Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
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(Address,
including zip code, and telephone number, including area code, of
registrant’s
principal
executive offices)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90
days. Yes x No
o
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act) Yes o
No x
Check
whether the issuer has filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes
x No
o
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
General
and administrative (non-cash of $1.1 million and $.1 million and
$2.9
million and $.7 million for the three and six months ended June 30,2006
and 2005)
2,865
1,790
5,933
4,650
Research
and development
60
—
100
3,218
2,149
6,537
5,242
LOSS
FROM OPERATIONS
(2,930
)
(2,018
)
(5,825
)
(5,077
)
OTHER
INCOME (EXPENSE)
Gain on
revaluation of warrant and put option liabilities
169
—
304
1,519
Interest
income (expense), net
(3
)
5
(9
)
2
Other
income (expense)
7
129
4
125
173
134
299
1,646
LOSS
BEFORE INCOME TAXES
(2,757
)
(1,884
)
(5,526
)
(3,431
)
PROVISION
FOR INCOME TAXES
—
—
4
4
NET
LOSS
$
(2,757
)
$
(
1,884
)
$
(5,530
)
$
(3,435
)
NET
LOSS PER COMMON SHARE
BASIC
AND DILUTED
$
(0.08
)
$
(0.06
)
$
(0.16
)
$
(0.11
)
WEIGHTED
AVERAGE OF COMMON SHARES OUTSTANDING —
BASIC
AND DILUTED
34,748
31,459
33,753
30,877
See
accompanying notes to condensed consolidated financial statements
(unaudited).
-3-
ZAP
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Stock-based
compensation for consulting and other services
1,987
6,292
Stock-based
employee compensation
946
(5,000
)
Gain
on revaluation of warrant and put option liabilities
(304
)
(1,519
)
Depreciation
and amortization
1,036
702
Loss
on disposal of equipment
4
—
Allowance
for doubtful accounts
(118
)
199
Changes
in other items affecting operations:
Receivables
(9
)
(220
)
Note
receivable from Smart Auto
—
(1,000
)
Smart
car inventory
918
188
Inventories
20
362
Prepaid
expenses and other assets
(541
)
(88
)
Accounts
payable
(139
)
191
Accrued
liabilities
(223
)
313
Deferred
revenue
39
—
Net
cash used for operating activities
(1,914
)
(3,005
)
CASH
FLOWS FROM INVESTING ACTIVITES
Purchase
of equipment
(357
)
(419
)
Proceeds
from sale of equipment
35
—
Net
cash used for investing activities
(322
)
(419
)
CASH
FLOWS FROM FINANCING ACTIVITIES
Repurchase
of common stock
—
(500
)
Payments
on note receivable to stockholder
—
14
Issuance
of common stock and warrants, net of offering costs
2,396
2,225
Borrowings
and repayments of long-term debt
(44
)
(85
)
Net
cash provided by financing activities
2,352
1,654
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
116
(1,770
)
CASH
AND CASH EQUIVALENTS, beginning
of period
1,547
5,354
CASH
AND CASH EQUIVALENTS, end
of period
$
1,663
$
3,584
See
accompanying notes to condensed consolidated financial statements
(Unaudited)
-4-
ZAP
NOTES
TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS
(1) BASIS
OF PRESENTATION
The
financial statements included in this Form 10-QSB have been prepared by us,
and
have not been audited. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted, although
management believes the disclosures are adequate to make the information
presented not misleading. The results of operations for any interim period
are
not necessarily indicative of results for a full year. These statements should
be read in conjunction with the financial statements and related notes included
in the Company’s Annual Report on Form 10-KSB for the year ended December 31,2005.
The
financial statements presented herein, for the three and six months ended June30, 2006 and 2005 reflect, in the opinion of management, all material
adjustments consisting only of normal recurring adjustments necessary for a
fair
presentation of the financial position, results of operations and cash flow
for
the interim periods.
The
risks
related to our business. The Company has a history of losses and might not
achieve profitability. The Company will need additional capital to achieve
its business plan. There can be no assurance that additional capital will be
available, or if it is available, that it will be on acceptable terms. A
substantial portion of the Company’s growth in the past four years has come
through acquisitions and the Company may not be able to identify, complete
and
integrate future acquisitions.
Other
risks include, but are not limited to, the following:
We
face
intense competition, which could cause us to lose market share. Changes in
the
market for electrical or fuel-efficient vehicles could cause our products to
become obsolete or lose popularity. We cannot assure you that growth in the
electric vehicle industry or fuel-efficient cars will continue and our business
may suffer if growth in the electric vehicle industry or fuel-efficient market
decreases or if we are unable to maintain the pace of industry demands. We
may
be unable to keep up with changes in electric vehicle or fuel-efficient
technology and, as a result, may suffer a decline in our competitive position.
The failure of certain key suppliers to provide us with components could have
a
severe and negative impact upon our business. Product liability or other claims
could have a material adverse effect on our business. We may not be able to
protect our Internet address. Our success is heavily dependent on protecting
our
intellectual property rights.
The
Company relies on other entities such as G&K Automotive to convert or
Americanize Smart cars for sale in certain states in the United States; and
to
provide services under warranties and all other maintenance and repair services.
If these entities are unable to supply or service Americanized Smart cars,
and
the Company is unable to obtain alternate sources of supply for these products
and services, the Company might not be able to fill existing backorders and/or
sell more Smart cars.
ZAP
has
shipped and sold approximately 270 smart cars in the first 6 month of 2006
and
anticipates selling at least another 50 smart cars over the next quarter.
However, due to the actions by Daimler Chrysler Corporation and others named
in
ZAP’s suit, ZAP cannot predict how many more smart cars the Company will be able
to sell in the future. As part of ZAP’s business plan, ZAP had anticipated that
Smart Car availability was uncertain and over the past 18 months was
aggressively seeking out other advanced transportation vehicles for
distribution. The Xebra is now under production and sales are accelerating
beyond original expectations. The pre-production unit for Obvio the gas/ethanol
vehicle from Brasil is now undergoing road testing and is slated for
distribution in 2008. Other vehicles are also in the planning
phase.
-5-
(2) SIGNIFICANT
ACCOUNTING POLICIES
NET
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic
and
diluted loss per common share is based on the weighted average number of common
shares outstanding in each period. Potential dilutive securities associated
with
stock options, warrants and convertible preferred stock and debt have been
excluded from the diluted per share amounts, since the effect of these
securities would be anti-dilutive. At June 30, 2006, these potentially dilutive
securities include options for 6,392,508 shares of common stock, warrants for
53,693,415 shares of common stock and debt convertible into 930,000 shares
of
common stock.
PRINCIPLES
OF CONSOLIDATION - The
accounts of the Company and its consolidated subsidiaries are included in the
condensed consolidated financial statements after elimination of significant
inter-company accounts and transactions.
REVENUE
RECOGNITION
The
Company records revenues only upon the occurrence of all of the following
conditions:
-The
Company has received a binding purchase order or similar commitment from the
customer or distributor authorized by a representative empowered to commit
the
purchaser (evidence of a sale);
-The
purchase price has been fixed, based on the terms of the purchase
order;
-The
Company has delivered the product from its distribution center to a common
carrier acceptable to the purchaser. The Company’s customary shipping terms are
FOB shipping point; and
-The
Company deems the collection of the amount invoiced probable.
The
Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances.
The
Company does not recognize sales taxes collected from customers as
revenue.
DEFERRED
REVENUE - One
of
the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships
under the ZAP name. The license agreements call for the licensee to purchase
a
minimum number of vehicles from ZAP each year. The Company collected $1,100,000
related to these agreements, which is classified as deferred revenue until
the
Company begins delivering a substantial number of vehicles to these dealerships
on a regular basis. Accordingly, the Company has recognized approximately
$11,000 of revenue for the six month period ended June 30, 2006 resulting in
an
ending balance of $1,089,000.
USE
OF ESTIMATES - The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the Company’s financial statements and
accompanying notes. Actual results could differ materially from those estimates.
Significant estimates include:
ACCOUNTS
RECEIVABLE -
The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally requires no collateral from its customers. The Company
maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. If the financial
condition of the Company’s customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
INVENTORY
-
The
Company maintains reserves for estimated excess, obsolete and damaged inventory
based on projected future shipments using historical selling rates, and taking
into account market conditions, inventory on-hand, purchase commitments, product
development plans and life expectancy, and competitive factors. If markets
for
the Company’s products and corresponding demand were to decline, then additional
reserves may be deemed necessary.
