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 QUARTERLY PERIOD ENDED: SEPTEMBER 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)
Issuer's Telephone Number, including Area Code: (613) 727-1397
N/A
(Former name, former address and former fiscal year,
if changed since last report)
1
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 NOVEMBER 10, 2004
Common shares 59,432,869
Transitional Small Business Format (check one): Yes |_| No |X|
2
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended September 30, 2004 and September 30, 2003...... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended September 30, 2004 and September 30, 2003................ 5
Condensed Consolidated Balance Sheets as at September 30, 2004
(Unaudited) and March 31, 2004............................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 7
Item 2. Management's Discussion and Analysis or Plan of Operation........ 14
Item 3. Controls and Procedures.......................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 27
Item 3. Defaults upon Senior Securities.................................. 27
Item 4. Submission of Matters to a Vote of Security Holders.............. 27
Item 5. Other Information................................................ 27
Item 6. Exhibits......................................................... 28
Signatures................................................................ 29
Exhibits
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ZIM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months Three months Six months Six months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------ ------------------- ------------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
REVENUE 3,227,000 507,317 4,705,716 950,674
------------------- ------------------- ------------------- -----------------
EXPENSES
Cost of revenue 2,612,763 60,567 3,894,378 121,599
Selling, general and administrative 821,486 580,452 1,859,983 1,340,387
Research and development 191,121 169,692 364,601 349,803
Amortization of intangible assets 105,387 9,351 172,783 14,823
Loss on disposal of property and equipment 29,543 - 29,543 -
------------------- ------------------- ------------------- -----------------
Total expenses 3,760,300 820,062 6,321,288 1,826,612
------------------- ------------------- ------------------- -----------------
Operating loss before income taxes
and interest (533,300) (312,745) (1,615,572) (875,938)
Interest (2,238) 31,619 (621) 58,158
------------------- ------------------- ------------------- -----------------
Operating loss before income taxes (531,062) (344,364) (1,614,951) (934,096)
Income taxes (recoverable) 3,952 (19,999) (87,732) (93,973)
------------------- ------------------- ------------------- -----------------
Net loss (535,014) (324,365) (1,527,219) (840,123)
=================== =================== =================== =================
Basic and fully diluted loss per
share (0.009) (0.008) (0.027) (0.021)
=================== =================== =================== =================
Weighted average number of shares
outstanding 57,745,747 40,090,209 56,533,934 39,508,881
=================== =================== =================== =================
===================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ZIM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in US dollars)
- ------------------------------------------------------------------------------------------------------------------------
Six months ended Six months ended
September 30, 2004 September 30, 2003
--------------------- -----------------------
(Unaudited) (Unaudited)
$ $
OPERATING ACTIVITIES
Net loss (1,527,219) (840,123)
Items not involving cash:
Depreciation of property and equipment 161,660 68,798
Amortization of intangible assets 269,966 14,823
Loss on disposal of property and equipment 29,543 -
Compensation expense 281,824 -
Changes in operating working capital (834,945) (259,871)
--------------------- -----------------------
Cash flows used in operating activities (1,619,171) (1,016,373)
--------------------- -----------------------
INVESTING ACTIVITIES
Proceeds on disposal of property and equipment 901 -
Purchase of property and equipment (36,015) (66,694)
--------------------- -----------------------
Cash flows used in investing activities (35,114) (66,694)
--------------------- -----------------------
FINANCING ACTIVITIES
Repayment of capital lease obligations - (15,109)
Proceeds from the exercise of options 66,600 -
Proceeds from shares issued through private placements, net 1,143,136 -
Proceeds from debt issued - 827,370
--------------------- -----------------------
Cash flows provided by financing activities 1,209,736 812,261
--------------------- -----------------------
Effect of changes in exchange rates on cash (5,544) 41,030
--------------------- -----------------------
DECREASE IN CASH (450,093) (229,777)
Cash, beginning of period 870,520 442,924
--------------------- -----------------------
Cash, end of period 420,427 213,147
===================== =======================
=========================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ZIM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
- ----------------------------------------------------------------------------------------------------------------
September 30, March 31,
2004 2004
---------- -----------
(Unaudited) (Audited)
