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: DECEMBER 31, 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)
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 FEBRUARY 10, 2005
- --------------------------------------------------------------------------------
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 Nine Months Ended December 31, 2004 and December 31, 2003.........4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended December 31, 2004 and December 31, 2003...................5
Condensed Consolidated Balance Sheets as at December 31, 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.........15
Item 3. Controls and Procedures...........................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......29
Item 3. Defaults upon Senior Securities...................................29
Item 4. Submission of Matters to a Vote of Security Holders...............29
Item 5. Other Information.................................................29
Item 6. Exhibits..........................................................30
Signatures.................................................................31
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 Nine months Nine months
ended ended ended ended
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
--------------- --------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
REVENUE 2,810,821 430,596 7,516,537 1,381,270
--------------- --------------- -------------- --------------
EXPENSES
Cost of revenue 2,281,976 68,065 6,176,354 189,664
Selling, general and administrative 524,604 704,593 2,384,587 2,044,980
Research and development 207,446 159,094 572,047 508,897
Amortization of intangible assets 93,390 12,895 266,173 27,718
Loss on disposal of property and equipment 4,018 - 33,561 -
--------------- --------------- -------------- --------------
Total expenses 3,111,434 944,647 9,432,722 2,771,259
--------------- --------------- -------------- --------------
Operating loss before income taxes and interest (300,613) (514,051) (1,916,185) (1,389,989)
Interest (3,435) 36,445 (4,056) 94,603
--------------- --------------- -------------- --------------
Operating loss before income taxes (297,178) (550,496) (1,912,129) (1,484,592)
Income taxes (recoverable) (44,324) (60,340) (132,056) (154,313)
--------------- --------------- -------------- --------------
Net loss (252,854) (490,156) (1,780,073) (1,330,279)
=============== =============== ============== ==============
Basic and fully diluted loss per share (0.004) (0.012) (0.031) (0.033)
=============== =============== ============== ==============
Weighted average number of shares outstanding 59,365,743 40,200,714 57,481,290 40,126,910
=============== =============== ============== ==============
================================================================================================================================
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)
- ----------------------------------------------------------------------------------------------------------------------------
Nine months ended Nine months ended
December 31, 2004 December 31, 2003
----------------------- ------------------------
(Unaudited) (Unaudited)
$ $
OPERATING ACTIVITIES
Net loss (1,780,073) (1,330,279)
Items not involving cash:
Depreciation of property and equipment 157,430 109,140
Amortization of intangible assets 417,393 27,718
Loss on disposal of property and equipment 33,561 -
Compensation expense 303,708 -
Changes in operating working capital (581,840) (429,409)
----------------------- ------------------------
Cash flows used in operating activities (1,449,821) (1,622,830)
----------------------- ------------------------
INVESTING ACTIVITIES
Proceeds on disposal of property and equipment 911 -
Purchase of property and equipment (36,015) (56,647)
----------------------- ------------------------
Cash flows used in investing activities (35,104) (56,647)
----------------------- ------------------------
FINANCING ACTIVITIES
Repayment of capital lease obligations - (15,109)
Proceeds from the exercise of options 66,600 -
Proceeds from shares issued through a private placement, net 1,540,186 -
Proceeds from debt issued - 1,314,610
----------------------- ------------------------
Cash flows provided by financing activities 1,606,786 1,299,501
----------------------- ------------------------
Effect of changes in exchange rates on cash 70,208 180,337
----------------------- ------------------------
INCREASE (DECREASE) IN CASH 192,069 (199,639)
Cash, beginning of period 870,520 442,924
----------------------- ------------------------
Cash, end of period 1,062,589 243,285
======================= ========================
============================================================================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ZIM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in US dollars)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, March 31,
2004 2004
-------------------- --------------------
(Unaudited) (Audited)
$ $
ASSETS
Current assets
Cash 1,062,589 870,520
Accounts receivable, net 2,104,926 1,022,626
Investment tax credits receivable 514,816 350,780
Prepaid expenses 19,525 60,430
-------------------- --------------------
3,701,856 2,304,356
Property and equipment, net 469,809 601,523
Intangible assets, net 1,125,461 1,442,666
Goodwill 2,615,500 2,397,620
-------------------- --------------------
7,912,626 6,746,165
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 1,217,412 491,053
Accrued liabilities 910,136 876,007
Deferred revenue 210,579 369,077
-------------------- --------------------
2,338,127 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 December 31, 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 December
31, 2004 and NIL at March 31, 2004. All special shares were converted into
common shares on June 1, 2003.