LEGAL
ACCOUNTS -
The
Company estimates the amount of potential exposure it may have with respect
to
litigation claims and assessments.
-6-
RECOVERY
OF LONG-LIVED ASSETS -
The
Company evaluates the recovery of its long-lived assets at least annually by
analyzing its operating results and considering significant events or changes
in
the business environment.
STOCK
ISSUED AS COLLATERAL - In
December 2004, the Company issued 2.9 million common shares as collateral for
a
$1 million loan. The $3.529 million market value of these shares at the date
of
issuance was recorded in common stock with an offsetting contra equity account.
These shares were previously issued to Mercatus Partners LLP in January 2003
as
collateral for a loan that never funded. The shares were reported as lost to
the
Company in December 2003. In December 2004, the shares were reissued to Mercatus
Partners who then assigned the shares and their interests to Phi-Nest Fund,
L.P.
as collateral for the $1 million loan commitment. The Company amended the Loan
Agreement allowing them to purchase 500,000 shares for $1.16 per share. On
March30, 2006, the Company received $500,000 in net proceeds from the sale. The
collateral was reduced to 2,441,176 shares and the loan is still pending.
WARRANTY
- The
Company provides 30 to 90 day warranties on its personal electric products
and
records the estimated cost of the product warranties at the date of sale. The
estimated cost of warranties has not been significant to date. Should actual
failure rates and material usage differ from our estimates, revisions to the
warranty obligation may be required.
The
Company also has an agreement with an outside company to provide a 36 month
or
36,000 mile warranty on the Smart Car Americanized by ZAP. At June 30, 2006,
the
Company has recorded a warranty liability for $210,800.
CASH
AND CASH EQUIVALENTS
-
The
Company considers highly liquid investments with maturities from the date of
purchase of three months or less to be cash equivalents.
(3)
STOCK-BASED COMPENSATION
We
have
stock compensation plans for employees and directors which are described in
Note
10 to our consolidated financial statements in our 2005 Annual Report on Form
10-KSB as filed with the SEC on March 31, 2006. In June 2006, our shareholders
approved the Company’s 2006
incentive
stock plan. Under the 2006 plan, we may grant stock options for up to 4 million
shares of common stock. We adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), “ Share-Based
Payment ,”
(“SFAS
123R”) effective January 1, 2006. SFAS 123R requires the recognition of the fair
value of stock compensation in net income (loss). We recognize the stock
compensation expense over the requisite service period of the individual
grantees, which generally equals the vesting period. All of our stock
compensation is accounted for as an equity instrument. Prior to January 1,2006, we followed Accounting Principles Board Opinion 25, “ Accounting
for Stock Issued to Employees, ”
(“APB
25”) and related interpretations in accounting for our stock compensation.
We
elected the modified prospective method in adopting SFAS 123R. Under this
method, the provisions of SFAS 123R apply to all awards granted or modified
after the date of adoption. The unrecognized expense of awards not yet vested
at
the date of adoption is recognized in net income (loss) in the periods after
the
date of adoption using the same valuation method ( i.e.
Black-Scholes)
and assumptions determined under the original provisions of SFAS 123, “
Accounting
for Stock-Based Compensation,” as
disclosed in our previous filings. In accordance with the modified prospective
method, the consolidated financial statements for periods prior to 2006 have
not
been restated to reflect SFAS 123R. Therefore, the results for the first quarter
of 2006 are not directly comparable to the same period in the prior year.
Under
the
provisions of SFAS 123R, we recorded $423,010 and $916,275 of stock
compensation, net of estimated forfeitures, in selling, general and
administrative expenses, in our unaudited condensed consolidated statement
of
operations for the three months and six months ended June 30, 2006 . We utilized
the Black-Scholes valuation model for estimating the fair value of the stock
compensation granted after the adoption of SFAS 123R, with the following
weighted-average assumptions:
2006
Dividend
yield
—
Expected
volatility
154.43
%
Risk-free
interest rate
5.21
%
Expected
life (in years)
6.0
-7-
The
dividend yield of zero is based on the fact that we have never paid cash
dividends and have no present intention to pay cash dividends. Expected
volatility is based upon historical volatility of our common stock over the
period commensurate with the expected life of the options. The risk-free
interest rate is derived from the average U.S. Treasury Constant Maturity Rate
during the period, which approximates the rate in effect at the time of the
grant. Our unvested options vest over the next three years. Our options
generally have a 10-year term. The expected term is calculated using the
simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based
on the above assumptions, the weighted-average fair values of the options
granted under the stock option plans for the three months and six months ended
June 30, 2006 was $1.97 and $0.51. As required by SFAS No. 123R, we
now estimate forfeitures of employee stock options and recognize compensation
cost only for those awards expected to vest. Forfeiture rates are determined
based on historical experience. Estimated forfeitures are now adjusted to
actual forfeiture experience as needed.
SFAS
123R
requires us to present pro forma information for the comparative period prior
to
the adoption as if we had accounted for all our employee stock options under
the
fair value method of the original SFAS 123. The following table illustrates
the
effect on net loss and loss per share if we had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation in
the
prior-year periods (dollars in thousands, except per-share data).
The
assumptions used to determine the pro forma expenses under the Black-Scholes
option model for the three months ended June 30, 2005 under SFAS 123 were based
on the following assumptions: expected dividend yield: 0; expected volatility:
154.43%; expected lives, in years: 6; and risk-free interest rate: 5.21%. In
the
pro forma information for periods prior to 2006, we accounted for forfeitures
as
they occurred.
Aggregate
intrinsic value is the sum of the amounts by which the quoted market price
of
our stock exceeded the exercise price of the options at June 30, 2006, for
those
options for which the quoted market price
was
in excess of the exercise price (“in-the-money-options”). The total intrinsic
value of options exercised was $198,328 and $0 for the three month period end
June 30, 2006 and 2005, respectively, and $420,918 and $0 for the six months
ended June 30, 2006 and 2005.
As
of
June 30, 2006, total compensation cost of unvested employee stock options is
$2.17 million. This cost is expected to be recognized through November 2008.
We
recorded no income tax benefits for stock-based compensation expense
arrangements for the three months and six months ended June 30, 2006, as we
have
cumulative operating losses, for which a valuation allowance has been
established.
As
of
June 30, 2006, total compensation cost of unvested options and warrants to
consultants total $1.3 million. This cost is expected to be recognized through
December 2008.
(4) INVENTORIES-
TheInventories
at June 30, 2006 are summarized as follows (thousands):
Vehicles
- conventional
$
205
Advanced
Transportation vehicles
686
Parts
and supplies
286
Finished
Goods
879
2,056
Less-inventory
reserve
(204
)
$
1,852
(5) LICENSE
AND DISTRIBUTION FEE
On
April19, 2004, ZAP entered into an Exclusive Purchase, License and Supply Agreement
with Smart-Automobile LLC ("SA"), a California limited liability company, to
distribute and manufacture Smart cars. Smart is the brand name for a 3-cyclinder
gas turbo engine car manufactured by Daimler Chrysler AG, which can achieve
estimated fuel economy of 40 miles per gallon. SA is not affiliated with Daimler
Chrysler, but is a direct importer.
-9-
Under
the
agreement ZAP will be SA’s exclusive distributor and licensee of the right to
manufacture and distribute Smart cars in the United States and the non-exclusive
distributor and licensee outside of the United States for a period of ten years.
Subject to the terms of the agreement, ZAP will pay SA a license and
distribution fee of $10,000,000: a $1 million payment in cash was made upon
execution of the agreement, $1 million will be payable in cash ratably
commencing with the delivery of the first 1,000 smart cars, and $8 million
was
paid in ZAP preferred stock.
A
more
detailed agreement was signed and completed on October 25, 2004. Under this
agreement, SA exchanged their original Preferred Shares for new Preferred Shares
with the designation of SA. These SA preferred shares convert to ZAP common
shares under the following formula: For every 1,000 Smart vehicles delivered
to
ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant to sell
in
the United States as new cars, the holder shall convert 500 shares of preferred
stock SA to $500,000 of common stock, and allow the holder to receive 505,000
warrants with an exercise price of $2.50 per share exercisable through July7,2009, or when all the preferred have been converted. During 2004, ZAP allowed
SA
to convert 500 preferred shares to $500,000 of common stock prior to delivering
any EPA compliant Smart Cars.
