U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER: 000-28519
ZANN CORP.
(Name of small business issuer in its charter)
NEVADA 76-0510754
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1549 N. LEROY ST., SUITE D-200, FENTON, MICHIGAN 48430
(Address of principal executive offices) (Zip Code)
(810) 714-2978
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 4, 2005, the
issuer had 29,816,788 shares of its common stock issued and
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Financial Statements (Unaudited) . . . . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . 1
Condensed Consolidated Statement of Losses . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flow . . . . . . . . 3
Notes for Condensed Consolidated Financial Statements. . . . . 4
Item 2. Management's Discussion and Analysis or Plan of Operation. . . 14
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. . 19
Item 3. Defaults Upon Senior Securities .. . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ZANN CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2005 December 31, 2004
(Unaudited)
-----------
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 25,411 $ 39,890
Inventory (Note D) 103,475 16,397
Prepaid expenses and other 316 2,314
-----------------------------------------
Total Current Assets 129,202 58,601
-----------------------------------------
Property and equipment, net of depreciation of $151,825 2,446,262 -
-----------------------------------------
Intangibles 2,587,640 -
-----------------------------------------
Total Assets $ 5,163,104 $ 58,601
=========================================
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
- --------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities (Note E) $ 1,009,425 $ 704,934
Accounts payable - related party (Note I) 196,585 1,600
Notes payable - others (Note F) 4,689,475 30,000
-----------------------------------------
Total Current Liabilities 5,895,485 736,534
-----------------------------------------
Notes payable - long term 293,855 -
-----------------------------------------
Total Liabilities 6,189,340 736,534
-----------------------------------------
Commitment and contingencies (Note M) - -
Deficiency in Stockholders' Equity
Common stock, $.001 par value, 4,000,000,000 shares authorized,
29,816,788 and 219,800 shares outstanding at September 30, 2005 and
December 31, 2004 respectively $ 29,817 $ 220
Subscription receivable (150,000) (39,616)
Preferred stock, $.001 par value, 350,000,000 shares authorized
Series A: 2,497,700 and 2,437,700 shares issued and outstanding
at September 30, 2005 and December 31, 2004 respectively 2,498 2,438
Series B: 392,501 and 0 shares issued and outstanding at
September 30, 2005 and December 31, 2004 respectively 393 -
Series C: 10,000,000 issued and outstanding at September 30,
2005 and December 31, 2004 respectively 10,000 10,000
Additional paid-in-capital 37,060,946 35,468,653
Accumulated deficit (37,979,890) (36,119,628)
-----------------------------------------
Total Deficiency in Stockholders' Equity (1,026,236) (677,933)
-----------------------------------------
Total Liabilities and Deficiency in Stockholders' Equity $ 5,163,104 $ 58,601
=========================================
See accompanying notes to unaudited condensed consolidated financial statements
- 1 -
ZANN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months For the nine months
ended September 30 ended September 30
2005 2004 2005 2004
(Restated-Note J) (Restated-Note J)
--------------------------------------------------------------------
REVENUES
Sales, net $ 227 $ 505 $ 826 $ 505
Cost of goods sold (126) - (1,242) -
--------------------------------------------------------------------
Gross (loss) 101 505 (417) 505
--------------------------------------------------------------------
OPERATING EXPENSES
Depreciation 66,526 - 66,526 -
Selling, general and administrative 472,539 3,652,015 1,783,362 5,639,283
--------------------------------------------------------------------
Total operating expenses 539,065 3,652,015 1,849,888 5,639,283
--------------------------------------------------------------------
LOSS FROM OPERATIONS (538,964) (3,651,510) (1,850,305) (5,638,778)
--------------------------------------------------------------------
Other (expense) income
Interest income (expense) (5,517) (12,835) (9,956) (12,835)
Goodwill write off - (296,280) - (296,280)
Debt forgiveness - - 616,132
--------------------------------------------------------------------
Total other (expense) income (5,517) (309,115) (9,956) 307,017
--------------------------------------------------------------------
NET (LOSS) BEFORE PROVISION FOR INCOME
TAX AND MINORITY INTEREST (544,480) (3,960,625) (1,860,260) (5,331,761)
PROVISION FOR INCOME TAX - - - -
--------------------------------------------------------------------
NET (LOSS) $ (544,480) $ (3,960,625) $ (1,860,260) $ (5,331,761)
====================================================================
Loss per share (basic and fully diluted) $ (0.02) $ (800.77) $ (0.11) $ (1,273.71)
====================================================================
Basic and diluted weighted average number of shares
outstanding as restated for reverse and forward stock
splits 27,163,363 4,946 17,165,635 4,186
====================================================================
See accompanying notes to unaudited condensed consolidated financial statements
- 2 -
ZANN CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
For the nine months ended September 30
2005 2004
---------------------------------------------
Cash Flows Used in Operating Activities (Restated - Note J)
Net (loss) $ (1,860,261) $ (5,331,761)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation expense 66,526 -
Common stock issued for services 486,041 3,391,233
Employee stock option expense 512,326 558,117
Preferred series A issued for services 900 -
Preferred series B issued for services and interest 1,485 -
Goodwill write off - 296,280
Debt forgiven - (616,132)
Changes in:
Accounts payable and accrued expenses 341,431 (175,876)
Inventory and prepaid expenses 3,677 (785)
Accounts payable - related - (9,548)
---------------------------------------------
Net cash provided (used) in operating activities (447,874) (1,888,472)
---------------------------------------------
Cash Flows from Investing Activities
Cash acquired in acquisition of subsidiary 395 -
Acquisition of subsidiary (200,000) -
Increase in other assets - (12,400)
---------------------------------------------
Net cash (used) in investing activities (199,605) (12,400)
---------------------------------------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock 357,906 1,524,746
Proceeds from sale of preferred stock 117,001 -
Convertible debenture 100,000 -
Payments on convertible debenture (1,907) -
Notes payable 225,000 -
Payments on notes payable (165,000) -
Proceeds from related party - 113,750
Repayment of note payable to related party - (90,000)
---------------------------------------------
Net cash provided by financing activities 633,000 1,548,496
---------------------------------------------
Net change in cash (14,479) (352,376)
Cash at beginning of period 39,890 367,978
---------------------------------------------
Cash at end of period $ 25,411 $ 15,602
=============================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 9,956 $ 12,835
Cash paid during the period for income taxes - -
Common stock issued in exchange for services rendered $ 486,041 $ 3,391,233
Preferred B shares issued for cash received in October 2005 $ 150,000 -
Preferred A and B shares issued for services and interest $ 2,385 -
Preferred shares issued for debt - $ 3,022,550
Employee stock option expense $ 512,326 $ 558,117
Income from liabilities forgiven - $ 616,132
Acquisition: (Note B and C)
Assets acquired $ 5,189581 $ -
Liabilities assumed $ 509,581 $ -
Cash paid $ 200,000 $ -
Notes payable $ 4,480,000 $ -
See accompanying notes to unaudited condensed consolidated Financial Statements
- 3 -
ZANN CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
NOTE A - SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the nine-month period ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated December 31, 2004 financial statements and footnotes thereto
included in the Company's SEC Form 10-KSB.