$ $
ASSETS
Current assets
Cash 420,427 870,520
Accounts receivable, net 2,621,770 1,022,626
Investment tax credits receivable 435,596 350,780
Prepaid expenses 34,679 60,430
----------- -----------
3,512,472 2,304,356
Property and equipment, net 450,423 601,523
Intangible assets, net 1,214,368 1,442,666
Goodwill 2,491,940 2,397,620
----------- -----------
7,669,203 6,746,165
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 834,880 491,053
Accrued liabilities 1,421,718 876,007
Deferred revenue 265,062 369,077
----------- -----------
2,521,660 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 September 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 September 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, 17,239,506 16,029,770
authorized unlimited shares issued and outstanding 58,414,792 shares at
September 30, 2004 and 55,180,026 shares at March 31, 2004
Additional paid-in capital (Note 6) 1,822,783 1,540,959
Accumulated deficit (13,776,792) (12,249,573)
Accumulated other comprehensive loss (137,954) (311,128)
----------- -----------
5,147,543 5,010,028
----------- -----------
7,669,203 6,746,165
=========== ===========
===============================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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
unaudited 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 six months ended September 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 September 30, 2004 the Corporation has incurred a loss of $1,527,219 for
the six 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 $1,619,171 for the six months ended September 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 services and applications. To establish
the interactive mobile messaging business model, 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
operations and may necessitate a reduction in operating activities. The
unaudited, condensed 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.
7
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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 applications and
services and 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 for gross proceeds of $294,800. The shares issued
in the private placement were priced at $0.38 per unit, the closing market price
on the Over the Counter Bulletin Board ("OTCBB") on June 8, 2004, with each unit
consisting of one common share and two warrants to purchase common shares for
$0.38 per share.
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 gross proceeds of $761,600.
All of the 2,004,211 units were purchased by the spouse of the Corporation's
Chief Executive Officer.
4 - SIGNIFICANT ACCOUNTING POLICIES
STOCK OPTIONS
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.
8
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Three months Three months Six months Six months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
------------------- ------------------- ------------------- -------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
Net loss, as reported (535,014) (324,365) (1,527,219) (840,123)
Stock-based employee compensation expense
determined under fair value based method
for all awards (90,975) (184,197) (1,139,121) (1,290,771)
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Net loss, pro forma (625,989) (508,562) (2,666,340) (2,130,894)
=================== =================== =================== ===================
Basic and diluted net loss per share:
As reported, basic and diluted (0.009) (0.008) (0.027) (0.021)
=================== =================== =================== ===================
Net loss, pro forma per share (0.011) (0.013) (0.047) (0.054)
=================== =================== =================== ===================
Total options granted during the three and six months ended September 30, 2004
were 1,045,000 and 6,652,500, respectively, and for the three and six months
ended September 30, 2003, were 589,593 and 4,192,165, respectively. Options
granted to employees during the three and six months ended September 30, 2004
were 845,000 and 5,492,500, respectively and for the three and six months ended
September 30, 2003, were 589,593 and 4,192,165, 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 and six months ended September
30, 2004 were 200,000 and 1,160,000, respectively and NIL for the three and six
months ended September 30, 2003. 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 $24,145 and $281,824 were recognized in the three and
six months ended September 30, 2004, respectively, based on the fair value of
these options.
9
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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:
September 30, 2004 September 30, 2003
------------------------ ---------------------
Stock options 15,000 14,800,000
Warrants -
Total options outstanding at September 30, 2004 and 2003 were 21,955,671 and
19,055,497 respectively. Total warrants outstanding at September 30, 2004 and
2003 were 7,179,538 and NIL respectively.
6 - SHAREHOLDERS' EQUITY
The Corporation issued 120,000 and 220,000 common shares during the three and
six months ended September 30, 2004, respectively and NIL for the three and six
months ended September 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.
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. Each warrant may be exercised at any time prior to October 30, 2005.