On
June19, 2006, ZAP agreed in principal to modify the October 25, 2004 agreement
with
Smart Automobile LLC (“SA”) in regard to payments due to SA from ZAP and the
acquisition of certain rights and assets. As a result, SA returned to
ZAP all of the remaining shares of preferred stock of 7,500 shares valued
at $7.5 million in exchange for issuing 300,000 shares of common stock valued
at
approximately $400,000 and one million warrants with an exercise price of
$1.75,
valued at $950,000 using the Black-Scholes pricing model. The agreement also
provides that SA will receive 700,000 shares of common stock at the rate
of
50,000 shares per 100 cars delivered to ZAP. In exchange, SA agreed to transfer
to ZAP all ownership interest for the intellectual property that helped engineer
the Smart Car Americanized for ZAP to meet U.S. Department of Transportation
(“DOT) compliance. However, due to the actions of Damler Chrysler and others
named in ZAP’s suit, ZAP cannot predict how many more Smart Cars Americanized by
ZAP will be able to be sold in the future. This new agreement will replace
the
previous agreements by providing ZAP full ownership in the DOT rights and
intellectual property which makes the Smart Car DOT compliant, including
all
testing related to various crash and engineering, analyses, tests performed
by
SA and those contracted out to third parties. In addition, ZAP received
cancellation of future license fees due under the previous agreements totaling
$906,000 at June 30, 2006.
ZAP
has
also agreed to purchase of all the remaining assets and rights of SA by
issuing common stock and warrants. This purchase will include all equipment,
technologies, licenses and distribution rights (concerning conversions and
otherwise) of SA and technical updates to service computers purchased earlier
by
ZAP. The purchase price is subject to negotiation and arbitration. At June30,2006, the Company has established an estimated liability of $7.1 million
in
connection with the ultimate settlement of its agreements with Smart Automobile
LLC. See further discussion below in Note 6- Shareholders’ Equity-Preferred
Stock.
The
Company recorded the cost of the Smart Automobile license at $10.6 million,
based on: 1) the $10 million the Company paid to Smart Automobile LLC as
consideration for a Purchase, License and Supply Agreement dated April 19,2004;
and 2) the fair value of five-year warrants issued under the Agreement for
the
purchase of 505,000 common shares at $2.50 per share and expiring in July1,2009. The warrants were valued at $1.16 per share using the Black-Scholes
option
pricing model with the following assumptions: expected dividend yield of
0.0%;
risk free interest rate of 3.08%; contractual life of 4.5 years; and volatility
of 229.43%.
During
the fourth quarter of 2005, the Company filed a lawsuit against Daimler Chrysler
Corporation ("Daimler Chrysler") and others alleging that Daimler Chrysler
has
engaged in a series of anti-competitive tactics aimed at defaming ZAP and
disrupting its third party relationships including this arrangement.
Shortly thereafter, the Company commenced its annual impairment assessment.
An
independent valuation of the Smart Automobile license as of December 31, 2005
estimated the fair value to be $3.1 million with a remaining life of two years
which was less than the $10.6 million recorded cost of the license. The carrying
cost of the license was $8.8 million prior to the impairment calculation and
accordingly, the Company recorded an impairment charge of $5.721 million for
the
year ended December 31, 2005. The valuation of the license was based on the
Company’s discounted projected cash flows from projected sales of Smart Cars
over the estimated life of the license agreement. The remaining value of the
license is being amortized using the straight-line method over the next two
years, which is the revised estimated life of the license. License amortization
for the six month period ended June 30, 2006 was $775,200.
(6)
SHAREHOLDERS’ EQUITY-On
July1, 2002, ZAP’s stock began trading on the National Association of Securities
Dealers, Inc. Electronic Bulletin Board (the“ OTC Bulletin Board”) under the
stock symbol of ZAPZ. On June 20, 2005, ZAP received approval to list its common
stock on the Archipelago Exchange (ArcaEx). This exchange was a facility of
the
Pacific Exchange (PCXE) and is the nation’s first totally open, all-electronic
stock exchange. The Company changed its stock ticker symbol used on the
Archipelago Exchange (ArcaEX) from “ZAPZ” to “ZP” on July 7, 2005. On March 7,2006, the ArcaEx merged with the New York Stock Exchange (the “NYSE”) creating
the NYSE Arca electronic trading platform. ZAP’s stock now trades on the NYSE
Arca, however, the PCXE rules still apply to all stock listed on the NYSE Arca,
and all prior actions taken by the Arca or the PCXE apply to our listing on
the
NYSE Arca.
Preferred
Stock
On
June19, 2006, Smart Automobile LLC returned to the Company all the remaining shares
of preferred stock with a carrying value of $7.5 million in exchange for 300,000
shares of common stock valued at approximately $400,000,
one million warrants with a strike price of $1.75 valued at approximately
$950,000, and other future consideration. See Note 5, License and
Distribution Fee, for further discussion on this transaction.
-10-
The
Company’s shareholder equity activity for the six months ended June 30, 2006 is
summarized as follows:
The
Company issued common stock as consideration under agreements for consulting
and
employee services during the three months ended June 30, 2006. The Company
recorded the cost based on the market value of the stock at the date of grant.
The cost of consulting services resulting from issuing stock and warrants and
stock options is being recognized as expense over the term of their
respective agreements. Unrecognized compensation on consulting contracts
at June 30, 2006 is $1,254,000 and will be recognized as expense through
2007.
In
December 2004, the Company issued 2.9 million common shares as collateral for
a
$1 million loan. The $3.529 million market value of these shares at the date
of
issuance was recorded in common stock with an offsetting contra equity account.
These shares were previously issued to Mercatus Partners LLP in January 2003
as
collateral for a loan that never funded. The shares were reported as lost to
the
Company in December 2003. In December 2004, the shares were reissued to Mercatus
Partners who then assigned the shares and their interests to Phi-Nest Fund,
L.P.
as collateral for the $1 million loan commitment. The Company amended the Loan
Agreement allowing them to purchase and sell 500,000 shares for $1.16 per share.
On March 30, 2006, the Company received $500,000 in net proceeds from the sale.
The collateral was reduced to 2,441,176 shares and the loan is still pending.
The
Company also issued options and warrants to consultants for professional
services. During the six months ended June 30, 2006, the Company issued
warrants to consultants to purchase 2,527,000 shares of common stock at
prices ranging from $0.32 per share to $2.13 per share, with a contractual
life
ranging from 1 to 2 years. The options and warrants were nonforfeitable and
fully vested at the date of issuance and were valued using the Black-Scholes
option pricing model with the following range of assumptions:
Low
High
Exercise
price per share
$0.32
$2.13
Market
price
$0.32
$2.13
Assumptions:
Expected
dividend yield
0.0%
0.0%
Risk
free rate of return
4.63%
5.21%
Expected
life
1.0
years
10 years
Volatility
140.87%
154.43%
Fair
market value
$0.06
$1.97
Under
a
purchase agreement dated February 16, 2005, the Company issued 600,000 shares
of
its common stock and 3 warrants for the purchase of 900,000 shares of its common
stock to Lazarus Investment Partners LLP on February 17, 2005, for an aggregate
purchase price of $1,260,000. Each of the 3 warrants is exercisable for 5 years,
and will be exercisable for 300,000 shares of common stock at the initial
exercise prices of $2.50, $3.25, and $4.00 per share. The Company also issued
30,000 shares and warrants to purchase 90,000 shares of stock to placement
agents. The stock purchase agreement contains antidilution provisions under
which the Company is obligated to issue additional common shares for no
additional consideration if within 6 months the Company completes certain
subsequent financing at less than $2.10 per share. No financings were completed
during the six month period following the agreement.