BUSINESS AND BASIS OF PRESENTATION
The Company incorporated in Florida on March 4, 1999 as Investra Enterprises
Inc. On March 6, 2000, we completed a Share Purchase Agreement in which
Pathobiotek Diagnostics, Inc., a Texas Corporation, acquired all of our
issued and outstanding shares for $150,000 for the purpose of completing a
merger of Pathobiotek Diagnostics, Inc. and Investra Enterprises. Pathobiotek
Diagnostics, Inc., a Texas corporation, was the surviving entity.
Effective September 7, 2001, we implemented a reverse split of our Common Stock
at the ratio of one post-consolidation share for each 40 pre-consolidation
shares, except that no shareholder was reduced to less than 10 shares.
On October 16, 2001, we completed the Plan and Agreement of Reorganization by
and between Pathobiotek Diagnostics Inc., ATNG Acquisition, Inc., a Texas
corporation, and ATNG, Inc., a Nevada corporation under which Pathobiotek
Diagnostics Inc. issued 27,836,186 shares of its common stock as consideration
for its wholly owned subsidiary, ATNG Acquisition, Inc. to acquire 100 percent
of the issued and outstanding stock of ATNG, Inc., a Nevada corporation.
Following the October 16, 2001 reorganization, ATNG Acquisition, Inc. and ATNG,
Inc. merged. On October 17, 2001, we changed our name to ATNG, Inc. On September
6, 2003 we changed our domicile from Texas to Nevada and changed our name to
ATNG Inc.
On August 10, 2004, the Company acquired Blue Kiwi, Inc., a Michigan corporation
engaged in the marketing and sale of nutritional supplements. Blue Kiwi, Inc.
currently markets two lines of products: Fatigue Pack(R) and PMS(TM) Pack.
In November, 2004, the Shareholders and Directors of the Company approved a
change in the name of the Company from ATNG, Inc. to Zann Corp., amended its
Articles of Incorporation, increasing the number of authorized shares to
4,000,000,000, and authorized a reverse stock split effective December 3, 2004
of one post consolidation share for every 900 pre-consolidation share.
On March 1, 2005, the sole Director approved a decrease in the number
of authorized shares to 11,428,572 and authorized a reverse stock split
effective March 10, 2005 of one post consolidation share for every 350
pre-consolidation shares.
On April 19, 2005 the Sole Director approved a forward stock split of three
shares for every one share held as of May 3, 2005. On May 9, 2005, the
shareholders and directors of the Company amended its Articles of Incorporation
to increase the authorized Common Stock to 4,000,000,000 and the authorized
Preferred Stock to 350,000,000.
- 4 -
The accompanying financial statements reflect these changes. Accordingly, all
historical weighted average share and per share amounts have been restated
to reflect the reverse and forward stock splits.
On June 27, 2005 the Company acquired approximately 42.6% of the Common and
6.52% of the Convertible Preferred Second Series of Sartam Industries, Inc., a
Florida Corporation engaged the manufacturing and sale of automatic riveting
machines and the re-supply of riveting belts. We are presently evaluating the
assets of Sartam Industries, Inc. The condensed consolidated financial
statements include the estimated fair market value of the assets acquired and
the related notes payable and an insignificant amount of operating expenses.
The condensed consolidated financial statements include the accounts of the
Company, Blue Kiwi, Inc., the Company's wholly-owned subsidiary, and Sartam
Industries, Inc., a subsidiary of which the Company owns approximately 42.6% of
the Common Stock and 6.52% of the Convertible Preferred Second Series.
Significant intercompany transactions have been eliminated in consolidation.
INVENTORY
The Company values inventory on the first in, first out basis. Inventory is
reviewed periodically for obsolescence and any unsaleable products are written
off. Health and nutritional supplements are purchased from an outside
manufacturer and include all costs including labeling and packaging. Rivet guns
and magazines are manufactured and include all direct and indirect costs
associated with the manufacturing.
PROPERTY AND EQUIPMENT
Costs for property and equipment are accumulated in work in progress until
assets are placed in service at which time the accumulated cost is depreciated
or amortized over the estimated useful life of the asset.
Major classes of property and equipment on September 30, 2005 and December 31,
2004 consist of the following:
2005 2004
--------------------
Equipment $ 129,005 $ -
Packaging Machines 2,469,082 -
--------------------
Gross Assets 2,598,087 -
Less: Accumulated Depreciation 151,825 -
--------------------
Net Property and Equipment $2,446,262 $ -
====================
Information required to complete the purchase price allocation for certain
tangible and intangible property relating to investment in Sartam is not yet
available. Final allocation of the purchase price will be completed as soon as
this information is available.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. SFAS No. 121 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell. Intangibles acquired in the acquisition of Sartam will be
accounted for according to SFAS 142. Such determination will be made by
management subsequent to September 30, 2005.
SEGMENT INFORMATION
The Company has various separate, reportable segments under Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how
- 5 -
to allocate resources and assess performance. The information disclosed herein,
materially represents all of the financial information related to the Company's
principal operating segments.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods financial statements
to conform to classifications used in the current period.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in accordance
with Staff Accounting Bulletin No. 104, REVENUE RECOGNITION ("SAB104"), which
superseded Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB101"). SAB 101 requires that four basic criteria must be met
before revenue can be recognized: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the selling price is fixed and
determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required. SAB 104 incorporates Emerging Issues
Task Force 00-21 ("EITF 00-21") MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS. EITF
00-21 addresses accounting for arrangements that may involve the delivery or
performance of multiple products, services and/or rights to use assets. The
effect of implementing EITF 00-21 on the Company's consolidated financial
position and results of operations was not significant. For the period
ended September 30, 2005 neither of the Company's subsidiaries had significant
revenue.
Revenue for Sartam will be recognized when finished products are shipped
to the customer against confirmed purchase orders or contracts.
STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2003 and has
adopted the interim disclosure provisions for its financial reports for the
subsequent periods. The Company does not have any awards of stock-based employee
compensation issued and outstanding at September 30, 2005.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share-Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
- 6 -
NEW ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143", which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than its last quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows. In May
2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154,
"Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20
and FASB Statement No. 3." SFAS 154 requires retrospective application to prior
periods' financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 also requires that retrospective application of a
change in accounting principle be limited to the direct effects of the change.
Indirect effects of a change in accounting principle, such as a change in
non-discretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE B - MINORITY INTERESTS AND ACQUISITIONS
MINORITY INTERESTS
Minority interest reflects the other owners' proportionate share in the assets,
liabilities and equity of business ventures as of the date of purchase, adjusted
by the proportionate share of post-acquisition income or loss. As the operating
results of entities with minority interest are consolidated, minority interests
income, represents the income or loss attributable to the other owners.
ACQUISITIONS
On August 10, 2004, the Company acquired Blue Kiwi, Inc., a Michigan corporation
engaged in the marketing and sale of nutritional supplements. The Company
entered into an acquisition agreement with Robert C. Simpson, the Company's
president, chief executive officer, and majority shareholder, to purchase all of
the issued and outstanding capital stock of Blue Kiwi Inc., a Michigan
corporation, for the sum of $5 million, payable in monthly installments of up to
10 percent of our gross profit. The obligation to pay $5 million to Dr. Simpson
in connection with the Blue Kiwi acquisition is expressly conditioned upon the
Company generating profit. In the absence of profits, the Company is not
obligated to pay $5 million to Dr. Simpson. The obligation will not bear any
interest. As of September 30, 2005, no payments have been made to Dr. Simpson.
As a result of the acquisition, Blue Kiwi became our wholly-owned subsidiary.
The following is the summary of assets acquired and liabilities assumed
and consideration paid relating to the transaction: assets acquired:
Cash $ 10,612
Other Current Assets 3,256
---------
Total Assets Acquired 13,868
Accounts Payable 9,548
Due to Related Party 299,600
---------
Total Liabilities Assumed 309,148
Cash Paid (1,000)
---------
Goodwill $296,280
The acquisition was accounted for as a purchase in accordance with SFAS 141 and,
accordingly, the operating results of the acquired company have been included in
the Company's consolidated financial statements since the date of acquisition.
On June 27, 2005 the Company acquired approximately 42.6% of the Common and
6.52% of the Convertible Preferred Second Series of Sartam Industries, Inc. for
$200,000 in cash and $4,480,000 in Promissory Notes. The acquisition of Sartam
was accounted for using the purchase method in accordance with SFAS 141,
"Business
- 7 -
Combinations". The results of operations for Sartam have been included in the
condensed consolidated statements of losses for the nine months ended September
30, 2005, since the date of acquisition. Sartam did not have any operations for
period between June 27, 2005 and September 30, 2005. Sartam has been
consolidated based on the significant percentage of ownership of common shares
(42.6%), control of the Board of Directors and management control of operations.
In accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed. The estimate of fair value of the
assets acquired was based on management's estimates. The total purchase price
was allocated to the assets and liabilities acquired as follows:
September 30, 2005 June 30, 2005
-------------------------------------
Assets acquired
Cash $ 395 $ 395
Inventory 88,757 89,027
Property and equipments-net 2,512,789 2,068,707
Intangibles 2,587,640 2,764,263
-------------------------------------
Total $ 5,189,581 $ 4,922,392
=====================================
Liabilities assumed $ (509,581) $ (522,392)
Cash paid (200,000) (200,000)
Notes payable (4,480,000) (4,200,000)
-------------------------------------
Total $ (5,189,581) $ (4,922,392
=====================================
Amounts reported at June 30, 2005 differ from amounts at September 30, 2005 as a
result of additional machinery and equipment located after acquisition and an
increase in Notes Payable to the selling shareholders for additional value.
Information required to complete the purchase price allocation for certain
tangible and intangible property is not yet available. Final allocation of the
purchase price will be completed as soon as this information is available. The
remaining 57.4% is owned by approximately 100 shareholders and is recognized as
minority interest. Sartam manufactures and sells patented Rivet Guns and Rivet
Belts to the manufacturing industry. Operating results are consolidated
consistent with the acquisition date of June 27, 2005. There is no minority
interest reflected in the September 30, 2005 or December 31, 2004 balance sheets
because Sartam had a stockholders' deficit as of those dates.
Sartam Industries, Inc. has two classes of preferred shares outstanding. The
First Series Preferred has a par value of $.01 per share, there are 7,000 shares
issued and outstanding held by one individual. The shares have no voting right,
are not convertible into common, contain a $100 per share liquidation preference
and may be redeemed by the company for $100 per share five years after issuance.
The Second Series has a par value of $1.00 per share, there are 3,000,000 shares
authorized and 2,563,278 shares issued and outstanding at September 30, 2005
held by approximately 125 shareholders. The Second Series are convertible into
common on a 1:1 basis by the shareholders and may be converted into common by
the Company after three years from issuance. The Second Series shareholders can
nominate one Director to the Board of Directors and are entitled to dividend
preference of 60% of any dividend declared by the Board of Directors.
NOTE C - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
The Company has adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 142 addresses
how intangible assets that are acquired individually or with a group of other
assets should be accounted for in financial statements upon their acquisition.
This statement requires goodwill amortization to cease and for goodwill to be
periodically reviewed for impairment. Under SFAS No. 142, goodwill impairment
occurs if the net book value of a reporting unit exceeds its estimated fair
value. The Company's goodwill asset was with regard to the acquisitions of Blue
Kiwi for $296,280. The test completed in the last quarter ended on December 31,
2004 indicated that the recorded book value of the reporting unit exceeded its
fair value, as determined by discounted cash flows. The decrease in fair value
is a result of:
- Significant operating losses during the past six months
- Unanticipated decline in revenues and profitability
- Loss of key personnel
As a result of these events and circumstances, Company management believes that
the fair value of the reporting unit's goodwill has been reduced below its
carrying value. As a result, management performed an evaluation of the
reporting unit's tangible and intangible assets for purposes of determining
the implied fair value of goodwill at December 31, 2004. Upon completion of
the assessment, management recorded a non-cash impairment charge of $(296,280),
net of tax, or $(23.16) per share, to reduce the carrying value of goodwill in
this reporting unit to its estimated value of $0.
- 8 -
The Company does not have complete information relating to intangible property
acquired with Sartam acquisition. The Company will perform allocation of
purchase price, including intangibles and related impairment test subsequent to
September 30, 2005.