All of the 2,004,211 units were purchased by the spouse of the Corporation's
Chief Executive Officer.
ADDITIONAL PAID IN CAPITAL
During the three and six month periods ended September 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 $24,145 and $281,824,
respectively.
10
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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:
Three months Three months Six months Six months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------- ------------------- ------------------- --------------------
$ $ $ $
Net loss, as reported (535,014) (324,365) (1,527,219) (840,123)
Foreign currency translation adjustment 259,604 (20,855) 173,174 (122,980)
--------------------- ------------------- ------------------- --------------------
Comprehensive loss (275,410) (345,220) (1,354,045) (963,103)
===================== =================== =================== ====================
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 Six months Six months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------- --------------------- -------------------- -------------------
$ $ $ $
Revenue
SMS 2,913,871 66,913 4,073,941 95,746
Software 313,129 440,404 631,775 854,928
--------------------- --------------------- -------------------- -------------------
Total revenue 3,227,000 507,317 4,705,716 950,674
===================== ===================== ==================== ===================
The following table sets forth segment assets used by each product line:
September 30, 2004 March 31, 2004
(Unaudited) (Audited)
--------------------- -------------------
$ $
Segment assets
SMS 6,118,889 5,705,354
Software 1,550,314 1,040,811
--------------------- -------------------
Total segment assets 7,669,203 6,746,165
===================== ===================
11
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 Six months Six months
ended ended ended ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------- ------------------- -------------------- -------------------
$ $ $ $
Revenue
Canada 182,231 96,245 253,470 170,881
Brazil 221,814 304,228 421,223 525,878
United States 1,553,811 51,695 1,608,562 74,098
United Kingdom 1,236,405 - 2,356,836 -
Europe 30,786 53,397 58,509 176,255
Other 1,953 1,752 7,116 3,562
------------------- ------------------- -------------------- -------------------
Total revenue 3,227,000 507,317 4,705,716 950,674
=================== =================== ==================== ===================
9 - COMMITMENTS AND CONTINGENCIES
The Corporation's lease commitments relating to facilities and equipment totals
$421,541. The minimum lease payments are:
$
Balance of 2005 83,804
2006 145,820
2007 135,240
2008 56,677
------------------
421,541
==================
GOVERNMENT ASSISTANCE
During the year ended May 31, 2002, the Corporation received approximately
$97,465 from the Canadian International Development Agency for the purpose of
undertaking a viability study of acquiring Zim Technologies do Brasil Ltda. The
amount is fully repayable, based on 1% of Zim Technologies do Brasil Ltda.'s
revenues from July 23, 2001 to May 31, 2005, if revenues realized by Zim
Technologies do Brasil Ltda. exceed $3,963,221 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.
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.
12
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
10 - RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
11 - SUBSEQUENT EVENTS
On October 7, 2004, the Corporation completed a private placement of 1,018,077
units at $0.39 per unit, the closing market price of ZIM's common shares on the
OTCBB, on October 6, 2004. The units were purchased by the spouse of the
Corporation's Chief Executive Officer, with each unit consisting of one common
share and two warrants to purchase common shares for $0.39 per share.
On October 25, 2004, the Corporation acquired the customer list and domain names
of TextForce Limited, a UK based corporation. The transaction was completed by
issuing options to the shareholder of TextForce Limited. The fair value of
approximately $20,000 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.
13
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 our current expectations, estimates
and projections about the registrant and the industries in which we operate. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the registrant. 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. We undertake 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, our need for significant
additional funding, the uncertain market acceptance of our products, the
uncertainties inherent in managing the integration of businesses acquired by us,
our reliance on wireless carriers to market and use our applications and
services 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 various applications and services based on SMS (Short Messaging
Service) technology. Commencing in February 2004, revenue from these SMS
applications and services has become our primary source of revenue.
Since the acquisition of EPL Communications and E-Promotions Limited (together
referred to as "EPL"), our major revenue source has been providing aggregator
services to various mobile content providers. ZIM provides mobile content
providers, our customers, access to the mobile operators (also referred to as
"carriers"). By expanding the services acquired from EPL, we are now providing
these services internationally. For the first quarter of the 2005 fiscal year,
revenues from these operations were approximately $1.1 million. For the second
quarter of the 2005 fiscal year, revenues from these services are approximately
$2.9 million.