On
July22, 2004, the Company entered into a stock purchase agreement with Fusion
Capital Fund II, LLC (Fusion Capital). The stock purchase agreement provided
for
the issuance of $24.5 million in common stock over a 40-month period. The
agreement provided for the immediate issuance of 300,000 common shares as
commitment and signing shares at no cost and the immediate issuance of 5-year
warrants for the purchase of 2.5 million shares of common stock at prices
ranging from $2.50 to $5.50 per share. The stock purchase agreement required
the
Company to file a registration statement by August 20, 2004 for the resale
of
shares issued or issuable under the stock purchase agreement and have the
registration statement declared effective within 120 days. The stock purchase
agreement provided for cash liquidated damages if the Company failed to meet
the
registration deadline. The Company did not file the required registration
statement. Pursuant to EITF 00-19, the warrants issuable under the stock
purchase agreement were valued using the Black Scholes option pricing model
and
recorded as a liability. The warrant liability was revalued at December 31,2004
with the marked to market adjustment recorded in other expense. On February22,2005, the Company terminated its stock purchase agreement with Fusion Capital.
The Company revalued the warrant liability on February 22, 2005 and recorded
the
marked to market adjustment of $1.5 million in other income. The remaining
warrant liability of $6.7 million was transferred to equity since the Company
was no longer required to file a registration statement for the warrant
shares.
Under
the termination agreement, the Company repurchased 200,000 common shares from
Fusion Capital for the original issuance price of $500,000. Fusion Capital
retained certain commitment and signing common shares that were previously
issued, and warrants to purchase up to 2.5 million shares of common
stock.
-12-
(7) LITIGATION
-
Other
than the following, we are not party to any pending material legal proceedings
and are not aware of any threatened or contemplated proceedings by any
government authority against us.
Marieta
Cruz Hansel v. Robert Warren Johnson, Jr, ZAP, et.al.,
A
dormant complaint filed in 2005 against Robert Johnson, ZAP, et al, was
reactivated by the plantiff Ms. Marieta Cruz Hansell. The compliant was
filed against Robert Johnson (a former employee of ZAP) and ZAP for personal
injury, property damage and permanent disability based on an alleged automobile
collision between Ms. Hansell and Mr. Johnson. The Company and Mr. Johnson
have both filed answers and case management statements containing a general
denial of all of the plaintiff’s claims, and the Company has agreed to defend
Mr. Johnson in this matter. The plaintiff is claiming permanent disability,
and
has submitted a Statement of Damages in the amount of $108,727.34, plus
unspecified amounts of future general damages, future wage loss, diminution
of
earning capacity damages, and incidental, consequential and special damages.
The
plaintiff has not yet made any demand for settlement. The Company intends to
vigorously defend both itself and Mr. Johnson against these
claims.
First
Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
ZAP,
American Arbitration Association Case No. 74 133 00081 06 NOCA.First
Class Imports executed a licensing and distributorship agreement with Voltage
Vehicles, in May 2004. On January 14, 2006, First Class Imports and its
principal, Leon Atkind, filed an arbitration demand with the American
Arbitration Association. First Class Imports and Mr.Atkind alleged that
the Company and Voltage Vehicles breached the licensing agreement by not
delivering new SMART-branded vehicles to First Class Imports and demanded return
of the $100,000 licensing fees paid to Voltage Vehicles under the agreement,
plus interest. Voltage Vehicles filed a counterclaim against both First Class
Imports and Mr. Atkind. The counterclaim alleges breach of contract due to
First
Class Imports refusal to accept SMART-branded vehicles offered to it pursuant
to
the parties’ licensing agreement. Voltage
Vehicles seeks as damages the lost revenue it otherwise would have gained
through First Class Imports’ purchase of SMART-branded vehicles, as well as
damages based on the depreciation of a SMART-branded vehicle it loaned to First
Class Imports.
In
a
separate
cause of action, Mr. Atkind alleged Voltage Vehicles breached a second contract
by failing to timely deliver a stock certificate in exchange for a Mercedes
vehicle that he sold to the Company. Voltage Vehicles countered-claim alleging
breach of contract against Mr. Atkind based on his failure to deliver title
to
the Mercedes identified above seeking as damages the depreciation of the
Mercedes during the time in which it has been unable to sell the vehicle. An
arbitrator has been selected, but the arbitration has been continued while
the
parties discuss settlement. The court overseeing the arbitration has scheduled
a
case management conference for November 2, 2006.
ZAP
v. Norm Alvis, et al., Superior
Court of California, Case No. SCV-238419, complaint filed March 27, 2006. Mr.
Alvis was engaged by ZAP as a consultant to perform public relations work on
behalf of the Company. As consideration for Mr. Alvis’ consent to the contract,
ZAP gave Mr. Alvis a motor home worth at least $500,000. ZAP sued Mr. Alvis,
claiming that he has not performed his obligations under the contract. ZAP
is
seeking either the return of the motor home or $500,000 in damages. Mr. Alvis
did not timely respond to the complaint, defendant’s default the court entered a
default judgment on May 16, 2006. Also on May 16, 2006, ZAP obtained a
writ of possession for the motor home. On June 18, 2006, the defendant
filed a motion asking the court to set aside the default and default
judgment and to vacate its order authorizing the issuance of the writ of
possession. The court agreed to set aside the defaults, but it left the
writ of possession in place. Mr. Alvis has now filed an answer denying
ZAP’s allegations. Defendant has also filed a cross-claim against ZAP,
Steve Schneider in his individual capacity, and Rotoblock Corporation, alleging
two counts of breach of contract, one common count of work, labor, and
services received, and one count of fraud. All of these claims
relate to two contracts that required the defendant to provide certain marketing
services to ZAP and Rotoblock. The defendant claims he provided these
services but received inadequate or no consideration in exchange. For the
fraud claim, defendant claims ZAP, Schneider, and Rotoblock executed the
contracts with no intent to perform. The defendant prays for damages of
$2,000,000, interest according to proof, punitive damages, and an order
directing the cross-defendants to perfect title to the motor home in
question. The court has set a case management conference for November 2,2006. The Company intends to vigorously defend itself against these
claims.
-13-
On
October 28, 2005, we filed a complaint against DaimlerChrysler Corporation
and
others in the Los Angeles Superior Court. The complaint includes claims for
intentional and negligent interference with prospective economic relations;
trade libel; defamation; breach of contract - agreement to negotiate in good
faith; breach of implied covenant of good faith and fair dealing; and unfair
competition. The complaint alleges that DaimlerChrysler has engaged in a series
of anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
business relationships. As a result of the allegations, the complaint requests
damages in excess of $500 million and such other relief as the court deems
just
and proper. DaimlerChrysler has successfully filed a motion to quash that
compliant for lack of personal jurisdiction, and the court’s ruling on that
matter is in the process of being appealed.
James
A. Arnold,et al.v. Steven Schneider, et al., A
dormant
complaint filed in 2002 against the RAP Group and Steve Schneider the Chief
Executive Officer of ZAP, individually was reactivated by the plaintiff -Jim
Arnold Trucking. The complaint alleges breach of contract, promissory estoppel
and fraud and seeks contract damages in the amount $71,000 plus monthly storage
fees and punitive damages of $750,000. The Company has cross-claimed against
Jim
Arnold Trucking seeking compensatory damages, attorneys’ fees and equitable
relief for breach of oral contract, common count for goods sold and delivered,
conversion, liability of surety, violation of statute, and violation of the
Unfair Practices Act. On February 17, 2005, the court referred the matter to
non-binding arbitration. The non binding arbitration hearing was held on July27, 2005 where the arbitrator awarded the plaintiff damages in the amount of
$68,290 plus prejudgment interest of 7%. On May 2, 2006 a trial was held with
the parties agreeing to settle the matter for $40,000 and execute mutual
releases of all claims arising out of the subject matter of the litigation.
RAP
Group has made the first payment to the plaintiff for $20,000; the second
payment of $20,000 is due on or before January 5, 2007.
(8)
RELATED PARTY TRANSACTIONS
Rental
agreements
The
Company leases office space, land and warehouse space from its CEO and major
shareholder. These properties are used to operate the car outlet and to store
inventory. Rental expense under these leases was approximately $77,000 and
$84,000 for the six months ended June 30, 2006 and 2005,
respectively.
Consulting
services and other services
In
November and December 2003, the Company entered into certain agreements with
two
cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
Restricted warrants and 25 shares of preferred stock, which was later converted
into 50,000 shares of restricted common stock. The stock and warrants were
issued for website design services. The other cousin received 200,000 shares
of
unrestricted common stock in January 2004. The shares were issued for consulting
services. In April 2004, the Company issued 2 million B-2 restricted warrants
and 1 million K-2 restricted warrants to Sunshine 511 Holdings for consulting
services. The managing partner of Sunshine 511 Holdings is the cousin of the
CEO
of ZAP. In the fourth quarter of 2005 the Company expensed approximately $2.2
million, the carrying value of the prepaid services, since limited services
had
not been received and there were no assurances that future services would be
received. Also in 2004, certain leasehold improvements in the amount of $65,000
made by the Company on rental properties were abandoned in favor of the
landlord, who is the CEO of ZAP.