Considerable management judgment is necessary to estimate fair value.
Accordingly, actual results could vary significantly from managements'
estimates.
NOTE D - INVENTORIES
Inventories are stated at the lower of cost or market determined by the
first-in, first-out (FIFO) method. As of September 30, 2005, inventories consist
of pre-packaged Health and Nutritional supplements of $14,718 and Manufactured
Rivet Guns and Belts of $88,757 available for sale to customers.
Components of inventories as of September 30, 2005 and December 31, 2004 are as
follows:
2005 2004
-------- -------
Finished goods $103,475 $16,397
======== =======
NOTE E - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of September 30, 2005 and December
31, 2004 consist of the following:
2005 2004
---------- --------
Accounts payable $ 653,586 $346,801
Accrued salaries 120,909 116,903
Payroll taxes 234,930 234,930
Accrued interest - 6,300
--------------------
Total $1,009,425 $704,934
====================
NOTE F - NOTES PAYABLE
Notes payable as of September 30, 2005 and December 31, 2004 are as follows:
2005 2004
-----------------------
Convertible Debenture, due April 1, 2005, interest 12%, convertible into
180,000 preferred shares-Series A. On April 1, 2005 the holder of this
debenture agreed to accept 50,000 shares of preferred shares-Series B. $ - $ 30,000
-----------------------
Convertible Debenture, due January 1, 2006, interest 10%, payable
$1,000 per month, convertible into 15,000 preferred shares-Series A on
a basis of $.663 cents for each share converted 98,093 -
-----------------------
Promissory Notes, Non-Interest Bearing, due $620,000 in December
2005; $1,060,000 in March 2006 and $2,800,000 in August 2006 4,480,000 -
-----------------------
Promissory Note, Non-Interest Bearing, due in August 2005,
collateralized by 7,000 shares of Preferred Series A 35,000 -
-----------------------
Promissory Note, Non-Interest Bearing, due from royalties or revenue
from Honsel until paid in full. If not paid from royalties or revenue
from Honsel then $50,000 due December 31, 2005 and remaining
balance due by December 31, 2006. 343,855 -
-----------------------
Promissory Note dated July 1, 2001, Interest 9% per annum, due on
demand, including accrued interest of $382.50 1,382 -
-----------------------
- 9 -
Promissory Note-Due December 31, 2005 plus interest at 10% 25,000 -
-----------------------
Total 4,983,330 30,000
=======================
Less: current portion (4,689,475) (30,000)
-----------------------
Notes payable-others-non current $ 293,855 $ -
-----------------------
NOTE G - CAPITAL STOCK
In November, 2004, the Shareholders and Directors of the Company approved a
change in the name of the Company from ATNG, Inc. to Zann Corp., amended its
Articles of Incorporation, increasing the number of authorized shares to
4,000,000,000, and authorized a reverse stock split effective December 3, 2004
of one post consolidation share for every 900 pre-consolidation share.
On March 1, 2005, the sole Director approved a decrease in the number
of authorized shares to 11,428,572 and authorized a reverse stock split
effective March 10, 2005 of one post consolidation share for every 350
pre-consolidation shares.
On April 19, 2005 the Sole Director approved a forward stock split of three
shares for every one share held as of May 3, 2005. On May 9, 2005, the
shareholders and directors of the Company amended its Articles of Incorporation
to increase the authorized Common Stock to 4,000,000,000 and the authorized
Preferred Stock to 350,000,000.
The accompanying financial statements reflect these changes. Accordingly, all
historical weighted average share and per share amounts have been restated to
reflect the reverse and forward stock splits.
COMMON STOCK
The Company is authorized to issue 4,000,000,000 shares of common stock, with
$0.001 par value per share. As of September 30, 2005 and December 31, 2004 the
Company has issued and outstanding 29,816,788 and 219,800 shares respectively of
common stock with par value of $0.001 per share.
During the nine months ended September 30, 2005 and 2004, the Company issued an
aggregate of 14,192,327 and 1,980 shares for employee stock incentive program
for $830,616 and $1,632,200 respectively. In relation to issuance of shares for
employee stock incentive program, the Company received cash of $357,906 and
$1,524,746 respectively. The Company recorded $512,326 and $558,117 respectively
as employee compensation expenses for the nine months ended September 30, 2005
and 2004.
During the nine months ended September 30, 2005 and 2004, the Company issued an
aggregate of 14,965,062 and 383 shares respectively for various professional
services valued at $486,041 and $607,395 respectively. The Company valued the
shares issued at the closing price on the date the shares were issued, which
approximated the fair value of the services rendered. The compensation costs of
$486,041 and $607,395 were charged to operations during the nine months ended
September 30, 2005 and 2004 respectively.
The Company accounts for its employee stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. The Company granted 14,192,327 and 1,980 options to purchase
common stock to employees in the nine month periods ended September 30, 2005 and
2004, respectively. All options vest immediately, have an exercise price of 90
percent of market value on the date of grant and expire 10 years from the date
of grant. All options are exercised on the day of grant. At September 30, 2005
and 2004 the Company recorded $830,616 and $1,632,200 for the 14,192,327 and
1,980 shares issued to employees. The Company also charged expenses of $512,326
and $558,117 relating to these issuances.
All of the above share information has been adjusted to reflect the post
consolidation of 900:1 on December 3, 2004 and 350:1 on March 10, 2005 and
the forward split of 3:1 on May 3, 2005.
- 10 -
PREFERRED STOCK
Each share of Series A Preferred Stock is convertible into 10 shares of common
stock. The Series A Preferred Stock will have one vote per share on all matters
submitted to a vote of the holders of common stock, including, without
limitation, the election of directors. At September 30, 2005 and December
31, 2004 there were 2,497,700 and 2,437,700 shares issued and
outstanding, respectively.
During the nine months ended September 30, 2004, the Company issued an aggregate
of 154,700 shares of Series A Preferred Stock in exchange of debt for
$3,022,550.
During the nine months ended September 30, 2005, the Company issued an aggregate
of 60,000 shares of Series A Preferred Stock for various professional services
valued at $900. The Company valued the shares issued at $0.015 per share, which
approximated the fair value of the services rendered. The compensation costs of
$900 were charged to operations during the nine months ended September 30, 2005.