Revenues from our SMS applications, like SMS Office and custom mobile
applications have not grown significantly during the quarter as carriers
continue to market these applications to their end users. Revenues from these
applications were approximately $69,000 in the second quarter of fiscal 2005, as
compared to $15,000 in the first quarter of fiscal 2005.
Sales of Zim IDE Software, our legacy offering, were lower than expected as
customers continued to wait for the release of a new version of the product,
known as Zim 8. Zim 8 was released in October 2004 and management anticipates an
increase in sales volumes by the end of this fiscal year. We do not expect the
overall volume of the software segment to become a significant portion of our
revenue.
14
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, Canada 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 mobile data
software products and services. ZIM designs these mobile data software tools 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. In February 2004 we acquired EPL in the UK which further
extended our SMS offerings.
Currently we are generating a significant portion of our revenue by providing
mobile content providers with access to mobile operators internationally. Mobile
operators do not work directly with the content providers, but instead work with
companies such as ZIM to allow the mobile content providers to send content to
their end users. We will continue to grow this area of the business as the
international acceptance of SMS as a method of communication expands.
In addition to providing the above service, we have developed several
applications that integrate with desktop computers in a business and consumer
environment to extend the functionality of the 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. Currently our
applications are being offered to subscribers of Rogers in Canada, Telcel in
Mexico, StarHub in Singapore and Digi in Malaysia.
As indicated in the first quarter report, we did not expect significant revenues
from our SMS applications in this quarter as most of the carriers were in
various stages of their commercial launch. The future growth and success of this
business line 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
The following discussion includes information from the unaudited, condensed
consolidated statements of operations for the three months ended September 30,
2004 and 2003. The information for the three months ended September 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.
15
REVENUES
Three months As a % of Three months As a % of % change
ended September total ended September total between 2004
30, 2004 revenue 30, 2003 revenue and 2003
------------------- --------------- ------------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $
REVENUE
SMS applications 2,913,871 90.3% 66,913 13.2% 4255%
Software 79,742 2.5% 183,315 36.1% -56%
Maintenance 224,820 7.0% 246,564 48.6% -9%
Consulting 8,567 0.3% 10,525 2.1% -19%
------------------- --------------- ------------------- ---------------
3,227,000 100% 507,317 100% 536%
=================== =============== =================== ===============
Total revenue for the three months ended September 30, 2004 was $3,227,000,
representing an increase of 536% from the same period in the prior year. As
mentioned in the overview, this increase is a result of our changing focus away
from being a database provider toward offering our customers SMS services and
applications. Revenues for the first three months of the current fiscal year
were $1,478,716. The increase on a quarter to quarter basis is 120%.
SMS applications
Revenues from SMS applications for the three months ended September 30, 2004 has
increased substantially from the similar period in the prior year. In February
2004, we began to expand our SMS offering to include aggregator services. This
expansion in services was a direct result of the acquisition of EPL. Subsequent
to February 2004, we have continued to expand our customer base, resulting in
further increases in revenue.
Within this segment of our operations we are generating revenue from the
following SMS products and services:
Three months Three months
ended ended
September 30, 2004 September 30, 2003
------------------ --------------------
(Unaudited) (Unaudited)
$ $
AGGREGATOR SERVICES
Bulk SMS 264,985 -
Premium SMS 2,525,882 -
Virtual mobile 6,492 -
Location based service 20,286 -
Web hosting 27,588 -
------------------ --------------------
2,845,233 -
------------------ --------------------
SMS APPLICATIONS 68,638 66,913
------------------ --------------------
2,913,871 66,913
================== ====================
As indicated above, the prime source of revenue is premium SMS. Effective July
2004, we have increased our volumes in bulk and premium services to mobile
content providers.
16
Included in the SMS applications are custom mobile solutions such as our chat
applications and our paging applications. Management expects to see growth in
these areas in the third quarter of this fiscal year as customers of the
carriers start using the applications.