Inventory
Purchase
In
December 2005, the Company purchased inventory from a related entity where
three
of ZAP’s officers and or Directors are also members of its Board of Directors.
The transaction resulted in a payable due to the related Company of $204,000
at
December 31, 2005 and June 30, 2006. During the second quarter of 2006 the
parties agreed that the payment will be offset against future outside
advertising services which will be provided to the related entity by the
Company.
-14-
(9) SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
Item
2.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This
quarterly report of Form 10-QSB contains forward-looking statements that are
not
statements of historical fact and may involve a number of risks and
uncertainties. These statements relate to analyses and other information that
are based on forecasts of future results and estimates of amounts not yet
determinable. These statements may also relate to our future prospects,
developments and business strategies.
We
have
used the words “anticipate,"“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“will,”“plan,”“predict,”“project” and similar terms and phrases,
including references to assumptions, in this quarterly report of Form 10-QSB
to
identify forward-looking statements. These forward-looking statements are made
based on expectations and beliefs concerning future events affecting us and
are
subject to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond
our control, that could cause our actual results to differ materially from
those
matters expressed in or implied by these forward-looking statements. The
following factors are among those that may cause actual results to differ
materially from our forward-looking statements:
•
general economic and industry conditions;
•
our history of losses, deficits and negative operating cash flows;
•
our limited operating history;
•
industry competition;
•
environmental and government regulation;
•
protection and defense of our intellectual property rights;
•
reliance on, and the ability to attract, key personnel;
•
other factors including those discussed in "Risk Factors" in our annual report
on Form 10-KSB filed on March 31, 2006.
You
should keep in mind that any forward-looking statement made by us in this
quarterly report or elsewhere speaks only as of the date on which we make it.
New risks and uncertainties arise from time to time, and it is impossible for
us
to predict these events or how they may affect us. We have no duty to, and
do
not intend to, update or revise the forward-looking statements in this quarterly
report after the date of filing, except as may be required by law. In light
of
these risks and uncertainties, you should keep in mind that any forward-looking
statement made in this quarterly report or elsewhere might not
occur.
In
this
quarterly report on Form 10-QSB the terms “ZAP,”“Company,”“we,”“us” and “our”
refer to ZAP and its subsidiaries.
-15-
Overview
ZAP
stands for Zero Air Pollution(R). The Company’s mission is to be the leading
distribution portal of socially responsible and environmentally sustainable,
advanced transportation technology vehicles.
Founded
on September 23, 1994, ZAP has over the years invented, designed, manufactured,
and marketed numerous innovative products. The Company began marketing electric
transportation on the internet through the websitewww.zapworld.com.
It has
pioneered electric vehicles such as a zero-emission ZAP(R)electric bicycle
and
the ZAPPY(R) electric scooter. We were also one of the first to offer electric
motorbikes, electric dive scooters and electric ATVs. To date, ZAP has delivered
more than 90,000 electric vehicles to customers in more than 75 countries,
establishing the Company firmly as a leader in the niche for alternative
transportation.
Today,
ZAP is renewing its focus as a pioneer at the forefront of advanced
transportation technologies. The Company has established an automotive portal
to
distribute vehicles to offer consumers fleet and other stakeholders product
that
better address social responsibility and environmental sustainability than
is
being offered by the traditional automobile manufacturers. Through this portal,
and the continued establishment of partnerships with select manufacturers,
ZAP
intends to play a small part in building awareness of the evolving technologies
available for automotive transportation and in reducing our nation’s dependency
on foreign oil. The Company has already set the pace with the introduction
of
the first micro-car to be brought to the US with the smart car, the most fuel
efficient all gas vehicle available in the United States. In June of this year
we began delivery of our Xebra, the only full production electric vehicle
available in the United States capable of speeds in excess of 25 miles per
hour.
And also recently we entered into a partnership with OBVIO!, a new Brazilian
automobile manufacturer, to import a unique micro-car capable of running on
ethanol, gasoline or any combination thereof.
To
complement the efforts of its automotive portal, ZAP is also aggressively
upgrading and expanding its traditional consumer products, incorporating new
motor , drive control and battery technologies and solidifying its advance
energy solutions through a new portable energy line of products.
In
summary, ZAP is a one-stop portal for a quality, affordable advanced automotive
technologies, and our goal is to become the largest and most complete
distribution portal in the United States for advanced technology vehicles.
We
are focused on creating a distribution channel for our automobile and consumer
products by establishing qualified automobile-dealers and developing
relationships with specialty dealers throughout the United States. We currently
market and sell our automobile products through qualified automotive dealers
including our subsidiary, Voltage Vehicles. We currently market and sell our
consumer products directly to consumers through our Internet Web site,
independent dealers and representatives, retail outlets as well as through
our
qualified automobile dealers. We continue to develop new products independently
and through development and acquisition agreements with companies and
manufacturers, and by the purchase of products manufactured to our
specifications. We have grown from a single product line to a full product
line
of electric vehicle and advanced transportation products.
ZAP
was
incorporated under the laws of the State of California, on September 23, 1994,
as “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” on
May 16, 1999 in order to increase our visibility in the world of electronic
commerce. We subsequently changed our name to ZAP on June 18, 2001 in order
to
reflect our growth and entry into larger, more traditional markets. Our
principal executive offices are located at 501 Fourth Street Santa Rosa,
California, 95401. Our telephone number is (707) 525-8658.
We
have
the following wholly owned subsidiaries: Voltage Vehicles, a Nevada company
(“Voltage Vehicles”), RAP Group, Inc., a California company (“RAP Group”), ZAP
Rental Outlet, a Nevada company (“ZAP Rentals”), ZAP Stores, Inc., a California
company (“ZAP Stores”), ZAP Manufacturing, Inc., a Nevada company (“ZAP
Manufacturing”) and ZAP World Outlet, Inc., a California company (“ZAP World”).
Voltage Vehicles is engaged primarily in the distribution and sale of advanced
technology and conventional automobiles; RAP Group is engaged primarily in
the
sale and liquidation of conventional automobiles; ZAP Stores is engaged
primarily in consumer sales of ZAP products and ZAP Manufacturing is not
currently an operating subsidiary. ZAP World Outlet is not currently an
operating subsidiary. Voltage Vehicles and RAP Group were acquired by the
Company in July 2002.
-16-
Recent
Developments
Some
of
the significant events for the Company that occurred during the second quarter
of 2006 and through the date of this report are as follows:
1.
ZAP
reported record revenues for the three and six months ended June30, 2006
primarily due to sales of various models of the Smart Car Americanized
by
ZAP. Sales for 2006 have surpassed all of 2005. The autos were shipped
to
ZAP Dealers in various states. The Company has sold over 270 Smart
Cars
Americanized by ZAP.
2.
ZAP
announced amid new record oil prices that it has delivered the first
of
its new XEBRA(TM) electric vehicles to five ZAP car dealerships in
California, Arizona, Florida and two in Oregon. Some are already
making
the choice to start driving electric. So far this summer, ZAP has
seen
interest surge for the XEBRA, with concerns over rising gas prices
generating over a $500,000 backlog in XEBRA orders from dealers and
fleet
buyers. ZAP calls the XEBRA a ’City-Car,’ designed to travel at a top
speed of 40 MPH and pricing under $10,000. ZAP’s idea with the XEBRA is to
create an economical alternative to gas cars, useful for around town
fleet
driving or multi-car families.
3.
ZAP
announced the introduction of a new series of lithium battery packs
designed specifically to work with the iPod. Called iZAP, the battery
accessories for the iPod are part of a new line of ZAP Portable Energy
systems to power a wide range of mobile electronics. The iZAP’s Portable
Energy(TM) chargers and power packs are designed to work in conjunction
with the iPod, including the iPod mini, iPod shuffle, iPod nano and
the
iPod with video. The iZAP designed for the iPod shuffle can extend
listening time up to 60 hours. The new rechargeable power packs can
power
a wide range of mobile electronics like cell phones, digital cameras,
laptops and more.
4.