Common Shares, no par value, 17,636,556 16,029,770
authorized unlimited shares issued and outstanding 59,432,869 shares
at December 31, 2004 and 55,180,026 shares at March 31, 2004.
Additional paid-in capital (Note 4) 1,844,667 1,540,959
Accumulated deficit (14,029,646) (12,249,573)
Accumulated other comprehensive income (loss) 122,922 (311,128)
-------------------- --------------------
5,574,499 5,010,028
-------------------- --------------------
7,912,626 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 nine months ended December 31, 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. Commencing in this fiscal
year, the Corporation has been providing mobile messaging infrastructure. The
Corporation is focused on connecting companies with customers through mobile or
text messaging.
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.
The Corporation has incurred a loss of $1,780,073 for the nine months ended
December 31, 2004 and has incurred losses during each of the last five fiscal
years. In addition, the Corporation generated negative cash flows from
operations of $1,449,821 for the nine months ended December 31, 2004 and has
generated negative cash flows from operations during each of the last five
fiscal years.
The Corporation has changed its focus 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 that 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 also 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 an aggregate of 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.
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. Gross
proceeds were $397,050.
4 - 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.
8
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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.
Three months Nine months
Three months ended ended December ended December Nine months ended
December 31, 2004 31, 2003 31, 2004 December 31, 2003
-------------------- ------------------ ---------------- -------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
$ $ $ $
Net loss, as reported (252,854) (490,156) (1,780,073) (1,330,279)
Stock-based employee compensation expense
determined under fair value based method for
all awards (25,206) (319,937) (1,164,327) (1,610,708)
-------------------- ------------------ ---------------- -------------------
Net loss, pro forma (278,060) (810,093) (2,944,400) (2,940,987)
==================== ================== ================ ===================
Basic and diluted net loss per share:
As reported, basic and diluted (0.004) (0.012) (0.031) (0.033)
==================== ================== ================ ===================
Pro forma, basic and diluted (0.005) (0.020) (0.051) (0.073)
==================== ================== ================ ===================
Total options granted during the three and nine months ended December 31, 2004
were 338,333 and 6,990,833, respectively, and for the three and nine months
ended December 31, 2003 were 2,103,374 and 6,295,539, respectively.
Employee options
Options granted to employees during the three and nine months ended December 31,
2004 were 198,333 and 5,690,833, respectively and for the three and nine months
ended December 31, 2003, were 2,103,374 and 6,295,539, respectively. The fair
value of options granted to employees and stock purchased under our employee
stock option plan (ESOP) at date of grant was estimated using the Black-Scholes
pricing model with an expected life of 18 months, an expected volatility of 80%,
a risk free rate of 3.00% and dividend yield of NIL.
9
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
Non-employee options
Options granted to non-employees during the three and nine months ended December
31, 2004 were 140,000 and 1,300,000, respectively and NIL for the three and nine
months ended December 31, 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, an expected volatility of 80%, a risk
free rate of 3.00% and dividend yield of NIL.
Compensation expense of $21,884 and $303,708 were recognized in the three and
nine months ended December 31, 2004, respectively, based on the fair value of
these options.
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 as at
December 31, 2004 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:
December 31, 2004 December 31, 2003
--------------------------------------------
Stock options 4,356,835 2,316,702
Warrants 8,065,686 -
Total options outstanding at December 31, 2004 and 2003 were 21,728,171 and
20,936,371, respectively. Total warrants outstanding at December 31, 2004 and
2003 were 9,215,692 and NIL, respectively.
6 - SHAREHOLDERS' EQUITY
The Corporation issued NIL and 220,000 common shares during the three and nine
months ended December 31, 2004, respectively and 147,000 common shares for the
three and nine months ended December 31, 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 at an exercise price of $0.38 per share. Of these 1,010,555 units,
775,789 were purchased by related parties.
10
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
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 at
an exercise price of $0.38 per share. All of the 2,004,211 units were purchased
by the spouse of the Corporation's Chief Executive Officer.
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. Gross and
net proceeds were $397,050.
ADDITIONAL PAID IN CAPITAL
During the three and nine month periods ended December 31, 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 $21,884 and $303,708,
respectively.