Software, Maintenance and Consulting
Software sales have decreased for the three months ended September 30, 2004 as
customers were waiting for the release of the next version of the Zim IDE
software, Zim 8. Although we had anticipated this release in the second quarter
of this fiscal year, we did not release the product until subsequent to the end
of the second quarter.
Maintenance contracts have decreased 9% for the three months ended September 30,
2004 as compared to the three months ended September 30, 2003. Maintenance
revenue for the three months ended September 30, 2004 is consistent with
maintenance revenues for the three months ended June 30, 2004.
Consulting revenues continue to decline as all customers are using a version of
the software that has been on the market for over 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
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 EPL.
Three months Three months % change
ended September ended September between
30, 2004 30, 2003 periods
------------------- ------------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
$ $
Cost of revenue 2,612,763 60,567 4214%
Selling, general and administrative 821,486 580,452 42%
Research and development 191,121 169,692 13%
Amortization of intangible assets 105,387 9,351 1027%
Loss (gain) on disposal of property and equipment 29,543 - -
Interest (2,238) 31,619 -107%
Income taxes (recoverable) 3,952 (19,999) -120%
------------------- -------------------
3,762,014 831,682 5068%
=================== ===================
17
COST OF REVENUE
Three months ended Three months ended
September 30, 2004 September 30, 2003
---------------------------------------------------
(Unaudited) (Unaudited)
$ $
COST OF REVENUE
SMS applications 2,553,872 5,586
Software 46,555 34,133
Maintenance 10,904 20,359
Consulting 1,432 489
-------------------- -------------------
2,612,763 60,567
-------------------- -------------------
MARGINS
SMS applications 359,999 12% 61,327 92%
Software 33,187 42% 149,182 81%
Maintenance 213,916 95% 226,205 92%
Consulting 7,135 83% 10,036 95%
-------------------- -------------------
614,237 19% 446,750 88%
-------------------- -------------------
Overall, we realized a gross margin of $614,237 or 19% for the three months
ended September 30, 2004 as compared to $446,750 or 88% for the three months
ended September 30, 2003. This change is a result of the increased activity in
our SMS applications. The decrease in gross margins is a result of the
composition of the revenue in the prior year. Revenue in the three months ended
September 30, 2003 was primarily related to sales of software and related
maintenance, which has lower direct costs than 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 related to the support for the applications. As a result we experienced
a gross margin of 12%. 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. As a result, we experienced a gross margin
of 92% for the same period in the prior year.
For the three months ended September 30, 2004, direct costs of $46,555 relating
to software sales include approximately $35,000 of costs incurred as a result of
sales in Brazil. The remaining $11,555 relates to salaries incurred in Canada to
support software sales. For the prior year, of the $34,133, approximately
$24,000 relates to costs incurred in Brazil with the balance of $10,133 being
salaries incurred in Canada. Salaries are a fixed cost and do not fluctuate
based on sales volume and as a result of the lower sales volumes for the three
months ended September 30, 2004, there is a lower margin realized. In addition,
included in Brazil's costs are various taxes related to sales. These taxes
increased from 8% of Brazilian revenue in the three months ended September 30,
2003 to 13% of Brazilian revenue for the three months ended September 30, 2004.
The combined affect of the increase in taxes and decrease in sales volumes for
software for the three months ended September 30, 2004 has resulted in the
decrease in margins from 81% to 42%.
The gross margins on maintenance between the second quarter of 2005 and 2004
have remained relatively stable at 95% and 92% respectively. Maintenance direct
costs are salaries and benefits related to the support given to customers.
18
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
Selling, general and administrative expenses increased by $241,034 for the three
months ended September 30, 2004. This increase is primarily a result of running
our UK operations. Approximately $161,000 was incurred as selling, general and
administrative expenses for the three months ended September 30, 2004. As we did
not acquire EPL until February 2004, there are no corresponding expenses in the
same period for the prior year.