Business
2.0 magazine features automotive pioneer ZAP in an article entitled
the
“Top 31 Best Business Ideas in the World,” (August 2006 issue)for the idea
of creating a line of fuel-efficient and renewable energy vehicles
to tap
into the market created by rising energy costs. ZAP was recognized
for the
Smart Car Americanized for ZAP, a fuel-efficient all-gas turbo car
from
Europe that the company is distributing in the US. ZAP also recently
launched sales for a new electric car called the XEBRA and has announced
a
partnership with OBVIO ! of Brazil for the manufacture and distribution
of
cars using ethanol, electric and other technologies for the US market.
ZAP
has started a dealership network throughout the country for its advanced
technology vehicles. “ We are extremely honored that Business 2.0, one of
America’s most prestigious new business magazines, has confirmed our
business plan of establishing a portal and a brand for consumers
looking
for fuel-efficient vehicles," said Steven Schneider, ZAP
CEO.
5.
ZAP
began selling a new and improved line of electric scooters such as
the
ZAPPY ® 3 Pro and the ZAPPY® 3 EZ. In addition, the ZAP BUZZZ All Terrain
Vehicle and the ZAP MUD’E Trail Bike have also been introduced into the
consumer market place.
CRITICAL
ACCOUNTING POLICIES
Share-Based
Payments. We
grant
options to purchase our common stock to our employees and directors under our
stock option plan. The benefits provided under this plan are share-based
payments subject to the provisions of revised Statement of Financial Accounting
Standards No. 123 (“SFAS 123(R)”), Share-Based
Payment.
Effective January 1, 2006, we use the fair value method to apply the provisions
of SFAS 123(R) with a modified prospective application which provides for
certain changes to the method for valuing share-based compensation. The
valuation provisions of
-17-
SFAS
123(R) apply to new awards and to awards that are outstanding on the effective
date and subsequently modified or cancelled. Under the modified prospective
application, prior periods are not revised for comparative purposes. Share-based
compensation expense recognized under SFAS 123(R) for the three and six months
ended June 30, 2006 was $423,010 and $916,275, respectively. At June 30, 2006,
total unrecognized estimated compensation expense related to non-vested stock
options granted prior to that date was $2.17 million, which is expected to
be
recognized through November, 2008.
Upon
adoption of SFAS 123(R), we continued estimating the value of stock option
awards on the date of grant using Black-Scholes option pricing model
(Black-Scholes Model). The determination of the fair value of share-based
payment awards on the date of grant using an option pricing model is affected
by
our stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate
and
expected dividends.
If
factors change and we employ different assumptions in the application of SFAS
123(R) in future periods, the compensation expense that we record under SFAS
123(R) may differ significantly from what we have recorded in the current
period. Therefore, we believe it is important for investors to be aware of
the
high degree of subjectivity involved when using option pricing models to
estimate share-based compensation under SFAS 123(R). Option-pricing models
were
developed for use in estimating the value of traded options that have no vesting
or hedging restrictions, are fully transferable and do not cause dilution.
Because our share-based payments have characteristics significantly different
from those of freely traded options, and because changes in the subjective
input
assumptions can materially affect our estimates of fair values, in our opinion,
existing valuation models, including the Black-Scholes and lattice binomial
models, may not provide reliable measures of the fair values of our share-based
compensation. Consequently, there is a risk that our estimates of the fair
values of our share-based compensation awards on the grant dates may bear little
resemblance to the actual values realized upon the exercise, expiration, early
termination or forfeiture of those share-based payments in the future. Certain
share-based payments, such as employee stock options, may expire worthless
or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments that are
significantly in excess of the fair values originally estimated on the grant
date and reported in our financial statements. There is currently no
market-based mechanism or other practical application to verify the reliability
and accuracy of the estimates stemming from these valuation models, nor is
there
a means to compare and adjust the estimates to actual values. Although the
fair
value of employee share-based awards is determined in accordance with SFAS
123(R) and the Securities and Exchange Commission’s Staff Accounting Bulletin
No. 107 (SAB 107) using an option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market
transaction.
Estimates
of share-based compensation expenses are significant to our financial
statements, but these expenses are based on option valuation models and will
never result in the payment of cash by us. For this reason, and because we
do
not view share-based compensation as related to our operational performance,
we
exclude estimated share-based compensation expense when evaluating the business
performance of our operations.
The
guidance in SFAS 123(R) and SAB 107 is relatively new, and best practices are
not well established. The application of these principles may be subject to
further interpretation and refinement over time. There are significant
differences among valuation models, and there is a possibility that we will
adopt different valuation models in the future. This may result in a lack of
consistency in future periods and materially affect the fair value estimate
of
share-based payments. It may also result in a lack of comparability with other
companies that use different models, methods and assumptions.
Theoretical
valuation models and market-based methods are evolving and may result in lower
or higher fair value estimates for share-based compensation. The timing,
readiness, adoption, general acceptance, reliability and testing of these
methods is uncertain. Sophisticated mathematical models may require voluminous
historical information, modeling expertise, financial analyses, correlation
analyses, integrated software and databases, consulting fees, customization
and
testing for adequacy of internal controls. Market-based methods are emerging
that, if employed by us, may dilute our earnings per share and involve
significant transaction fees and ongoing administrative expenses. The
uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to investors.
-18-
Results
of Operations
The
following table sets forth, as a percentage of net sales, certain items included
in the Company’s Income Statements (see Financial Statements and Notes) for the
periods indicated:
Net
sales
for the
quarter ended June 30, 2006 were $4.4 million compared to $923,000 in 2005.
RAP’s net sales for the period accounted were $306,000 versus $ 659,000 in 2005.
The net sales for ZAP (including Voltage Vehicles) were $4.1 million versus
$264,000 in 2005. The sales for RAP for gas automobiles were less than last
year
while ZAP experienced an increase of $3.8 million primarily due to the sales
of
the Smart Cars Americanized by ZAP and various models of electric
vehicles.
Gross
profit
was
$288,000 for the second quarter ended June 30, 2006 compared to $131,000 for
the
quarter ended June 30, 2005. The RAP Group accounted for $103,000 of the gross
profit for the quarter ended June 30, 2006 versus $105,000 in 2005. ZAP’s gross
profit, excluding the RAP Group, increased from $26,000 in 2005 to a gain
of $185,000 in 2006. The increase in gross profit was due to higher sales of
the
Smart Cars Americanized by ZAP.
Salesand
marketing expenses
in the
second quarter of 2006 were $353,000 as compared to $299,000 in 2005. RAP’s
expenses were $27,000 in 2006 and $38,000 in 2005 and ZAP’s expenses were
$326,000 versus $261,000 in 2005. As a percentage of sales, total selling
expenses decreased from 32% of sales to 8% due to a higher sales base even
though ZAP only expenses increased for the quarter ended June 30, 2006. The
higher expenses for ZAP were primarily due to higher salaries for sales and
marketing personnel with more new hires plus higher expenses for trade shows
to
promote the Company’s products.
General
and administrativeexpenses
for 2006
were $2.9 million for the quarter ended June 30, 2006 as compared to $1.8
million in 2005. RAP’s portion of the expenses was $88,000 in 2006 versus
$383,000 in 2005. RAP’s decrease of $295,000 was primarily due to lower bad debt
expenses in the 2006 second quarter. For ZAP, the expenses increased from $1.5
million to $2.8 million. As a percentage of sales, general and administration
expenses decreased from 195% of sales to 65.9% of sales. ZAP’s net increase of
$1.3 million in general and administration expenses was due
to stock-based compensation expense due to the adoption of SFAS 123R and
higher professional and consulting fees.
Interest
income (expense),
net decreased from
$5,000 income in second quarter 2005 to $3,000 expense in second
quarter 2006.
Other
income (expense) increased
$39,000 from $134,000 for the second quarter of 2005 to $173,000
in the second quarter of 2006. The other income increase resulted from the
change in the value of the put option liabilities.
Net
Loss was
$2.8
million for the quarter ended June 30, 2006 as compared to a net loss of $1.9
million for period ended June 30, 2005. The increase was primarily due to higher
consulting and professional fees, as well as stock-based compensation expense
due to the adoption of SFAS 123R.
