On June 25, 2004, the Corporation completed the first part of a non-brokered
private placement of 1,010,555 units at $0.38 per unit, for total gross proceeds
of $384,011. Each unit consists of one common share and two common share
purchase warrants. Each warrant may be exercised at any time prior to September
25, 2005. Of these 1,010,555 units, 775,789 were purchased by related parties.
ADDITIONAL PAID IN CAPITAL
During the three month period ended June 30, 2004, the Corporation issued
options to non-employees, in consideration for advisory services, and as a
result, additional paid in capital has been increased by $257,679.
7 - COMPREHENSIVE LOSS
Comprehensive loss includes changes in the balances of items that are reported
directly in a separate component of shareholders' equity in our unaudited
Condensed Consolidated Balance Sheet. The components of comprehensive loss are
as follows:
8
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Three months Three months
ended June 30, ended June 30,
2004 2003
(Unaudited) (Unaudited)
------------------------ ------------------------
$ $
Net loss, as reported (992,203) (515,761)
Foreign currency translation adjustment (86,430) (102,125)
------------------------ ------------------------
Comprehensive loss (1,078,633) (617,886)
======================== ========================
8 - SEGMENT REPORTING
There has been no change in the basis of segmentation or basis of measurement of
segment profit or loss from that presented in the audited financial statements
for the ten month period ended March 31, 2004.
The following table sets forth external revenues attributable to and used by the
two identified product lines:
Three months Three months
ended June 30, ended June 30,
2004 2003
(Unaudited) (Unaudited)
------------------------ ------------------------
$ $
Revenue
SMS 1,160,070 28,833
Software 318,646 414,524
----------------------- -------------------
Total revenue 1,478,716 443,357
======================= ===================
The following table sets forth segment assets used by each product line:
June 30, 2004 March 31, 2004
(Unaudited) (Audited)
----------------------- ------------------------
$ $
Segment assets
SMS 4,693,930 5,705,354
Software 1,340,790 1,040,811
----------------------- ------------------------
Total segment assets 6,034,720 6,746,165
======================= ========================
9
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
The following table set forth external revenues attributable to geographic
areas. External revenues are based on location of the customer:
Three months Three months
ended June 30, ended June 30,
2004 2003
(Unaudited) (Unaudited)
----------------------- ------------------------
$ $
Revenues
Canada 71,239 74,636
Brazil 199,410 221,650
United States 54,751 22,403
United Kingdom 1,120,430
Europe 27,723 122,858
Other 5,163 1,810
---------------------- ------------------------
Total revenue 1,478,716 443,357
====================== ========================
9 - COMMITMENTS AND CONTINGENCIES
The Corporation has the following lease commitments relating to facilities and
equipment:
$
Balance of 2005 125,250
2006 145,820
2007 135,240
2008 56,677
Thereafter nil
-----------------
462,987
==================
GOVERNMENT ASSISTANCE
During the year ended May 31, 2002, the Corporation received $78,412 from the
Canadian International Development Agency for the purpose of undertaking a
viability study of acquiring Zim Technologies do Brasil Ltda. The amount is
repayable, based on 1% of Zim Technologies do Brasil Ltda.'s revenues from July
23, 2001 to May 31, 2005 to a maximum of $78,413, if revenues realized by Zim
Technologies do Brasil Ltda. exceed $3,646,973 cumulatively.
OTHER
The Corporation is committed to pay an arm's length third party $75,000, in
consideration for consulting services, upon the listing of ZIM Corporation's
common shares on a national securities exchange selected by ZIM Corporation's
board of directors.
10
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2004
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Zim Technologies do. Brasil Ltda. may be subject to the Contribution of
Intervention on Economic Domain tax on values remitted abroad. However, the
Corporation's management intends to contest this assessment if issued.
Consequently, no provision has been accounted for in that respect. If an
assessment is issued and the Corporation is unsuccessful at contesting the
assessment, the resulting settlement would not have a material impact on the
consolidated financial statements of the Corporation.
10 - RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
11 - SUBSEQUENT EVENTS
On July 30, 2004, the Corporation completed the second part of this private
placement of 2,004,211 units at $0.38 per unit, for total gross proceeds of
$761,600. All of the 2,004,211 units were purchased by the spouse of the
Corporation's Chief Executive Officer.