In addition, approximately $20,000 relates to bad debts adjusted at the end of
the quarter. The increase in bad debts from prior years is a result of the
increase in our customer base and revenues.
Other variations between the three months ended September 30, 2004 and September
30, 2003 are related to options granted to non-employees resulting in a non-cash
expense of approximately $38,000 and our increase in insurance coverage to
protect our UK operations.
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended September 30, 2004
were $191,121 as compared to $169,692 for the similar period in the prior year.
The increase in research and development is a result of increased salaries and
benefits. For the three months ended September 30, 2004, as compared to the
three months ended September 30, 2003, additional engineering resources were on
staff to assist with the transition to being an SMS company.
AMORTIZATION OF INTANGIBLE ASSETS
We acquired 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 for these intangible assets.
Amortization of intangible assets relating to the core technology has been
included in the direct costs of SMS applications.
INTEREST
During the three month period ended September 30, 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 second quarter of fiscal
2005. Our operations in Brazil received interest income on their surplus cash
for the period.
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 for the quarter ended September 30, 2004 are higher than September
30, 2003, as a result of the decrease in ITCs. The decrease in ITCs is a result
of a decrease in eligible expenditures for the tax credits. With the change in
the composition of our revenue, not all research and development projects are
eligible for ITCs. In the period ended September 30, 2004, it is estimated that
approximately 60% of the work done is eligible for ITCs, as compared to an
estimate of 90% for the previous year. Management expects further reductions in
ITCs as we are allocating fewer resources to research and more resources to
supporting revenue.
As a result of the factors described above, the net loss for the three months
ended September 30, 2004 was $535,014 as compared to $324,365 for the three
months ended September 30, 2003.
19
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO
THE SIX MONTHS ENDED SEPTEMBER 30, 2003
REVENUES
% change
Six months ended As a % of Six months ended As a % of from prior
September 30, 2004 total revenue September 30, 2003 total revenue year
------------------- --------------- ------------------- --------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $
REVENUE
SMS applications 4,073,941 86.6% 95,746 10.1% 4155%
Software 178,704 3.8% 402,184 42.3% -56%
Maintenance 441,048 9.4% 429,137 45.1% 3%
Consulting 12,023 0.3% 23,607 2.5% -49%
------------------- --------------- ------------------- ---------------
4,705,716 100% 950,674 100% 395%
=================== =============== =================== ===============
Total revenue for the six months ended September 30, 2004 was $4,705,716,
representing an increase of 395% from the same period in the prior year. As
mentioned in the overview, this increase is a result of our changing focus away
from being a provider of database software toward offering our customers SMS
services and applications.
SMS applications
Revenues from SMS applications in the six months ended September 30, 2004 have
increased substantially from the similar period in the prior year. As mentioned
above, this increase was a direct result of the acquisition of EPL. Subsequent
to February 2004, we have continued to expand our customer base, resulting in
further increases in revenue.
Within this segment of our operations we are generating revenue from the
following SMS products and services:
Six months ended Six months ended
September 30, 2004 September 30, 2003
------------------- -------------------
(Unaudited) (Unaudited)
$ $
AGGREGATOR SERVICES
Bulk SMS 338,572 -
Premium SMS 3,507,245 -
Virtual mobile 13,763 -
Location based service 77,108 -
Web Hosting 52,871 -
------------------- -------------------
3,989,559 -
------------------- -------------------
SMS APPLICATIONS 84,382 95,746
------------------- -------------------
4,073,941 95,746
=================== ===================
20
As indicated above, the prime source of revenue is premium SMS. Effective July
2004, we have been providing bulk and premium services to a mobile content
provider in the United States for delivery of messages to end users in Canada
and the UK. There were no significant revenues from this customer prior to the
three months ended September 2004.
Included in SMS applications are custom mobile solutions; including our chat and
paging applications.
Software, Maintenance and Consulting
Software sales have decreased by 56% for the six months ended September 30, 2004
as customers were waiting for the release of the next version of the Zim IDE
software, Zim 8.
Maintenance contracts have increased 3% for the six months ended September 30,
2004 as compared to the six months ended September 30, 2003. Management does not
expect significant changes in the maintenance revenue for the balance of this
fiscal year.