Each share of Series B Preferred Stock is convertible into 1 share of common
stock. The Series B Preferred Stock will have one vote per share on all matters
submitted to a vote of the holders of common stock, including, without
limitation, the election of directors. During the nine months ended September
30, 2005 the Company issued 392,501 shares of Series B Preferred Stock as
follows:
Shares Amount
------- --------
Convertible debenture and accrued interest 50,000 $ 36,300
Cash 267,001 267,001
Interest on promissory notes 57,000 1,112
Services 18,500 372
------- --------
Total 392,501 $304,785
During the period ended September 30, 2005 267,001 of Series B Preferred Shares
were issued for cash of $267,001. $117,001 was received before September 30 and
the remaining $150,000 was received in October 2005.
At September 30, 2005 and December 31, 2004 there were 392,501 and 0 shares of
Series B Preferred Stock issued and outstanding, respectively.
The Series C Preferred Stock is not convertible into shares of common stock. The
Series C preferred stock has voting rights equal to 500 votes per share on all
matters submitted to a vote of the holders of common stock, including,
without limitation, the election of directors.
At September 30, 2005 and December 31, 2004 there were 10,000,000 shares
of Series C Preferred Stock issued and outstanding, respectively.
NOTE H - NON-QUALIFIED STOCK COMPENSATION PLAN
In May 2005, the Company authorized the Non-Employee Directors and Consultants
Retainer Plan ("NDCRP") for the Year 2005. The purpose of the NDRCP is to
attract non-employee directors and consultants who are capable of improving the
success of the Company by providing a direct economic interest to Company
performance. Under the terms of the plan, non-employee directors or consultants
may be compensated through the issuance of Company stock at Market Value on the
date of issuance. The plan is administered by the Company's Board of Directors.
NOTE I - RELATED PARTY TRANSACTIONS
The Company advances funds to related entities for business development
or reimbursement of expenses. During nine months ended September 30, 2005,
the Company has reimbursed $218,247 to related parties. The Company provides
management and consulting services under agreements with entities controlled by
the Company's President. The Company's management has determined that the
collectibility and length of time to collect the amount due from these entities
can not be reasonably assured. Accordingly, revenues are recognized as collected
in connection with the services rendered. During the nine months ended September
30, 2005 and 2004, the Company did not receive nor recognize revenues in
connection with providing these services.
- 11 -
At September 30, 2005 and December 31, 2004 the Company had accounts
payable-related party outstanding balances of $196,585 and $1,600 respectively.
These amounts represent funds advanced by an Officer for operating expenses.
During the nine months ended September 30, 2005 and 2004 the employees of the
Company were paid through entities owned by the Company's President. These
entities are responsible for payroll, all payroll taxes, health insurance plans
and all other employee benefits. During the nine months ended September 30,
2005 and 2004 the Company paid these entities approximately $283,688 and
$354,169 respectively, which has been charged to operations. At September 30,
2005, $4,006 was owed to the related entity (included in accounts payable) for
payroll expenses. There were no amounts due to these entities as of September
30, 2004.
NOTE J - RESTATEMENT
During the audit of the Company's financial statements for the twelve months
ended December 31, 2004, the Company made accounting adjustments for certain
transactions that occurred during the nine months ended September 30, 2004
as follows:
- - Recorded Employee stock options at Fair Market Value at the date of the
grant less cash received from the employee exercise. Increased Employee
Stock Option expense by $514,563 and increased Additional Paid in Capital
by $545,500 and increase stock subscription receivable by $30,937.
- - Recorded Preferred Series shares issued for debt at the fair market value
of the shares at the date agreements were made with creditors to take
shares in exchange for their debts. The effect of this adjustment was to
increase the Accumulated Deficit at December 31, 2003 by $2,809,824,
decrease Debt Forgiveness income by $285,641 and increase Additional Paid
In Capital by $3,095,465 for the nine months ended September 30, 2004.
- - Adjusted Other Obligations by negotiating the cancellation of certain
shares to be issued to a related party and others. This adjustment reduced
Debt Forgiveness by $135,600 and increasing Additional Paid in Capital by
$135,600.
- - Adjusted Common Stock to reflect the 900:1 and 350:1 reverse stock splits
on December 3, 2004 and March 10, 2005, respectively and the 3:1 forward
stock split on May 3, 2005. This adjustment increased Additional Paid in
Capital by $573,243 and decreased Common Stock by $573,243.
- - Adjusted the Par Value of Preferred Series C to reflect the correct par
value. This adjustment decreased the Par Value of Series C by $10,000 and
increased Additional Paid in Capital by $10,000.
The net effect of these adjustments for the nine months ended September 30, 2004
are as follows:
Originally
Nine Months Ended September 30, 2004 Reported As Restated
----------------------------
Total assets $ 28,787 $ 28,787
Liabilities and other obligations 996,653 996,653
Common stock 573,245 2
Common stock subscription receivable (30,937)
Preferred series A 2,154 2,154
Preferred series C 20,000 10,000
Additional paid in capital 25,567,838 29,927,646
Accumulated deficit (27,131,103) (30,876,731)
Total liabilities and (deficiency) in stockholders equity 28,787 28,787
Net loss (4,375,894) (5,331,761)
Loss per share-basic and diluted (1,045) (1,274)
NOTE K - BUSINESS SEGMENTS
The Company reports its businesses as three reportable segments:
- 12 -
BUSINESS DEVELOPMENT: This segment provides management, financing and business
advice to other business units and subsidiaries for a fee.
HEALTH AND NUTRITION PRODUCTS: This segment consists of consumer products
designed to promote good health and wellness.
RIVET TOOLS AND MAGAZINES: This segment consists of manufactured products sold
to the manufacturing industry to improve the riveting process through the use of
the Company's patented riveting process.
Segment operating income is total segment revenue reduced by operating expenses
identifiable with the business segment. Corporate includes general corporate
administrative costs.