11
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
This Management's Discussion and Analysis or Plan of Operation contains
forward-looking statements that are based on current expectations, estimates and
projections about the Corporation and the industries in which it operates. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the Corporation. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecast in such forward-looking
statements. The Corporation undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise, other than as required by law.
Potential risks and uncertainties include, without limitation, the uncertainties
inherent in the development of new software products, the Corporation's need for
significant additional funding, the uncertain market acceptance of the
Corporation's products, the uncertainties inherent in managing the integration
of the Corporation's acquired businesses, and rapid developments in technology,
including developments by competitors. We operate in a very competitive and
rapidly changing environment. New risks can arise and it is not possible for
management to predict all such risks, nor can it assess the impact of all such
risks on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction of
actual results.
EXECUTIVE SUMMARY
Beginning in 2001, we expanded our business strategy to include the design and
development of a line of mobile data software products based on SMS (Short
Messaging Service) technology. Commencing in February 2004, revenues from these
SMS applications have become a significant contributor to our total revenues.
The revenue sources from SMS applications are a result of the completion of a
suite of SMS products by ZIM as well as the acquisition of EPL (as defined
below) which was completed on February 10, 2004. For the first quarter of the
2005 fiscal year, revenues from UK operations were approximately $1.1 million.
Management expects to see revenues continue at this level for the balance of the
fiscal year.
Sales of Zim IDE Software continued at lower levels than expected as customers
are waiting for the release of a new version of the product. Management expects
sales of this software to increase in subsequent quarters with the anticipated
release of the next version; however we do not expect the overall volume of the
software segment to display significant increases or decreases on an annualized
basis.
12
OVERVIEW
Historically we have been known as a developer and provider of the Zim
Integrated Development Environment, or the Zim IDE software. Zim IDE software is
currently used by companies in the design, development, and management of
information databases and mission critical applications. The technology for Zim
IDE software was developed at Bell Northern Research in Ottawa, Ontario in the
1980s and acquired by ZIM in 1996. The software is now licensed to thousands of
customers through direct sales as well as an established network of VARs and
distributors.
Beginning in 2001, we expanded our business strategy to include the design and
development of a line of mobile data software products. ZIM designs these mobile
data software products to take advantage of the existing wireless data network
infrastructure known as SMS. SMS, or text messaging as it is also known, enables
users to communicate person to person and application to person through cellular
handsets and other SMS-enabled devices. The use of SMS has already experienced a
significant increase throughout Europe and Asia and the market is now expanding
in North America.
Many companies offer SMS text messaging applications to send one-way and two-way
messages from a desktop computer or website; however only a few of these
wireless product offerings allow for e-mails to be forwarded to a cellular
phone. Even fewer integrate with desktop computers in a business environment
that extends the functionality of the corporate office desktop (e-mail,
calendars, and contacts) to cellular phones. Our technology offers a unique
two-way SMS solution that allows for: seamless integration with both Microsoft
Outlook and Microsoft Excel, open delivery threads for on-going message
conversations, sending e-mail to SMS (and the reverse) without losing message
integrity and maintaining message history, two-way messaging directly via SMS
and without the use of complicated replying codes.
Our key products, ZIM SMS Office and ZIM Chat, are resold by telecommunication
carriers to their subscribers under the carrier's own brand. We have signed
contracts to distribute our applications with StarHub, an info-communications
provider based in Singapore, Radius-ED, a Malaysia-based SMS gateway and
solutions provider in the Asia-Pacific region, Rogers AT&T Wireless, a Canadian
telecommunications company, and Telcel, a Mexico-based company.
The first quarter of fiscal 2005 was focused on preparing for the commercial
launch of our products with Telcel in Mexico and Starhub in Singapore, including
their development of marketing collateral, establishing a billing system with
them and translating various aspects of the product. Now that this preparation
has been completed, management expects the launch of its products in the second
quarter of fiscal 2005. It is likely that the carriers will commence
distribution of the marketing collateral in the second quarter of fiscal 2005,
followed by a free trial period for their end users. ZIM does not expect
significant revenues in the second quarter as a result of the free trials.