As with the three month period, consulting revenues continued to decline as
customers were using a version of the software that has been on the market for
over 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
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 EPL.
Six months Six months % change
ended ended between
September 30, 2004 September 30, 2003 periods
------------------- ------------------ ----------------
(Unaudited) (Unaudited) (Unaudited)
$ $
Cost of revenue 3,894,378 121,599 3103%
Selling, general and administrative 1,859,983 1,340,387 39%
Research and development 364,601 349,803 4%
Amortization of intangible assets 172,783 14,823 1066%
Loss (gain) on disposal of property and equipment 29,543 - -
Interest (621) 58,158 -101%
Income taxes (recoverable) (87,732) (93,973) -7%
------------------- ------------------
6,232,935 1,790,797 248%
=================== ==================
21
COST OF REVENUE
Six months Six months
ended ended
September 30, 2004 September 30, 2003
--------------------------------------------------
(Unaudited) (Unaudited)
$ $
COST OF REVENUE
SMS applications 3,772,817 11,060
Software 83,795 62,166
Maintenance 33,310 42,166
Consulting 4,456 6,207
3,894,378 121,599
MARGINS
SMS applications 301,124 7% 84,686 88%
Software 94,909 53% 340,018 85%
Maintenance 407,738 92% 386,971 90%
Consulting 7,567 63% 17,400 74%
811,338 17% 829,075 87%
Overall, we realized a gross margin of $811,338 or 17% for the six months ended
September 30, 2004 as compared to $829,075 or 87% for the six months ended
September 30, 2003. As indicated in the analysis comparing the three month
periods, the decrease in gross margins is a result of the composition of the
revenue in the prior year. Revenue in the six months ended September 30, 2003
was primarily related to sales of software and related maintenance, which has
lower direct costs than SMS applications.
The overall margin of 17% for the six months ended September 30, 2004 is
slightly lower than the 19% margin realized on the three months ended September
30, 2004. The decrease is a result of lower revenue levels in the first quarter
but consistent direct costs related to the amortization of the technology
platform.
As mentioned above, 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 related to the support for the applications. As a
result we experienced a gross margin of 7%. 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. As a result, we
experienced a gross margin of 88% for the same period in the prior year.
As with the three month comparison, direct costs of $83,795 relating to software
sales relates primarily to the direct costs incurred in Brazil. The margins have
decreased in the six months ended September 30, 2004, as compared to the six
months ended September 30, 2003, as a result of the increase in taxes on Brazil
revenues and the fact that direct costs incurred in Canada are fixed and do not
vary based on revenue volumes. As a result, the reduced sales volumes did not
result in a similar reduction in direct costs.
The gross margins on maintenance between the six months ended September 30, 2004
and 2003 have remained relatively stable at 92% and 90% respectively.
Maintenance direct costs are salaries and benefits related to the support given
to customers.
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.
22
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased from $1,340,387 for the
six months ended September 30, 2003 to $1,859,983 for the six months ended
September 30, 2004. The two primary reasons for the increase relate to the
selling, general and administrative expenses incurred in the UK and the issuance
of options to non-employees. For the six months ended September 30, 2004, there
were non-cash compensation expenses relating to the options of $281,824 and
selling, general and administrative expenses in the UK of approximately
$275,000.
RESEARCH AND DEVELOPMENT
As indicated in the three month analysis, research and development expenses
increased slightly due to the hiring of additional staff.
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
For the six months ended September 30, 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 six months ended September 30, 2004.
Our operations in Brazil receive interest income on their surplus funds for the
period.
INCOME TAXES
Included in income taxes are taxes paid on revenues earned in Brazil as well as
ITC on research and development expenditures in Canada. As mentioned above,
there was a reduction in ITC eligible expenditures, and as a result, ITCs, for
the six months ended September 30, 2004, as compared to the six months ended
September 30, 2003 were lower. Management expects further reductions in ITCs as
we are allocating fewer resources to research and more resources to supporting
revenue.