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 ended Three months ended Nine months ended Nine months ended
December 31, 2004 December 31, 2003 December 31, 2004 December 31, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------- -------------------- ------------------- -------------------
$ $ $ $
Net loss, as reported (252,854) (490,156) (1,780,073) (1,330,279)
Foreign currency translation adjustment 260,876 (334,769) 434,050 (457,748)
-------------------- -------------------- ------------------- -------------------
Comprehensive loss 8,022 (824,925) (1,346,023) (1,788,027)
==================== ==================== =================== ===================
11
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN US DOLLARS)
(UNAUDITED)
8 - SEGMENT REPORTING
There have been no changes 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 Nine months Nine months
ended December ended December ended December ended December
31, 2004 31, 2003 31, 2004 31, 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------------ ------------------ ---------------- ---------------
$ $ $ $
Revenue
SMS 2,508,413 40,997 6,582,354 136,743
Software 302,408 389,599 934,183 1,244,527
------------------ ------------------ ---------------- ---------------
Total revenue 2,810,821 430,596 7,516,537 1,381,270
================== ================== ================ ===============
The following table sets forth segment assets used by each product line:
December 31, 2004 March 31, 2004
Unaudited Audited
----------------------- -------------------
$ $
Segment assets
SMS 6,929,216 5,705,354
Software 983,410 1,040,811
----------------------- -------------------
7,912,626 6,746,165
======================= ===================
12
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 Nine months ended Nine months ended
ended December ended December December 31, December 31,
31, 2004 31, 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------------- ----------------- ------------------- -------------------
$ $ $ $
Revenue
Canada 144,453 84,051 397,923 254,932
Brazil 205,442 284,920 626,665 810,798
United States 1,663,766 29,972 3,272,328 104,070
United Kingdom 757,618 0 3,114,454 0
Europe 37,407 27,968 95,916 204,223
Other 2,135 3,685 9,251 7,247
----------------- ----------------- ------------------- -------------------
Total revenue 2,810,821 430,596 7,516,537 1,381,270
================= ================= =================== ===================
9 - COMMITMENTS AND CONTINGENCIES
The Corporation's lease commitments relating to facilities and equipment totals
$379,639. The minimum lease payments are:
$
Balance of 2005 41,902
2006 145,820
2007 135,240
2008 56,677
------------------
379,639
==================
GOVERNMENT ASSISTANCE
During the year ended May 31, 2002, the Corporation received approximately
$102,298 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 $4,159,734 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.
13
ZIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 - NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123R, Share-Based Payment, ("SFAS 123R").
This revised standard addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the
fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. Under the new standard, companies will no
longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB 25. Instead, companies will be required
to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
periods beginning after June 15, 2005 and allows, but does not require,
companies to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The Corporation has not yet
determined which fair-value method and transitional provision it will follow.
The impact on ZIM'S financial statements of applying one of the acceptable
fair-value based methods of accounting for stock options is disclosed in Note 4.
14
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, ZIM's ability to
obtain additional funding in a timely manner or upon acceptable terms, ZIM's
historical losses, ZIM's limited operating history with SMS applications, the
uncertainties inherent in the development of new software products, the
uncertain market acceptance of our products, ZIM's reliance on wireless carriers
to market and use its applications and services, possible internal controls
deficiencies and possible accounting adjustments resulting from our quarter-end
accounting and review procedures, ZIM's ability to protect its intellectual
property rights, potential intellectual property infringement claims or
litigation, any failure to successfully integrate 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 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 has been derived principally from our provision
of aggregator services or mobile messaging infrastructure 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 2005 fiscal quarters to date, revenues from these operations have been
approximately $1.1 million for the first quarter, $2.9 million for the second
quarter and $2.5 million for the third quarter.
Revenues from our SMS applications, like SMS Office and custom mobile
applications did not grow significantly during the quarter ended December 31,
2004 as carriers continue to market these applications to their end users.
We successfully released a new version of Zim IDE Software, known as Zim 8,
during the quarter ended December 31, 2004. Zim 8 is currently being deployed
and marketed to our database customers. Management continues to anticipate 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.
15
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
or text messaging. SMS enables users to communicate person to person and
application to person through cellular handsets and other SMS-enabled devices.
Our February 2004 acquisition of UK-based EPL further expanded 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 intend to continue to grow this area of the business as the
international acceptance of SMS as a method of communication expands.
In addition to providing mobile data software products and services, 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 and 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, StarHub in
Singapore and Digi in Malaysia.
As indicated in our prior quarterly reports, we do not expect significant
revenues from our SMS products during fiscal 2005 as most of carriers are
currently still 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 DECEMBER 31, 2004
COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2003
The following discussion includes information derived from the unaudited
condensed consolidated statements of operations for the three months ended
December 31, 2004 and 2003. The information for the three months ended December
31, 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 the
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.