In addition, we continue to have trials of our SMS technology with carriers in
the U.S., Australia, Hong Kong and Malaysia with a customer base of
approximately 55 million subscribers. These trials are expected to continue
through the next quarter. Management expects to be in contract negotiations with
these carriers by the end of the current fiscal year. Management's business
model assumes a penetration of approximately 0.25% of users and a monthly
subscription fee of $1.50 per user. Under this model, the trials could result in
an end customer base of 137,500 users with recurring monthly revenue of
approximately $206,000. The future growth and sustainability of our business
model is dependent upon user acceptance of our products. Because these products
are new and the market is untested, we do not have a clear understanding of
consumer behavior, making it difficult to predict future growth or usage.
13
In February 2004, we purchased EPL Communications Limited and E-Promotions
Limited in the U.K. (together "EPL"). We have now leveraged this acquisition to
expand into the global SMS market for premium, bulk, location-based and
interactive two-way SMS delivery. During the first quarter of 2005, we were able
to further develop technology platforms that would allow us to offer more SMS
applications to small and medium sized enterprises. The resulting services were
launched subsequent to the quarter end, in partnership with MobileWay, a global
provider of mobile content and network services.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2003
The following discussion includes information from the unaudited consolidated
statements of earnings for the three months ended June 30, 2004 and 2003. The
information for the three months ended June 30, 2004, in management's opinion,
has been prepared on a basis consistent with the audited consolidated financial
statements for the ten months ended March 31, 2004, and includes all adjustments
necessary for a fair presentation of information presented. These operating
results are not necessarily indicative of results for any future period. You
should not rely on them to predict our future performance.
All financial information is prepared in accordance with generally accepted
accounting principles (GAAP) in the United States and is stated in US dollars.
REVENUES
We are deriving a significant portion of our revenue from SMS applications. We
also continue to have product sales of our Zim IDE software as well as the
maintenance and consulting services related to the software.
Change
Three months from As a % of Three months As a % of
ended prior total ended total
June 30, 2004 year revenue June 30, 2003 revenue
--------------------- ------------ ---------------- --------------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $
REVENUE
SMS applications 1,160,070 3,923% 78% 28,833 7%
Software 98,962 -55% 7% 218,869 49%
Maintenance 216,228 18% 15% 182,573 41%
Consulting 3,456 -74% 0% 13,082 3%
--------------------- ------------ ---------------- --------------------- ----------------
Total revenue 1,478,716 234% 100% 443,357 100%
--------------------- ------------ ---------------- --------------------- ----------------
Total revenues for the three months ended June 30, 2004 were $1,478,716,
representing an increase of 234% from the same period in the prior year. This
increase is primarily a reflection of the acquisition of the SMS operations in
the United Kingdom, on February 10, 2004.
14
Approximately $1,000,000 of the $1,160,170 in SMS revenue relates to ZIM's role
as an aggregator of SMS messages in the United Kingdom. Customers, including
telephone carriers, contract with ZIM to send SMS messages on our platforms.
The remaining revenues relate to SMS applications in Canada including SMS
marketing campaigns, SMS Office and SMS Mail.
Software sales have decreased for the three months ended June 30, 2004 as
customers are awaiting the release of the next version of the Zim IDE software.
We expect to release this software in the second quarter of 2005. With the
release of the new version, management anticipates sales levels to be consistent
with the prior year.
Maintenance contracts are 18% higher than in prior periods. The increase in
maintenance contracts relate to sales to new customers in Brazil that occurred
in the final few months of the prior fiscal period. Management expects the
maintenance revenue in the second quarter to be consistent with the results of
the first quarter of 2005, or approximately $216,000.
Consulting revenues continue to decline as all customers are using a version of
the software that has been on the market for a minimum of one year. With the
release of Zim 8, there may be new consulting opportunities but it is not
expected to be a significant part of ZIM's business.