As a result of the factors described above, the net loss for the six months
ended September 30, 2004 was $1,527,219 as compared to $840,123 for the six
months ended September 30, 2003.
23
LIQUIDITY AND CAPITAL RESOURCES
As at September 30, 2004, ZIM had cash of $420,427 and working capital of
$990,812 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 July 2004 (see below).
Cash flows for the fiscal periods were as follows:
Six months ended Six months ended
September 30, 2004 September 30, 2003
--------------------- ----------------------
(Unaudited) (Unaudited)
$ $
Cash flows used in operating activities (1,619,171) (1,016,373)
Cash flows used in investing activities (35,114) (66,694)
Cash flows provided by financing activities 1,209,736 812,261
---------------------
----------------------
(444,549) (270,806)
===================== ======================
ZIM used $1,619,171 in operating activities for the six months ended September
30, 2004 as compared to $1,016,373 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 $35,114 of cash in its investing activities during the six months of
fiscal 2005 and $66,694 during the same period in the prior year. These funds
were used primarily to purchase computer equipment.
ZIM increased its cash by financing activities in both periods ended September
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 related parties. On July 30, 2004, the Corporation completed the
second closing of this private placement of 2,004,211 units at $0.38 per unit,
for total gross and net proceeds of $761,600. All of the 2,004,211 units were
purchased by a related party of the Corporation's Chief Executive Officer. For
the six months ended September 30, 2003, the same related party provided funds
in the form of debt.
Both financings in the six months ended September 30, 2004 were non-brokered
private placements to non-U.S.-resident accredited investors. Each unit
consisted of one common share and two common share purchase warrants. Each
warrant may be exercised at any time within 15 months of the closing date at an
exercise price of $0.38 per share (being the market price of our common shares
at the time of closing). The form of warrant issued is attached as Exhibit 10.3
to this report and the form of share purchase agreement delivered by the
investors is attached as Exhibit 10.2.
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 $397,000 was received subsequent to the end of the quarter
from a related party in a 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 required financing of $2,800,000.
24
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. In this situation, ZIM would not be able to further its
technological 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 September 30, 2004 and is based on contracts signed
with third parties:
The Corporation's lease commitments relating to facilities and equipment totals
$421,531. The minimum lease payments are:
$
Balance of 2005 83,804
2006 145,820
2007 135,240
2008 56,677
------------------
421,541
==================
25
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.
26
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following sets forth certain information regarding sales of and other
transactions with respect to, our securities issued during the three months
ended September 30, 2004:
On July 30, 2004, the Corporation issued 2,004,211 units in a non-brokered
private placement to non-U.S. investors at $0.38 per unit and, as a result,
raised $761,600 in the aggregate. Each unit consists of one common share and two
warrants to purchase an additional common share per warrant at $0.38 per share
expiring October 30, 2005. The units were purchased by the spouse of the Chief
Executive Officer of the Corporation. This issuance was 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, as well as applicable exemptions
under Canadian securities laws.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Corporation held an annual meeting of its shareholders on September 23,
2004, the ("Annual Meeting").
(b) Not applicable.
(c) The following matter was voted on at the Annual Meeting:
The ratification of the appointment of Raymond Chabot Grant
Thornton LLP as the Corporation's independent auditors for the
fiscal year ending March 31, 2005. The votes were cast for this
matter as follows:
For Against Abstain
- ------------------------- --------------------- --------------------
33,466,932 110 5,440
(d) Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
27
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Agreement by and between ZIM Corporation and ** dated June 23,
2004. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF
THE EXHIBIT.
10.2 Form of Share Purchase Agreement by and among certain investors
and ZIM Corporation dated July 30, 2004
10.3 Form of Warrant by and among certain investors and ZIM
Corporation dated July 30, 2004
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.
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 August 13, 2004
to report on its financial results for the three months ended June
30, 2004.
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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 Chief Executive November 15, 2004
- ------------------------- Officer
Michael Cowpland
/s/ Jennifer North Chief Financial and Principal November 15, 2004
- --------------------- Accounting Officer
Jennifer North
29