Net
sales
for the
six months ended June 30, 2006, were $7.3 million compared to $2.1 million
for
the six months ended June 30 in the prior year. RAP accounted for $981,000
of
overall net sales for the six months ended June 30, 2006 versus $1.7 million
for
the six months ended June 30,2005. The net sales for ZAP, excluding the RAP
Group, were $6.3 million and $426,000 for the six months ended June 30,2006 and 2005. RAP experienced a decline in the sales of traditional automobiles
due to the less demand for pre-owned automobiles and higher interest rates.
ZAP,
including Voltage Vehicles, has experienced significant growth due to sales
of
the Smart Car Americanized by ZAP and other various models of electric sales.
The Company has shipped over 270 Smart Cars Americanized by ZAP through June30,2006.
Gross
profit
was
$712,000 for the six months ended June 30, 2006 compared to $165,000 for the
six
months ended June 30, 2005. The RAP Group accounted for $296,000 of the gross
profit for the six months ended June 30, 2006 versus $159,000 for the six months
ended June 30, 2005. ZAP’s gross profit, excluding the RAP Group, increased
from $6,000 in 2005 to $416,000 in 2006. The increase in RAP’s profits
reflect higher sales volume with better margins on car sales. ZAP’s increase in
gross profits was due to higher sales of Smart Cars Americanized by ZAP with
better profit margins.
Sales
and marketing expenses
in the
first six months of 2006 were 604,000 as compared to $492,000 in 2005. RAP’s
expenses were $64,000 in 2006 which is comparable to $65,000 for the six months
ended June 30, 2005. As a percentage of sales of the Company, sales and
marketing expenses decreased from 23.4% to 8.3% for the six months ended June30, 2006. ZAP’s portion of selling expenses was $540,000 in 2006 compared to
$427,000 in 2005. This was a increase of $113,000 or 26% from 2005 to 2006.
The
higher expenses were primarily for the promotion of the Smart Car and new
consumer products at various trade shows.
General
and administrativeexpenses
for
the
six months ended June 30, 2006 were $5.9 million as compared to $4.6 million
in
the six months ended June 30, 2005. As a percentage of sales of the Company
general and administrative expenses decreased from 219% to 81%. RAP’s portion of
the expenses was $185,000 in 2006 versus $564,000 in 2005. General and
administrative expenses for ZAP, excluding the RAP Group, increased from $4.1
million to $5.7 million, this is a increase of $1.6 million or 39% from 2005.
The increase in general and administrative expense is primarily due to
stock-based compensation for the six months ended June 30, 2006 of approximately
$1 million due to the adoption of FAS123R . The Company also incurred higher
consulting and professional fees.
Research
and development expenses decreased
from $100,000 for the six months ended June 30, 2005 to zero for the same period
in 2006. The primary focus of the Company in 2006 was the production of existing
models of various electric vehicles and consumer products.
Gain
on revaluation of warrant liability decreased
from
$1.5
million in 2005 to $304,000 in 2006. For last year’s period ended June 30, 2005
a one-time transaction accounted for $1.5 million representing the difference
between the fair market value of the warrant liability at December 31, 2004
and
the fair market value on February 22, 2005, the date when the warrant liability
was settled and transferred to equity. The balance for the six months
ended June 30, 2006 resulted from favorable changes in the value of warrant
and
put option liabilities.
Interest
income (expense), net decreased
by $11,000 to an interest expense of $9,000 for the first six months of 2006
as
compared to interest income of $2,000 for the first six months of 2005. This
was
due to lower overall cash balances in the money market investments offset by
interest expense primarily due to the note on the corporate office
building.
Other
income decreased from
$125,000 of income in the firs six months of 2005 to $4,000 in 2006. The other
income in 2005 represents a one time adjustment to the reorganization
reserve.
Net
Loss was
$5.5
million for the six months ended June 30, 2006 as compared to a net loss of
$3.4
million for period ended June 30, 2005. The increase was primarily due to higher
consulting and professional fees, as well as stock-based compensation expense
due to the adoption of SFAS 123R.
-20-
Liquidity
and Capital Resources
In
the
first six months of 2006 net cash used for operating activities was $1.9
million. In the first six months of 2005, the Company used cash for operations
of $3.0 million. Cash used in the first six months of 2006 was comprised of
the
net loss incurred for the first six months of $5.5 million plus net non-cash
expenses of $3.5 million plus the net change in operating assets and liabilities
of $0.1million. Cash used in operations in the first six months of 2005 was
comprised of the net loss of $3.4 million plus net non-cash expenses of $0.7
million, and the net change in operating assets and liabilities resulting in
a
use of cash of $0.3 million.
Investing
activities used cash of $322,000 in the first six months ended June 30, 2006
and
used $419,000 during the first six months ended June 30, 2005.
Financing
activities provided cash of $2.4 million and $1.7 million during the first
six
months ended June 30, 2006 and 2005, respectively.
In
September 2005, the Company signed a $425 million revolving financing facility
with Surge Capital II, LLC that, subject to certain conditions can be used
by
ZAP to import Smart Cars Americanized by ZAP and other advanced transportation
vehicles for ZAP dealers. The financing agreement has a term of one year, but
may be extended upon agreement by both parties. The financing is based on orders
ZAP receives from dealers who must be approved in advance by Surge Capital
II,
LLC and is secured by a first lien on substantially all of ZAP’s assets. No
funds have been drawn on the financing facility as of August 11, 2006. Each
financing incurs an interest charge equal to 2% of the principal amount for
the
first 30 days and thereafter at a Per Diem Rate of .067%.
At
June30, 2006the Company had cash of $1.6 million compared to $3.6 million at June30, 2005. At June 30, 2006, the Company had a working capital deficit of $5.4
million, as compared to working capital of $10.4 million at June 30, 2005.
The
decrease was due to the following: cash used in operations, the liability to
Smart Auto, and the expensing of prepaid non-cash professional fees. The
Company, at present, does not have a credit facility for working capital in
place with a bank or other financial institution.
We
do not
have a bank operating line of credit other than our line of credit with Surge
Capital II for inventory purchase, and there can be no assurance that any
required or desired financing will be available through bank borrowings, debt,
or equity offerings, or otherwise, on acceptable terms. If future financing
requirements are satisfied through the issuance of equity securities, investors
may experience significant dilution in the net book value per share of common
stock and there is no guarantee that a market will exist for the sale of the
Company’s shares.
The
Company’s primary capital needs are to fund its growth strategy, which includes
creating an auto distribution network for the distribution of the Smart Cars
and
electrical vehicles, increasing its internet shopping mall presence, increasing
distribution channels, establishing ZAP licensed dealerships, introducing new
products, improving existing product lines and developing a strong corporate
infrastructure.
Seasonality
and Quarterly Results
The
Company’s business is subject to seasonal influences for consumer products.
Sales volumes in this industry typically slow down during the winter months,
November to March in the U.S. The Company’s auto distribution network is
affected by the availability of cars ready to sell to dealers.
Inflation
Our
raw
materials and finished products and automobiles are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our product sources.
-21-
Item
3. Controls and
Procedures
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under
supervision and with the participation of our management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934 (the Exchange Act). Based on this evaluation,
our management, including our CEO and our CFO, concluded that our disclosure
controls and procedures were effective as of June 30, 2006, to ensure that
information required to be disclosed by us in the reports filed or submitted
by
us under the Exchange Act (i) is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, and (ii) is
accumulated and communicated to the Company’s management, including our CEO and
CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended June 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
In
the
normal course of business, we may become involved in various legal proceedings.
Except as stated below, we know of no pending or threatened legal proceeding
to
which we are or will be a party which, if successful, might result in a material
adverse change in our business, properties or financial condition. However,
as
with most businesses, we are occasionally parties to lawsuits incidental to
our
business, none of which are anticipated to have a material adverse impact on
our
financial position, results of operations, liquidity or cash flows.
Marieta
Cruz Hansel v. Robert Warren Johnson,Jr, ZAP, et.al.,
A
dormant complaint filed in 2005 against Robert Johnson, ZAP , et al, was
reactivated by the plantiff .Ms.Marieta Cruz Hansell .The compliant was filed
against Robert Johnson ( a former employee of ZAP) and ZAP for personal
injury,property damage and permanent disability based on an alleged automobile
collision between Ms. Hansell and Mr. Johnson. The Company and Mr. Johnson
have
both filed answers and case management statements containing a general denial
of
all of the plaintiff’s claims, and the Company has agreed to defend Mr. Johnson
in this matter. The plaintiff is claiming permanent disability, and has
submitted a Statement of Damages in the amount of $108,727.34, plus unspecified
amounts of future general damages, future wage loss, diminution of earning
capacity damages, and incidental, consequential and special damages. The
plaintiff has not yet made any demand for settlement. The Company intends to
vigorously defend both itself and Mr. Johnson against these claims.