EXPENSES
Three months ended Three months ended
June 30, June 30,
2004 2003
---------------------- -----------------------
(Unaudited) (Unaudited)
$ $
Cost of revenue 1,281,615 75,868
Selling, general and administrative 1,038,495 745,100
Research and development 173,480 180,111
Amortization of intangible assets 67,396 5,472
Interest 1,617 26,540
Income taxes recoverable (91,684) (73,973)
---------------------- -----------------------
2,470,919 959,118
====================== =======================
Operating expenses increased substantially from prior years as a result of the
costs related to revenue and the increase in amortization of intangible assets
purchased in the acquisition of the UK based companies.
15
COST OF REVENUE
Three months ended Three months ended
June 30, 2004 June 30, 2003
-----------------------------------------------------
$ $
COST OF REVENUE
SMS applications 1,218,945 20,310
Software 37,240 28,033
Maintenance 22,406 21,807
Consulting 3,024 5,718
--------------------- -----------------------
1,281,615 75,868
--------------------- -----------------------
MARGINS
SMS applications (58,875) -5% 8,523 30%
Software 61,722 62% 190,836 87%
Maintenance 193,822 90% 160,766 88%
Consulting 432 13% 7,364 56%
--------------------------------------------------------
197,101 13% 367,489 83%
--------------------------------------------------------
Overall, we realized a gross margin of $197,101 or 13% for the three months
ended June 30, 2004 as compared to $367,489 or 83% for the three months ended
June 30, 2003. This change is a result of the increased activity in our SMS
applications.
Commencing in February 2004, ZIM has been realizing revenues and direct expenses
relating to SMS applications. Included in direct costs are payments made to
carriers, amortization of core technology related to SMS applications and
salaries relating to support for applications. As a result we experienced a
negative gross margin of 5%. In the same period in prior years, the direct costs
related only to supporting salaries as there was no amortization of core
technology or payments to carriers.
In the first quarter of 2004, a portion of our SMS revenue came from the
transport of bulk SMS messages. Margins on bulk SMS, throughout the industry,
tend to be substantially lower than the transport of premium SMS messages. In
future quarters, management expects to see an increase in premium message
traffic which will provide additional margin. In addition, management expects to
see a positive gross margin on its SMS activities going forward as we start to
realize efficiencies in our support of the SMS applications.
Direct costs of $37,240 relating to software sales include approximately $33,110
of costs incurred as a result of sales in Brazil. The remaining $4,000 relates
to salaries incurred as a direct result of the sale of software. The margins
have decreased in the three months ended June 30, 2004, as compared to the three
months ended June 30, 2003, as a result of decreased selling prices.
The gross margins on maintenance between the first quarter of 2005 and 2004 have
remained relatively stable at 90% and 88% respectively. Maintenance direct costs
are salaries and benefits related to the support given to customers.
16
Consulting is not considered to be a core part of our business and as a result,
we offer consulting services at the request of our client. These services are
priced competitively with various margins achieved.
SELLING, GENERAL AND ADMINISTRATIVE
The $293,395, or 39% increase in selling, general and administrative expenses
for the quarter ended June 30, 2004 primarily relates to $257,679 in non-cash
compensation paid to non-employees for advisory services. In the first quarter
of 2005, advisory board members received options which have been valued using
the Black Scholes model and expensed in the period.
The remaining increase of $35,716 relates primarily to administrative expenses
in the United Kingdom.
RESEARCH AND DEVELOPMENT
Research and development decreased slightly from the same period in the prior
year. This decrease is related to a decrease in miscellaneous project
expenditures as the majority of the development is complete.
AMORTIZATION OF INTANGIBLE ASSETS
We acquired new intangible assets with the acquisition of EPL. Included in the
intangible assets are core technology and customer relationships. We have
estimated that the life of the core technology is five years and the customer
relationships are 18 months. As a result, effective February, 2004, we have been
recognizing increased amortization.
Amortization of intangible assets relating to the core technology has been
included in the direct costs of SMS applications.
INTEREST
In June 2003, the Corporation incurred interest on the debt held by our Chief
Executive Officer and a related party at 5% per annum. This debt was converted
into shares in January 2004, and as a result, there are minimal interest
expenses for the first quarter of fiscal 2005.