16
REVENUES
Three months ended As a Three months ended As a %
December 31, 2004 percent December 31, 2003 percent change
------------------------- ----------------- ------------------------- --------------- ---------------
(Unaudited) (Unaudited)
$ $
SMS applications 2,508,413 89% 40,997 10% 6019%
Software 37,578 1% 151,780 35% -75%
Maintenance 245,273 9% 227,401 53% 8%
Consulting 19,557 1% 10,418 2% 88%
------------------------- ----------------- ------------------------- ---------------
2,810,821 100% 430,596 100% 553%
========================= ================= ========================= ===============
Total revenue for the three months ended December 31, 2004 was $2,810,821, as
compared to $430,596 for the three months ended December 31, 2003, representing
an increase of 553%. This increase in revenue is a result of the shift in our
focus away from being a database provider toward offering our customers SMS
services and applications.
On a quarterly basis, revenues for the three months ended June 30, 2004 were
$1,478,716 as compared to revenues of $3,227,000 for the three months ended
September 30. The increase in revenues from the first quarter to the second
quarter is a result of new customers utilizing our SMS services. The decrease of
$416,179 or 13% between the second quarter and the third quarter ended December
31, 2004 is a result of reduced SMS traffic flow to various carriers by our
customers. Our revenue from SMS services is based on the flow of SMS messages
from our customers. It is anticipated that there will be fluctuations between
quarters as customers have different campaigns and practices.
SMS APPLICATIONS
Revenue from SMS applications for the three months ended December 31, 2004
increased substantially from the same period in the prior year. Revenue from SMS
applications was $2,508,413 for the three months ended December 31, 2004, as
compared to $40,997 for the three months ended December 31, 2003. As a result of
our acquisition of EPL in February 2004, we began to expand our SMS offering to
include SMS delivery services. Subsequent to February 2004, we have continued to
expand our customer base, resulting in further increases in revenue from SMS
applications. Together, these factors have resulted in increased revenue from
SMS applications during the three months ended December 31, 2004 as compared to
the same period in the prior year.
17
Within this segment of our operations we are generating revenue from the
following SMS products and services:
Three months Three months
ended December ended December
31, 2004 31, 2003
------------------- -----------------
(Unaudited) (Unaudited)
$ $
SMS SERVICES
Bulk SMS 319,843 -
Premium SMS 2,085,311 -
Virtual mobile 8,945 -
Location based service 25,637 -
Web hosting 31,820 -
------------------- -----------------
2,471,556 -
------------------- -----------------
SMS PRODUCTS 36,857 40,997
------------------- -----------------
2,508,413 40,997
=================== =================
As indicated above, the prime source of our SMS segment revenue is derived from
the delivery of premium SMS messages. Effective July 2004, we increased our
delivery services as a result of new arrangements with additional mobile content
providers.
Our SMS products include custom mobile solutions, such as our chat applications
and our paging applications.
SOFTWARE, MAINTENANCE AND CONSULTING
Software revenue decreased 75% during the three months ended December 31, 2004
as compared to the three months ended December 31, 2003. Software revenue was
$37,578 for the three months ended December 31, 2004 as compared to $151,780 for
the three months ended December 31, 2003. We released Zim 8 in October 2004.
During the third and fourth quarter to date, we have marketed Zim 8 to our
existing customer base. As customers begin to adopt this product release, we
expect to realize increased revenues in software sales.
On a quarterly basis, software revenue was $98,962 for the first quarter ended
June 30, 2004 and $79,742 for the second quarter ended September 30, 2004. This
decreasing trend is a result of the delay in the release of Zim 8.
Maintenance contract revenue increased 8% for the three months ended December
31, 2004 as compared to the three months ended December 31, 2003. Maintenance
contract revenue was $245,273 for the quarter ended December 31, 2004 as
compared to $227,401 for the quarter ended December 31, 2003. Maintenance
revenue has remained fairly consistent between fiscal quarters and fiscal years.
Over the years, ZIM has built a reliable customer base that depends on our
technical expertise for maintenance issues.
Consulting revenue increased during the quarter ended December 31, 2004 as
customers began to deploy Zim 8. Consulting revenue was $19,557 during the
quarter ended December 31, 2004 as compared to $10,418 for the quarter ended
December 31, 2003. We anticipate that the release of Zim 8 may produce other new
consulting opportunities, but we do not expect that Zim 8 will be a significant
part of ZIM's business.
18
EXPENSES
Expenses were substantially higher during the quarter ended December 31, 2004 as
compared to the quarter ended December 31, 2003. Expenses were $3,063,675 for
the quarter ended December 31, 2004 as compared to $920,752 for the quarter
ended December 31, 2003. This increase in expenses resulted from the costs
associated with revenue and the increase in amortization of intangible assets
purchased in the acquisition of EPL.