The Company evaluates performance and allocates resources based upon operating
income. The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. There are no inter-segment
sales. The following table summarizes segment asset and operating balances by
reportable segment for the nine months ended September 30, 2005 and 2004:
2005 2004
--------------------------
Net Sales to External Customers:
Health and nutrition products $ 826 $ 505
--------------------------
Total Sales to External Customers $ 826 $ 505
==========================
Depreciation and Amortization:
Business development - -
Health and nutrition products - -
Rivet guns and rivets $ 66,526 -
--------------------------
Total Depreciation and Amortization $ 66,526 -
==========================
General and Administrative Expense:
Business development $ 1,749,778 $ 5,585,556
Health and nutrition products 33,382 53,727
Rivet guns and rivets 66,728 -
--------------------------
Total General and Administrative Expense $ 1,849,888 $ 5,639,283
==========================
Capital Expenditures:
Business development - -
Health and nutrition products - -
Rivet guns and rivets - -
--------------------------
Total Capital Expenditures - -
==========================
Operating Loss:
Business development $(1,758,338) $(5,266,610)
Health and nutrition products (33,799) (65,151)
Rivet guns and rivets (68,124) -
--------------------------
Total Operating Loss $(1,860,261) $(5,331,761)
==========================
Segment Assets:
Business development $ 21,981 $ 14,979
Health and nutrition products 18,272 13,808
Rivet guns and rivets 5,122,851 -
--------------------------
Total Segment Assets $ 5,163,104 $ 28,787
==========================
NOTE L - GOING CONCERN
The accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the condensed consolidated financial
statements during the nine months ended September 30, 2005 the Company incurred
a loss of $1,860,261. The Company's current liabilities exceeded its current
assets by $5,766,283 as of September 30, 2005. These factors
- 13 -
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve its liquidity problems. Management anticipates
the Company will attain profitable status and improve its liquidity through the
continued developing, marketing and selling of its products and additional
equity investment in the Company. The accompanying financial statements do not
include any adjustments that might result should the Company be unable to
continue as a going concern.
In order to improve the Company's liquidity, the Company is actively pursing
additional financing through discussions with investment bankers and private
investors. There can be no assurance the Company will be successful in its
effort to secure additional financing.
If operations and cash flows continue to improve through these efforts,
management believes that the Company can continue to operate. However, no
assurance can be given that management's actions will result in profitable
operations or the resolution of its liquidity problems.
NOTE M - COMMITMENT AND CONTINGENCIES
The Company has formed a strategic alliance with Statewide Residential Lending
to originate residential mortgages throughout the State of Michigan. The Company
entered into an agreement to manage and operate several Branches.
On January 21, 2005, plaintiff Investrend Communications, Inc. d/b/a Investrend
Research commenced an action via Verified Complaint in the Supreme Court of the
State of New York, County of Queens, against the Company. The complaint, through
three causes of action, essentially alleged a breach of contract. The parties
have executed an agreement to settle the matter for the total amount of $7,500,
to be paid in six (6) installments. The first installment was paid on November
9, 2005. The settlement amount has not been included in the financial statements
at September 30, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING INFORMATION
Much of the discussion in this Item is "forward looking" as that term is used in
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934. Actual operations and results may materially differ from present
plans and projections due to changes in economic conditions, new business
opportunities, changed business conditions, and other developments. Other
factors that could cause results to differ materially are described in our
filings with the Securities and Exchange Commission.
There are several factors that could cause actual results or events to
differ materially from those anticipated, and include, but are not limited to
general economic, financial and business conditions, changes in and compliance
with governmental laws and regulations, including various state and federal
environmental regulations, our ability to obtain additional financing from
outside investors and/or bank and mezzanine lenders and our ability to generate
sufficient revenues to cover operating losses and position us to achieve
positive cash flow.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-QSB to be accurate as of the date
hereof. Changes may occur after that date. We will not update that
information except as required by law in the normal course of its public
disclosure practices.
Additionally, the following discussion regarding our financial condition and
results of operations should be read in conjunction with the financial
statements and related notes contained in Item 1 of Part I of this Form 10-QSB,
as well as the financial statements in Item 7 of Part II of our Form 10-KSB for
the fiscal year ended, December 31, 2004.
MANAGEMENT'S PLAN OF OPERATIONS
GENERAL OVERVIEW
- 14 -
Zann Corp. has four principal business units: biotechnology, nutritional
supplements, financial services and semi-automatic riveting products. Our
current focus is increasing production and sales of semi-automatic riveting
products based on our exclusive license to Sartam Industries, Inc.'s AutoFast
2000 technology. We recently acquired a 42.6% interest in the outstanding
Common Stock and 6.52% interest in the outstanding Convertible Preferred Second
Series of Sartam Industries, Inc. We are evaluating the long-term prospects of
our biotechnology, nutritional supplements and financial services businesses,
and we may consider joint ventures with respect to our biotechnology and/or
nutritional supplements businesses, and the discontinuance of our financial
services activities.
RECENT CHANGES IN OUR CORPORATE STRUCTURE
Effective March 10, 2005, we implemented a one-for-350 reverse split of our
authorized, issued and outstanding shares of common stock by filing a
Certificate of Change with the Secretary of State of Nevada (the "Reverse
Split"). Following the Reverse Split, the number of authorized shares of our
common stock was reduced to 11,428,572 in accordance with the one for 350 split
ratio. The number of our authorized preferred shares remained at 350,000,000,
and the par value of our common and preferred stock remained at $0.001 per share
following the Reverse Split.
All fractional shares which would otherwise be held by our stockholders
following the Reverse Split were rounded up to one whole share. We issued one
new share of common stock for up to each 350 shares of common stock held as of
March 9, 2005.
Effective May 3, 2005, we implemented a three for one forward split of
authorized, issued and outstanding shares of common stock by filing a
Certificate of Change with the Secretary of State of Nevada (the "Forward
Split"). Following the Forward Split, the number of authorized shares of common
stock was increased to 34,285,716 in accordance with the three for one split
ratio. The number of authorized preferred shares remained at 350,000,000, and
the par value of common and preferred stock remained at $0.001 per share
following the Forward Split.
The Forward Split was a mandatory exchange. Our stockholders were required to
surrender stock certificates representing their shares of our common stock in
order to receive stock certificates representing their post-Forward Split shares
of the Registrant's common stock.
Effective May 9, 2005, we increased the number of authorized common shares from
34,285,716 to 4,000,000,000 by filing Articles of Amendment to our Articles of
Incorporation with the Secretary of State of Nevada. The number of authorized
preferred shares remained at 350,000,000, and the par value of common and
preferred stock remained at $0.001 per share following the increase in the
number of authorized common shares.
STRUCTURE
Semi-Automatic Riveting
- ------------------------
We hold a 42.6% interest in the Common Stock and 6.52% interest in the
Convertible Preferred Second Series of Sartam Industries, Inc., the holder of
approximately 30 patents relating to the AutoFast 2000 technology. We also
entered into an exclusive license agreement with Sartam Industries, Inc. to
produce and sell semi-automatic riveting products world wide based on the
AutoFast 2000 technology. We are also currently negotiating to acquire the
balance of Sartam Industries, Inc. remaining capital stock. We are building
tools and rivet magazines under the AutoFast(R) brand name. We shipped our first
products during the third quarter of 2005 and we plan to increase our production
capacity and commercialization activities. There is enormous interest in the
AutoFast(R) products and if all the inquiries turn to sales we will far exceed
our sales goals.