INCOME TAXES
Included in income taxes are taxes paid on revenues earned in Brazil as well as
investment tax credits (ITC) on research and development expenditures in Canada.
Income taxes recoverable for the quarter ended June 30, 2004 are slightly higher
than June 30, 2003, as a result of lower revenues in Brazil and the resulting
lower taxes paid in Brazil combined with an increase in the accrual of ITCs
receivable. In the fiscal quarter ended June 30, 2003, we recognized 75% of the
estimated ITCs receivable. For the fiscal quarter ended June 30, 2004, we
increased this estimate to 90% of the ITCs receivable as a result of actual
receipts of past claims.
As a result of the factors described above, the net loss for the three months
ended June 30, 2004 was $992,203 as compared to $515,761 for the three months
ended June 30, 2003.
17
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, ZIM had cash of $391,699 and working capital of $425,912 as
compared to working capital of $568,219 at March 31, 2004. The working capital
continues to remain positive as a result of a private placement of units in June
2004 (see below).
Cash flows for the fiscal periods were as follows:
Three months Three months
ended June 30, ended June 30,
2004 2003
----------------- ------------------
(Unaudited) (Unaudited)
$ $
Cash flows used in operating activities (848,754) (417,448)
Cash flows used in investing activities (36,015) (41,319)
Cash flows provided by financing activities 428,136 520,101
----------------- ------------------
(456,633) 61,334
================= ==================
ZIM used $848,754 in operating activities for the three months ended June 30,
2004 as compared to $417,448 in the same period in 2003. The increase in cash
used in operations is attributed to increase in the net loss for the respective
periods and the use of non-cash working capital. As a result of the increase in
SMS revenue, ZIM is using more working capital to pay SMS vendors while
experiencing more days outstanding on accounts receivable. The increase in days
outstanding is a result of the time it takes the telephone carriers in the UK to
generate traffic reports for the messages sent and to generate payments. All
carriers have a strong payment history and usually pay within 50 days of the end
of each month.
ZIM used $36,015 of cash in its investing activities during the first quarter of
2005. These funds were used to purchase computer equipment. A similar amount was
used in the quarter ended June 30, 2003.
ZIM increased its cash by financing activities in both periods ended June 30,
2004 and 2003. In the first quarter ended June 30, 2004, ZIM completed a private
placement, for net proceeds of $381,536, with approximately 77% being received
from a related party. For the three months ended June 30, 2003, the same related
party provided funds in the form of debt.
The financing in June 2004, was a non-brokered private placement to non-U.S.
accredited investors of 1,010,555 units at $0.38 per unit, for total gross
proceeds of $384,010 and net proceeds of $381,536. Each unit consisted of one
common share and two common share purchase warrants. Each warrant may be
exercised at any time prior to September 25, 2005 at an exercise price of $0.38
per share.
ZIM will need an estimated $3,200,000 in additional financing in order to fund
its operating losses and other working capital requirements for the next 12
months. Approximately $750,000 was received subsequent to the end of the quarter
from a related party as part of the private placement. ZIM does not have a bank
credit facility or other working capital credit line under which ZIM may borrow
funds for the estimated additional financing of $2,450,000.
18
ZIM expects to obtain further financing through the sale of its securities to
investors as well as the exercising of options from option holders and warrants.
However, ZIM has not received any commitments from any third parties to provide
additional financing. Future liquidity and cash requirements will depend on a
wide range of factors including the level of business in existing operations and
ZIM's ability to raise additional financing. Accordingly, there can be no
assurance that ZIM will be able to meet its working capital needs for any future
period. If ZIM is unable to obtain further financing, the Corporation will
experience staff lay-offs and other cost reductions in order to continue
operations. ZIM would not be able to further technology developments or business
development initiatives.
As a result of some of the items noted above, the Report of the Independent
Registered Public Accounting Firm for the ten-month period ended March 31, 2004
indicated that there was substantial doubt regarding our ability to continue as
a going concern.