Three months Three months
ended December ended December % change between
31, 2004 31, 2003 periods
------------------ ------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
$ $
Cost of revenue 2,281,976 68,065 3253%
Selling, general and administrative 524,604 704,593 -26%
Research and development 207,446 159,094 30%
Amortization of intangible assets 93,390 12,895 624%
Loss (gain) on disposal of property and equipment 4,018 - N/A
Interest (3,435) 36,445 -109%
Income taxes (recoverable) (44,324) (60,340) -27%
------------------ -------------------
3,063,675 920,752 233%
================== ===================
COST OF REVENUE
Three months
Three months ended ended December
December 31, 2004 31, 2003
---------------------- ------------- ------------------- ------------
(Unaudited) (Unaudited)
$ $
COST OF REVENUE
SMS applications 2,198,095 5,641
Software 37,077 29,664
Maintenance 27,506 24,504
Consulting 19,298 8,256
---------------------- -------------------
2,281,976 68,065
---------------------- -------------------
MARGINS
SMS applications 310,318 12% 35,356 86%
Software 501 1% 122,116 80%
Maintenance 217,767 89% 202,897 89%
Consulting 259 1% 2,162 21%
---------------------- -------------------
528,845 19% 362,531 84%
---------------------- -------------------
19
Overall, we realized a gross margin of $528,845 or 19% for the three months
ended December 31, 2004 as compared to $362,531 or 84% for the three months
ended December 31, 2003. This decrease in gross margins is a result of both the
increased activity in our SMS applications during the quarter ended December 31,
2004 and the composition of revenue in the same period in the prior year.
Revenue in the three months ended December 31, 2003 was primarily related to
sales of software and related maintenance, which has lower direct costs than SMS
applications.
ZIM has been realizing significant revenues and direct expenses relating to SMS
applications since February 2004. Included in these direct costs are payments
made to carriers, payments made pursuant to revenue share arrangements,
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% for the quarter ended December 31, 2004. In the same period in the prior
year, the gross margin was 86% after considering direct costs related to
supporting salaries.
On a quarter to quarter comparison, SMS gross margins have fluctuated based on
revenue levels. Costs related to payments to operators and for revenue share
arrangements vary directly with the revenues. Costs related to the amortization
of core technology and salaries are fixed and therefore do not decrease in line
with decreased revenues.
For the three months ended December 31, 2004, direct costs for software sales of
$37,077 related to salaries in Canada and Brazil, as well as sales taxes in
Brazil, at approximately 13% of revenue. Direct costs incurred in the Canadian
operations were reduced substantially during the three months ended December 31,
2004 as compared to the same period in the prior year as one employee resigned
from his position and he was not replaced. For the three months ended December
31, 2003, the direct costs of $29,664 related to salary and support costs
incurred in Brazil, with the balance being for salaries in Canada. Salaries are
a fixed cost and do not fluctuate based on sales volume. Despite the reduction
in direct costs for Canadian salaries during the three months ended December 31,
2004, lower sales volumes during this period as compared to the three months
ended December 31, 2003 resulted in a lower margin on software sales.
The gross margins on maintenance have remained stable at 89% for each of the
three months ended December 31, 2004 and December 31, 2003. Direct maintenance
costs include salaries and benefits related to customer support.
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 clients. These services are
priced competitively; therefore margins do tend to vary.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased by $179,989 to $524,604
for the three months ended December 31, 2004 as compared to $704,593 for the
three months ended December 31, 2003. This decrease was a result of management's
cost saving measures, including down-sizing Brazilian operations and staff
reductions in Canada.
On a quarterly basis, selling, general and administrative expenses decreased
during the three months ended December 31, 2004 from each of the three months
ended September 30, 2004 and June 30, 2004. This decrease was a result of
downsizing UK operations and a reduction in option grants to non-employees
during the quarter ended December 31, 2004.
20
RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended December 31, 2004
were $207,446 as compared to $159,094 for the similar period in the prior year.
The increase in research and development expenses is a result of increased
salaries and benefits for engineering resources. For the three months ended
December 31, 2004, as compared to the three months ended December 31, 2003,
additional engineering resources were on staff to assist with the transition to
being an SMS company.
AMORTIZATION OF INTANGIBLE ASSETS
In February 2004, 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 December 31, 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 was no interest expense for the third quarter of fiscal 2005. Our
operations in Brazil and Canada received interest income on their surplus cash
for the three months ended December 31, 2004.
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 were $44,324 for the quarter ended December 31, 2004 as
compared to $60,340 for the quarter ended December 31, 2003. Income taxes for
the quarter ended December 31, 2004 were higher than the quarter ended December
31, 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 quarter ended December 31, 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 December 31, 2004 was $252,854 as compared to $490,156 for the three
months ended December 31, 2003.