Biotechnology
- -------------
The research of our biotechnology division resulted in the discovery,
identification, and characterization of novel microbial agents. This bacterium's
working title is "human blood-borne bacterium-1" (HBB1), and it is persistently
present in the human bloodstream. The levels of HBB-1 appear to be associated
with symptom activity in Multiple Sclerosis (MS) patients and with patients
suffering from other disorders, such as Chronic Fatigue Syndrome (CFS) and
certain autoimmune diseases. It has taken the Company several years to
characterize this organism and to produce antibodies. We are evaluating the
prospects of these antibodies and our options with respect to commercializing
related products and may consider partnering opportunities.
- 15 -
Nutritional Supplements
- ------------------------
We completed the acquisition of Blue Kiwi Inc. in the 3rd Quarter of 2004. Blue
Kiwi is a nutraceutical company and currently has two products on the market,
the Fatigue Pack(R) and the PMS Pack(TM). Our new product development team has
developed prototypes for approximately 24 additional products. We are evaluating
the prospects of these additional products and our options with respect to their
commercialization, as well as potential partnering strategies.
Financial services (development stage)
- -----------------------------------------
We have intended to facilitate mortgages working with existing mortgage brokers,
however, in view of rising interest rates and other factors, we are currently
evaluating whether to discontinue this business.
OBJECTIVES
Our current objectives are to:
- Raise operating capital to expand production and manufacturing
activities with respect to our semi-automatic riveting products based
on the AutoFast 2000 technology we recently exclusively licensed from
Sartam Industries, Inc.;
- Evaluate our other business units and develop plans for
commercializing additional products ourselves, with partners, or
alternatively, exiting one or more of these businesses
TECHNOLOGY AND PATENTS
We exclusively license the AutoFast 2000 technology used in our semi-automatic
riveting products from Sartam Industries, Inc. Sartam Industries, Inc. holds
approximately 30 patents relating to this technology.
We hold one patent relating to a blood-borne bacteria associated with multiple
sclerosis and chronic fatigue syndrome, and one patent relating to activating
virus associated with AIDS and several cancers. We also hold one patent
relating to compression technology.
OVERVIEW
Zann Corp. has four principal business units: biotechnology, nutritional
supplements, financial services and semi-automatic riveting products. Our
current focus is increasing production and sales of semi-automatic riveting
products based on our exclusive license to Sartam Industries, Inc.'s AutoFast
2000 technology. We recently acquired a 42.6% interest in the outstanding
Common Stock and 6.52% interest in the outstanding Convertible Preferred Second
Series of Sartam Industries, Inc. We are evaluating the long-term prospects of
our biotechnology, nutritional supplements and financial services businesses,
and we may consider joint ventures with respect to our biotechnology and/or
nutritional supplements businesses, and the discontinuance of our financial
services activities.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
REVENUE
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2004.
Total net sales and revenues were $826 for the nine months ended September 30,
2005 compared to $505 for the period ended September 30, 2004, an increase of 64
percent.
Our gross profit (loss) for the nine months ended September 30, 2005 compared to
2004 decreased to $(417) from $505. Gross (loss) as a percentage of sales
increased to (50) percent in 2005 from 100 percent in 2004.
Total operating expenses for the nine months ended September 30, 2005 compared
to 2004 decreased by $3,789,395 to $1,849,888 from $5,639,283 in the prior
period.
- 16 -
Operating loss decreased from a loss of $5,638,778 to a loss of $1,850,305 for
the nine months ended September 30, 2005 compared to the period ended September
30, 2004.
Interest expense, net for the nine months ended September 30, 2005 was $9,956
as compared to $12,835 for the same period of 2004.
Net loss from continuing operations for the nine months ended September 30, 2005
decreased to a loss of $1,860,260 from a loss of $5,331,761 compared to the same
period 2004
SETTLEMENT OF DEBTS AND LIABILITIES
We have continued to pursue an active program to settle all outstanding debts
and liabilities from the predecessor company. During the years ended December
31, 2004 and December 31, 2003, a number of debts were settled by partial
payments of cash or issuance of Common or preferred Stock. We will continue
to pursue the same course during 2005.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we had a deficiency in working capital of $5,766,283.
- During the nine months ended September 30, 2005 we raised the
following amounts for working capital: $100,000 through the issuance
on January 10, 2005 of a one year 10% Convertible Debenture, payable
at $1,000/month, which is convertible into shares of Series A
Preferred Stock at $.663 cents per share at the option of the holder;
- sold 14,192,327 shares of common stock through the employee stock
option plan for $357,906;
- sold 267,001 shares of Preferred Series B for $267,001 of which
$117,001 had been collected by September 30, 2005 and the remaining
$150,000 was collected in October 2005.
- borrowed $225,000 on non-interest bearing promissory notes.
During the nine months ended September 30, 2005 we paid $9,956 in interest; made
$1,907 payments on the principal balance of the Convertible Debenture and paid
$165,000 on the promissory notes.
We used $200,000 in investing activities for the purchase of a subsidiary and no
capital was used for property, plant, and equipment.
AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
"GOING CONCERN"
The independent auditors report on our December 31, 2004 financial statements
included in the Company's Annual Report states that the Company's historical
losses and the lack of revenues raise substantial doubts about the Company's
ability to continue as a going concern. If we are unable to develop our
business, we have to discontinue operations or cease to exist, which would be
detrimental to the value of the Company's common stock. We can make no
assurances that our business operations will develop and provide us with
significant cash to continue operations.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements, we believe the following
critical accounting policy involve the most complex, difficult and subjective
estimates and judgments.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock
- 17 -
based employee compensation. FAS 148 also requires disclosure of the method used
to account for stock-based employee compensation and the effect of the method in
both the annual and interim financial statements. The provisions of this
statement related to transition methods are effective for fiscal years ending
after December 15, 2002, while provisions related to disclosure requirements are
effective in financial reports for interim periods beginning after December 31,
2002. We elected to continue to account for stock-based compensation plans using
the intrinsic value-based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
the provisions of APB No. 25, compensation expense is measured at the grant date
for the difference between the fair value of the stock and the exercise price.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123R (revised 2004), "Share Based Payment" which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation".