The following is a summary of ZIM's contractual obligations for the periods
indicated that existed as of June 30, 2004 and is based on contracts signed by
third parties:
Operating lease obligations:
$
Balance of 2005 125,250
2006 145,820
2007 135,240
2008 56,677
2009 -
2010 -
----------------
462,987
================
19
ITEM 3 - CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in its SEC reports are
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Corporation's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, as the Corporation's are designed
to do, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As disclosed in the Corporation's Form 10-KSB for the ten-month transitional
period ended March 31, 2004, the Corporation's independent registered public
accounting firm advised the Audit Committee and management of certain
significant internal control deficiencies that they considered to be, in the
aggregate, a material weakness. These consisted of, inadequate staffing and
supervision leading to the untimely identification and resolution of certain
accounting and disclosure matters and failure to perform timely and effective
reviews. The independent registered public accounting firm indicated that they
considered these deficiencies to be reportable conditions as that term is
defined under standards established by the American Institute of Certified
Public Accountants. A material weakness is a significant deficiency in one or
more of the internal control components that alone or in the aggregate precludes
our internal controls from reducing to an appropriately low level of risk that
material misstatements in our financial statements will not be prevented or
detected on a timely basis.
Effective March 15, 2004, we hired a Controller for the finance department to
perform additional review procedures on internally generated documents. The size
of the Corporation continues to prevent us from being able to employ sufficient
resources to enable us to have adequate segregation of duties within our
internal control system. We will continue to monitor and assess the costs and
benefits of additional staffing in the finance department.
In response to the observations made by the independent registered public
accounting firm, the Corporation has expanded the scope of the review of the
financial statements on a monthly basis and has identified certain enhancements
to its internal controls and procedures. These enhancements will continue to be
implemented during fiscal 2005. Management believes that these enhancements will
start to address the matters raised above.
As required by the SEC rules, we have evaluated the effectiveness of the design
and operation of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Form 10-QSB. This evaluation was performed
under the supervision and with the participation of the Corporation's
management, including the Chief Executive Officer and Chief Financial Officer.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's controls and procedures were not
effective, as noted above.
The Corporation is working closely with its corporate and securities lawyers to
ensure that it maintains compliance with the Sarbanes-Oxley Act of 2002 and the
SEC regulations promulgated pursuant to that Act.
20
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - CHANGES IN SECURITIES
The following sets forth certain information regarding sales of and other
transactions with respect to, our securities issued during the three months
ended June 30, 2004:
On June 25, 2004, the Corporation issued 1,010,555 units in a non-brokered
private placement to non-U.S. investors at $0.38 per unit. Each unit consists of
one common share and two warrants to purchase an additional common share per
warrant at $0.38 per share expiring September 25, 2005. The units were issued to
unaffiliated persons, except that Michael Cowpland, the Chief Executive Officer
of the Corporation purchased 387,895 units and his spouse, and a corporation
controlled by his spouse purchased 193,947 units each. All of these issuances
were made in reliance upon the exemption from the registration requirements of
the Securities Act of 1933, as amended, provided by Section 4(2) of the
Securities Act for transactions by an issuer not involving a public offering.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Warrant
10.1 Share Purchase Agreement
31.1 Certification by the President and Chief Executive Officer, Dr.
Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer, Ms. Jennifer North,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
21
32.1 Certification by the President and Chief Executive Officer, Dr.
Michael Cowpland, pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer, Ms. Jennifer North,
pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Corporation filed a Current Report on Form 8-K on April 8, 2004 to
report on its financial results for the three and nine months ended
February 29, 2004.
On April 21, 2004, the Corporation filed an amended Form 8-K to
provide the financial statements and proforma financial information
required in connection with the acquisition of all of the outstanding
ordinary shares of E-Promotions Limited and EPL Communications
Limited.
On June 14, 2004 the Corporation filed a Current Report on Form 8-K to
report its financial results for the transitional ten month period
ended March 31, 2004.
On June 30, 2004, the Corporation filed an amended Current Report on
Form 8-K to provide additional disclosure regarding the change in
independent public accountants in June 2003.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZIM Corporation
Registrant
SIGNATURE TITLE DATE
/s/ Dr. Michael Cowpland President and August 12, 2004
- ------------------------ Chief Executive Officer
Michael Cowpland
/s/ Jennifer North Chief Financial Officer August 12, 2004
- ------------------
Jennifer North
23