First
Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
ZAP,
American Arbitration Association Case No. 74 133 00081 06 NOCA.First
Class Imports executed a licensing and distributorship agreement with Voltage
Vehicles, in May 2004. On January 14, 2006, First Class Imports and its
principal, Leon Atkind, filed an arbitration demand with the American
Arbitration Association. First Class Imports and Mr.Atkind alleged that
the Company and Voltage Vehicles breached the licensing agreement by not
delivering new SMART-branded vehicles to First Class Imports and demanded return
of the $100,000 licensing fees paid to Voltage Vehicles under the agreement,
plus interes. Voltage Vehicles filed a counterclaim against both First Class
Imports and Mr. Atkind. The counterclaim alleges breach of contract due to
First
Class Imports refusal to accept SMART-branded vehicles offered to it pursuant
to
the parties’ licensing agreement. Voltage
Vehicles seeks as damages the lost
-22-
revenue
it otherwise would have gained through First Class Imports’ purchase of
SMART-branded vehicles, as well as damages based on the depreciation of a
SMART-branded vehicle it loaned to First Class Imports.
In
a
separate
cause of action, Mr. Atkind alleged Voltage Vehicles breached a second contract
by failing to timely deliver a stock certificate in exchange for a Mercedes
vehicle that he sold to the Company. Voltage Vehicles countered-claim alleging
breach of contract against Mr. Atkind based on his failure to deliver title
to
the Mercedes identified above seeking as damages the depreciation of the
Mercedes during the time in which it has been unable to sell the vehicle. An
arbitrator has been selected, but the arbitration has been continued while
the
parties discuss settlement. The court overseeing the arbitration has scheduled
a
case management conference for November 2, 2006.
ZAP
v. Norm Alvis, et al., Superior
Court of California, Case No. SCV-238419, complaint filed March 27, 2006. Mr.
Alvis was engaged by ZAP as a consultant to perform public relations work on
behalf of the Company. As consideration for Mr. Alvis’ consent to the contract,
ZAP gave Mr. Alvis a motor home worth at least $500,000. ZAP sued Mr. Alvis,
claiming that he has not performed his obligations under the contract. ZAP
is
seeking either the return of the motor home or $500,000 in damages. Mr. Alvis
did not timely respond to the complaint, defendant’s default the court entered a
default judgment on May 16, 2006. Also on May 16, 2006, ZAP obtained a
writ of possession for the motor home. On June 18, 2006, the defendant
filed a motion asking the court to set aside the default and default
judgment and to vacate its order authorizing the issuance of the writ of
possession. The court agreed to set aside the defaults, but it left the
writ of possession in place. Mr. Alvis has now filed an answer denying
ZAP’s allegations. Defendant has also filed a cross-claim against ZAP,
Steve Schneider in his individual capacity, and Rotoblock Corporation, alleging
two counts of breach of contract, one common count of work, labor, and
services received, and one count of fraud. All of these claims
relate to two contracts that required the defendant to provide certain marketing
services to ZAP and Rotoblock. The defendant claims he provided these
services but received inadequate or no consideration in exchange. For the
fraud claim, defendant claims ZAP, Schneider, and Rotoblock executed the
contracts with no intent to perform. The defendant prays for damages of
$2,000,000, interest according to proof, punitive damages, and an order
directing the cross-defendants to perfect title to the motor home in
question. The court has set a case management conference for November 2,2006. The Company intends to vigorously defend itself against these
claims.
On
October 28, 2005, we filed a complaint against DaimlerChrysler Corporation
and
others in the Los Angeles Superior Court. The complaint includes claims for
intentional and negligent interference with prospective economic relations;
trade libel; defamation; breach of contract - agreement to negotiate in good
faith; breach of implied covenant of good faith and fair dealing; and unfair
competition. The complaint alleges that DaimlerChrysler has engaged in a series
of anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
business relationships. As a result of the allegations, the complaint requests
damages in excess of $500 million and such other relief as the court deems
just
and proper. DaimlerChrysler has successfully filed a motion to quash that
compliant for lack of personal jurisdiction, and the court’s ruling on that
matter is in the process of being appealed.
James
A. Arnold,et al.v. Steven Schneider, et al., A
dormant
complaint filed in 2002 against the RAP Group and Steve Schneider the Chief
Executive Officer of ZAP, individually was reactivated by the plaintiff -Jim
Arnold Trucking. The complaint alleges breach of contract, promissory estoppel
and fraud and seeks contract damages in the amount $71,000 plus monthly storage
fees and punitive damages of $750,000. The Company has cross-claimed against
Jim
Arnold Trucking seeking compensatory damages, attorneys’ fees and equitable
relief for breach of oral contract, common count for goods sold and delivered,
conversion, liability of surety, violation of statute, and violation of the
Unfair Practices Act. On February 17, 2005, the court referred the matter to
non-binding arbitration. The non binding arbitration hearing was held on July27, 2005 where the arbitrator awarded the plaintiff damages in the amount of
$68,290 plus prejudgment interest of 7%. On May 2, 2006 a trial was held with
the parties agreeing to settle the matter for $40,000 and execute mutual
releases of all claims arising out of the subject matter of the litigation.
RAP
Group has made the first payment to the plaintiff for $20,000; the second
payment of $20,000 is due on or before January 5, 2007.
-23-
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
Not
Applicable
Item
3. Defaults Upon Senior
Securities
Not
Applicable
Item
4. Submission of Matters
to a Vote of Security Holders
The
following matters were submitted to a vote of security holders during our annual
meeting of shareholders held on June 18, 2006.
To
elect Louis Auletta to serve until the next annual meeting and until
their
successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
17,190,176
5,751,468
To
elect Renay Cude to serve until the next annual meeting and until
their
successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,777,947
163,697
To
elect Steve Schneider to serve until the next annual meeting and
until
their successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,798,778
142,866
To
elect Gary Starr to serve until the next annual meeting and until
their
successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,578,204
363,440
To
elect Guy Fieri to serve until the next annual meeting and until
their
successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,782,294
159,350
To
elect Matthias Heinze to serve until the next annual meeting and
until
their successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,602,986
338,658
To
elect Mark Haywood to serve until the next annual meeting and until
their
successors are elected and qualified.
FOR
WITHHELD
ABSTAIN
BROKER
NON-VOTES
22,613,320
328,324
Approval
of amendment to the Company’s Amended and Restated Articles of
Incorporation to effect a reverse stock split of all outstanding
common
stock in one of the following ratios:1-for-4 or 1-for-6, in the event
that
the Company’s common stock fails to satisfy the minimum bid price
requirement of the NYSE Arca.
FOR
AGAINST
ABSTAIN
BROKER
NON-VOTES
22,245,626
532,143
163,875
Approval
of amendment to the Company’s Amended and Restated Articles of
Incorporation to increase the authorized common stock from 100 million
to
200 million shares.
FOR
AGAINST
ABSTAIN
BROKER
NON-VOTES
22,129,589
588,346
223,709
-24-
Approval
of the Company’s Prior Equity Compensation Issuances.
FOR
AGAINST
ABSTAIN
BROKER
NON-VOTES
11,040,086
636,260
391,387
10,873,911
Approval
of the Company’s 2006 Incentive Stock Plan.
FOR
AGAINST
ABSTAIN
BROKER
NON-VOTES
11,071,725
719,626
276,382
10,873,911
To
ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as
the Company’s independent accountant.
FOR
AGAINST
ABSTAIN
BROKER
NON-VOTES
22,662,317
115,308
164,019
Item
5. Other
Information
Not
Applicable
Item
6. Exhibits
A.
Exhibits
3.4
Certificate
of Amendment to Amended and Restated Articles of
Incorporation
31.1
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act.
31.2
Certification
of Principal Financial and Accounting Officer Pursuant to Section
302 of
the Sarbanes-Oxley Act.
32.1
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act.
32.2
Certification
of Principal Financial and Accounting Officer Pursuant to Section
906 of
the Sarbanes-Oxley Act.
-25-
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.