Statement 123R supersedes APB opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123R is similar to the approach described
in Statement 123. However, Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro-forma disclosure is no longer
an alternative. On April 14, 2005, the SEC amended the effective date of the
provisions of this statement. The effect of this amendment by the SEC is that
the Company will have to comply with Statement 123R and use the Fair Value based
method of accounting no later than the first quarter of 2006. Management has not
determined the impact that this statement will have on Company's consolidated
financial statements.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than its last quarter of fiscal 2006. The Company
does not expect the adoption of this Interpretation to have a material impact on
its consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate affected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
INFLATION
In the opinion of management, inflation has not had a material effect on the
operations of the Company.
ITEM 3. CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officers and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure.
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Evaluation of Disclosure and Controls and Procedures. As of the end of the
period covered by this Quarterly Report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer, of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and communicated to the Company's
management, including its principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting. There was no change in
our internal controls over financial reporting, which are included within
disclosure controls and procedures, during our most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 28, 2004, R. Patrick Liska filed a lawsuit in a Minnesota District
Court asserting claims against the Company and a third party. The lawsuit has
since been transferred to the United States District Court in Minnesota. The
lawsuit alleges that Mr. Liska served as a director and Vice Chairman of the
Board of the Company in 2004. The lawsuit seeks recovery of 1,000,000 shares of
the Company's Series A Convertible Preferred stock, salary, vacation pay, and
various business expense reimbursements. Additionally, the lawsuit alleges
that the Company was engaged in a joint enterprise with the third party,
and as a result, the Company is liable for any salary, vacation pay, stock
grants, or expense reimbursements allegedly due and owing to Mr. Liska by
the third party. All of the operative allegations in the lawsuit have been
denied by the Company.
On January 21, 2005, Plaintiff Investrend Communications, Inc. d/b/a Investrend
Research commenced an action via Verified Complaint in the Supreme Court of the
State of New York, County of Queens, against ATNG, Inc. The complaint, through
three causes of action, alleged a breach of contract. Specifically, it alleged
that ATNG, Inc. did not pay Plaintiff for providing news coverage of ATNG, Inc.
The parties have executed an agreement to settle the matter for the total amount
of $7,500, to be paid in six (6) installments. The first installment was
paid on November 9, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Between July 1, 2005 and September 30, 2005, the Company executed Subscription
Agreements pursuant to which several private investors received a total of
267,001 shares of Zann Corp. Preferred Series B stock in exchange for
$267,001. The $267,001 was used for working capital.
Each share of the Series B preferred stock is convertible into one share of our
common stock. On all matters submitted to a vote of the holders of our common
stock, including, without limitation, the election of directors, a holder of
shares of the Series B preferred stock is entitled to the number of votes on
such matters equal to the number of shares of the Series B preferred stock held
by such holder. The shares of the Series B preferred stock rank superior to the
shares of our common stock, and to the shares of all other series of our
preferred stock. The shares of the Series B Preferred stock were issued in
reliance upon an exemption from registration pursuant to Section 4(2) of the
Securities Act. All of the investors took their securities for investment
purposes without a view to distribution and had access to information concerning
Zann Corp. and our business prospects, as required by the Securities Act.
In addition, there was no general solicitation or advertising for the purchase
of our shares. Our securities were sold only to persons with whom we had a
direct personal preexisting relationship, and after a thorough discussion.
Finally, our stock transfer agent has been instructed not to transfer any of
such shares, unless such shares are registered for resale or there is an
exemption with respect to their transfer.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
EXHIBIT
NO. IDENTIFICATION OF EXHIBIT
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2.1 (1) Articles of Merger of Investra Enterprises, Inc. into Pathobiotek Diagnostics, Inc., a Texas corporation
dated March 6, 2000.
2.2 (1) Agreement and Plan of Reorganization by and among Pathobiotek Diagnostics Inc., a Texas corporation,
and ATNG Inc., a Nevada corporation, dated August 24, 2001.
2.2 (2) Plan and Agreement of Merger between ATNG, Inc. (TX) and ATNG of Nevada, Inc., dated September
6, 2003.
2.3 (3) Blue Kiwi Acquisition Agreement between Blue Kiwi, Inc., a Michigan corporation, and the Registrant
dated August 10, 2004, as amended.
2.4 (4) Sartam Stock Purchase Agreement by and between Robert C. Simpson or the Registrant as Nominee, and
Charles Duke and Jonathon Derek Seltzer, dated June 27, 2005.
2.5 (4) Sartam Contribution and Assumption Agreement by and among the Registrant and Robert Simpson, an
individual, dated July 25, 2005.
3.1 (5) Certificate of Amendment to Articles of Incorporation of the Registrant, effective May 3, 2005.
3.2 Bylaws of the Registrant, as amended September 6, 2003.
4.1 (1) Certificate of Designation establishing the Registrant's Series A Preferred Stock, effective August 24,
2004.
4.2 (1) Certificate of Designation establishing the Registrant's Series B Preferred Stock, effective March 8, 2005.
4.3 (1) Certificate of Designation establishing the Registrant's Series C Preferred Stock, effective March 21,
2005, as amended.
10.1 Amended Promissory Note by and between the Registrant, Charles Duke and Jonathon Derek Seltzer
dated August 1, 2005.
10.2 Exclusive Licensing Agreement by and between the Registrant and Sartam Industries, Inc., a Florida
corporation, dated August 19, 2005.
31.1 Certification of Robert C. Simpson, President, Secretary, and Chairman of the Board of Directors of
Zann Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of George E. Betts, Chief Financial Officer of Zann Corp., pursuant to 18 U.S.C. Sec.1350,
as adopted pursuant to Sec.302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Robert C. Simpson, President, Secretary, and Chairman of the Board of Directors of Zann
Corp., pursuant to 18 U.S.C. Sec.1350, as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of George E. Betts, Chief Financial Officer of Zann Corp., pursuant to 18 U.S.C.
Sec.1350, as adopted pursuant to Sec.906 of the Sarbanes-Oxley Act of 2002
_____
(1) Incorporated by reference to the Registrant's Form 10-KSB as filed with the
SEC on April 18, 2005.
(2) Incorporated by reference to the Registrant's Form 14-A as filed with the
SEC on August 18, 2003
(3) Incorporated by reference to the Registrant's Form 8-K/A as filed with the
SEC on May 3, 2005.
(4) Incorporated by reference to the Registrant's Form 8-K as filed with the
SEC on July 16, 2005.
(5) Incorporated by reference to the Registrant's Form 8-K as filed with the
SEC on June 22, 2005.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Zann Corp.
Dated: November 21, 2005
By /s/ Robert C. Simpson
------------------------
Robert C. Simpson, President and
Chairman of the Board of Directors
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