On a quarterly basis, the net loss for the first quarter ended June 30, 2004 was
$992,203 and was $535,014 for the second quarter ended September 30, 2004. The
decrease in net loss for the second quarter of 2004 as compared to the first
quarter of 2004 is a result of increased SMS revenue during the second quarter.
The decrease in net loss from the second quarter to the current quarter ended
December 31, 2004 is a result of management's cost saving changes.
21
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED
TO THE NINE MONTHS ENDED DECEMBER 31, 2003
REVENUES
Nine months ended As a Nine months ended As a %
December 31, 2004 percent December 31, 2003 percent change
---------------------- ------------ --------------------- --------------- ------------
(Unaudited) (Unaudited)
$ $
SMS applications 6,582,354 88% 136,743 10% 4714%
Software 216,282 3% 553,964 40% -61%
Maintenance 686,321 9% 656,538 48% 5%
Consulting 31,580 0% 34,025 2% -7%
---------------------- ------------ --------------------- ---------------
7,516,537 100% 1,381,270 100% 444%
====================== ============ ===================== ===============
Total revenue for the nine months ended December 31, 2004 was $7,516,537 as
compared to $1,381,270 for the same period in the prior year, representing an
increase of 444%. This increase is a result of our shift in focus away from
being a provider of database software toward offering our customers SMS services
and applications.
SMS APPLICATIONS
Revenue from SMS applications in the nine months ended December 31, 2004
increased substantially from the similar period in the prior year. Revenue from
SMS applications were $6,582,354 for the nine months ended December 31, 2004 as
compared to $136,743 for the nine months ended December 31, 2003. As a result of
our acquisition of EPL in February 2004, we began to expand our SMS offering to
include aggregator services. Subsequent to February 2004, we have continued to
expand our customer base, resulting in further increases in revenue from SMS
applications and aggregator services. Together, these factors have resulted in
increased revenue from SMS applications and the related aggregator services
during the nine months ended December 31, 2004 as compared to the same period in
the prior year.
Within this segment of our operations we are generating revenue from the
following SMS products and services:
Nine months Nine months
ended December ended December
31, 2004 31, 2003
----------------- -----------------
(Unaudited) (Unaudited)
$ $
SMS SERVICES
Bulk SMS 658,415 -
Premium SMS 5,592,556 -
Virtual mobile 22,708 -
Location based service 102,745 -
Web hosting 84,691 -
----------------- -----------------
6,461,115 -
----------------- -----------------
SMS PRODUCTS 121,239 136,743
----------------- -----------------
6,582,354 136,743
================= =================
22
As indicated above, the prime source of our SMS service revenue is derived from
our premium SMS delivery services. Effective July 2004, we increased the volume
of our bulk and premium services to mobile content providers. In addition, 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.
Our SMS products include custom mobile solutions, such as our chat applications
and our paging applications.
SOFTWARE, MAINTENANCE AND CONSULTING
Software sales decreased by 61% for the nine months ended December 31, 2004 to
$216,282 as compared to $553,964 for the nine months ended December 31, 2003.
This decrease in software sales was primarily the result of customers waiting to
purchase the newest version of the Zim IDE software, Zim 8, which we released
during the quarter ended December 31, 2004.
Revenue from maintenance contracts increased 5% for the nine months ended
December 31, 2004 to $686,321 as compared to $656,538 for the nine months ended
December 31, 2003. Management does not expect significant changes in the
maintenance revenue for the balance of fiscal 2005.
As with the three month period ended December 31, 2004, consulting revenues
declined during the nine month period ended December 31, 2004 as compared to the
same period in the prior year as customers were using a version of the Zim IDE
software that had been on the market for over one year. With the release of Zim
8, we may secure new consulting opportunities but we do not expect that any such
consulting revenue will be a significant part of ZIM's total revenue.
EXPENSES
Expenses increased substantially during the nine months ended December 31, 2004
as compared to the nine month period ended December 31, 2003 as a result of the
costs related to revenue and the increase in amortization of intangible assets
purchased in the acquisition of EPL.
Nine months
ended December Nine months ended % change between
31, 2004 December 31, 2003 periods
------------------ ------------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
$ $
Cost of revenue 6,176,354 189,664 3156%
Selling, general and administrative 2,384,587 2,044,980 17%
Research and development 572,047 508,897 12%
Amortization of intangible assets 266,173 27,718 860%
Loss (gain) on disposal of property and equipment 33,561 - N/A
Interest (4,056) 94,603 -104%
Income taxes (recoverable) (132,056) (154,313) -14%
------------------ -------------------
9,296,610 2,711,549 243%
================== ===================
23
COST OF REVENUE
Nine months ended Nine months ended
December 31, 2004 December 31, 2003
---------------------- ------------- ------------------- ------------
(Unaudited) (Unaudited)
$ $
COST OF REVENUE
SMS applications 5,970,912 16,701
Software 120,872 91,830
Maintenance 60,816 66,670
Consulting 23,754 14,463
---------------------- -------------------
6,176,354 189,664
---------------------- -------------------
MARGINS
SMS applications 611,442 9% 120,042 88%
Software 95,410 44% 462,134 83%
Maintenance 625,505 91% 589,868 90%
Consulting 7,826 25% 19,562 57%
---------------------- -------------------
1,340,183 18% 1,191,606 86%
---------------------- -------------------
Overall, we realized a gross margin of $1,340,183 or 18% for the nine months
ended December 31, 2004 as compared to $1,191,606 or 86% for the nine months
ended December 31, 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 nine months ended December 31, 2003
was primarily related to sales of software and related maintenance, which has
lower direct costs than SMS applications.
As mentioned above, ZIM has been realizing significant revenues and direct
expenses relating to SMS applications since February 2004. 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 realized a gross margin of 9% for SMS applications for the nine months
ended December 31, 2004. 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 SMS applications for the same period in the prior year.
As with the three month comparison, direct costs of $120,872 for software sales
during the nine month period ended December 31, 2004 related primarily to the
direct costs incurred in Brazil. Direct costs were $91,830 for the nine months
ended December 31, 2003. Our software sales margins decreased for the nine
months ended December 31, 2004, as compared to the nine months ended December
31, 2003, as a result of the decrease in revenue without any commensurate
decrease in salaries in Canada or Brazil.
The gross margins on maintenance between the nine months ended December 31, 2004
and 2003 have remained relatively stable at 91% and 90%, respectively. Direct
maintenance direct costs include salaries and benefits related to customer
support.
24
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 the various margins achieved.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased from $2,044,980 for the
nine months ended December 31, 2003 to $2,384,587 for the nine months ended
December 31, 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 nine months ended December 31, 2004, there
were non-cash compensation expenses of $303,708 relating to option grants to
non-employees and selling, general and administrative expenses in the UK of
approximately $290,000.
RESEARCH AND DEVELOPMENT
As indicated in the three month analysis, research and development expenses
increased slightly during the nine months ended December 31, 2004 as compared to
the same period in the prior year due to the hiring of additional staff.
AMORTIZATION OF INTANGIBLE ASSETS
We acquired new intangible assets with the acquisition of EPL. Included in these
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 nine months ended December 31, 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 no significant interest expenses for the nine months ended December
31, 2004. Our operations in Brazil received 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, we
reduced our ITC eligible expenditures, and as a result, ITCs, for the nine
months ended December 31, 2004, as compared to the nine months ended December
31, 2003. Management expects further reductions in ITCs as we intend to allocate
fewer resources to research and more resources to supporting revenue.
As a result of the factors described above, the net loss for the nine months
ended December 31, 2004 was $1,780,073 as compared to $1,330,279 for the nine
months ended December 31, 2003.
25
LIQUIDITY AND CAPITAL RESOURCES
As at December 31, 2004, ZIM had cash of $1,062,589 and working capital of $
1,363,729 as compared to cash of $870,520 and 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 October 2004 (see below) and the increase in
revenue.
Cash flows for the fiscal periods were as follows:
Nine months ended Nine months ended
December 31, 2004 December 31, 2003
----------------------- ----------------------
(Unaudited) (Unaudited)
$ $
Cash flows used in operating activities (1,449,821) (1,622,830)
Cash flows used in investing activities (35,104) (56,647)
Cash flows provided by financing activities 1,606,786 1,299,501
----------------------- ----------------------
121,861 (379,976)
======================= ======================
ZIM used $1,449,821 in operating activities for the nine months ended December
31, 2004 as compared to $1,622,830 in the same period in 2003. The decrease in
cash used in operations is attributed to an increase in non-cash expenses for
the nine months ended December 31, 2004, including amortization of assets
purchased in February 2004 and non-cash compensation. In addition, we used less
working capital during the nine months ended December 31, 2004 as compared to
the same period in the prior year.
ZIM used $35,104 of cash in its investing activities during the first nine
months of fiscal 2005 and $56,647 during the same period in the prior year. This
increase in cash used in investing activities was primarily the result of the
purchase of computer equipment.
ZIM increased its cash through financing activities during the periods ended
each of Decembers 31, 2004 and 2003. During the current fiscal year, ZIM
completed three private placements, for net proceeds of $1,540,186, with
approximately 94% being received from related parties. For the first nine months
of the prior fiscal year, the same related parties provided funds in the form of
debt.
All financings in the nine months ended December 31, 2004 were non-brokered
private placements to 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 equal to the
market price of our common shares at the time of closing. The form of purchase
agreement entered into by the Corporation and the investor in the October 7,
2004 private placement is attached as Exhibit 10.8 to this Report on Form 10-QSB
and the form of warrant issued to the investor in the October 7, 2004 private
placement is attached as Exhibit 10.9 to this Report on Form 10-QSB.
Based on the first nine months of the current fiscal year, ZIM will need an
estimated $2,000,000 in additional financing in order to fund its operating
losses and other working capital requirements for the next 12 months. 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
$2,000,000.
26
ZIM may obtain further financing through the sale of its securities to investors
as well as the exercise of options by option holders and warrant holders.
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 or otherwise meet is
working capital needs, 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 December 31, 2004 and is based on contracts signed
with third parties:
The Corporation's total lease commitments relating to facilities and equipment
are $379,639. The minimum lease payments are:
(Unaudited)
-----------
$
Balance of 2005 41,902
2006 145,820
2007 135,240
2008 56,677
------------------
379,639
==================
OFF BALANCE SHEET ARRANGEMENTS
The Corporation did not have any off-balance sheet arrangements as at December
31, 2004.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS 123R, Share-Based Payment, ("SFAS 123R").
This revised standard addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the
fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. Under the new standard, companies will no
longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB 25. Instead, companies will be required
to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. SFAS 123R will be effective for
periods beginning after June 15, 2005 and allows, but does not require,
companies to restate the full fiscal year of 2005 to reflect the impact of
expensing share-based payments under SFAS 123R. The Corporation has not yet
determined which fair-value method and transitional provision it will follow.
The impact on ZIM'S financial statements of applying one of the acceptable
fair-value based methods of accounting for stock options is disclosed in Note 4.
27
ITEM 3 - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure 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.
As required by the SEC rules, our management evaluated the effectiveness of the
design and operation of the Corporation's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of end of
the period covered by this Quarterly Report on 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 have concluded that the Corporation's controls and procedures were
effective as of December 31, 2004 to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time period specified in the Securities and Exchange Commission rules and
forms, 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.
(b) Changes in internal controls over financial reporting.
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.
In response to the observations made by the independent registered public
accounting firm, the Corporation has expanded the scope of its monthly review of
the financial statements and has identified and begun implementing certain
enhancements to its internal controls over financial reporting. The Corporation
intends to continue to implement these enhancements during the remainder of
fiscal 2005 and beyond. Management believes that these enhancements will assist
in addressing the matters discussed above. However, 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.
28
There was no change in our internal controls over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-QSB that
has materially affected, or is reasonably likely to materially affect, our
internal controls.
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.
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 December 31, 2004:
On October 7, 2004, the Corporation issued 1,018,077 units in a non-brokered
private placement to Marlen Cowpland, the spouse of the Chief Executive Officer
and a non-U.S. investor, at $0.39 per unit and, as a result, raised $397,080 in
the aggregate. Each unit consists of one common share and two warrants to
purchase an additional common share per warrant at $0.39 per share expiring
January 7, 2006. 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 and Regulation D promulgated thereunder 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
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
29
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------- -----------
10.8 Form of Share Purchase Agreement between Marlen Cowpland and ZIM
Corporation dated October 7, 2004
10.9 Form of Warrant between Marlen Cowpland and ZIM Corporation dated
October 7, 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
On October 5, 2004 the Corporation filed a Current Report on Form 8-K
reporting under Items 2 and 9 the preliminary financial results for
the three and six months ended September 30, 2004.
On November 15, 2004 the Corporation filed a Current Report on Form
8-K reporting under Items 2 and 9 the financial results for the three
and six months ended September 30, 2004.
On December 30, 2004 the Corporation filed a Current Report on Form
8-K reporting under Items 5 and 9 the departure of its Chief
Technology Officer.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly 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 February 14, 2005
- ------------------------- Officer
Michael Cowpland
/s/ Jennifer North Chief Financial and Principal February 14, 2005
- --------------------- Accounting Officer
Jennifer North
31
EXHIBIT INDEX
Exhibit
Number Description
10.8 Form of Share Purchase Agreement between Marlen Cowpland and ZIM
Corporation dated October 7, 2004
10.9 Form of Warrant between Marlen Cowpland and ZIM Corporation dated
October 7, 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.
32