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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2004
Commission File Number 0-303000
ZAP
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 94-3210624
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
501 FOURTH STREET
SANTA ROSA, CA 95401
(707) 525-8658
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Shares
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 [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
25,722,645 shares of common stock as of November 12, 2004.
Transitional Small Business Disclosure Format Yes [_] No [X]
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ZAP
FORM 10-QSB
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheet as of
September 30, 2004 ...................................... 2
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended September 30, 2004
and 2003................................................. 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003................. 4
Notes to Condensed Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11
Item 3. Controls and Procedures.................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 17
Item 2. Changes in Securities and Use of Proceeds................ 18
Item 3. Defaults Upon Senior Securities.......................... 18
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Item 5. Other Information........................................ 18
Item 6. Exhibits and Reports on Form 8-K......................... 19
SIGNATURES .................................................................. 20
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZAP
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30,
2004
----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Includes Restricted Cash of $226) $ 1,959
Accounts receivable, net of allowance for doubtful accounts of $575 183
Inventories 1,605
Prepaid expenses and other current assets 4,704
----------
Total current assets 8,451
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,116 3,297
OTHER ASSETS
License and distribution fee, net (Note 4) 8,685
Patents and trademarks, net 161
Goodwill 476
Deposits and other 79
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Total assets $ 21,149
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 189
Accounts payable 99
Accrued liabilities 628
Deferred revenue 540
----------
Total current liabilities 1,456
LONG-TERM LIABILITIES
Long-term debt, less current portion 2,105
----------
Total liabilities 3,561
----------
SHAREHOLDERS' EQUITY
Preferred stock, authorized 50 million shares; no par value,
8,000 shares issued and outstanding (Note 4) 8,000
Common stock, authorized 100 million shares;
no par value; 22,248,632 shares issued and outstanding 40,525
Notes receivable from shareholders, net (56)
Accumulated deficit
(30,881)
----------
Total shareholders' equity 17,588
----------
Total liabilities and shareholders' equity $ 21,149
==========
See accompanying notes to condensed consolidated financial statements (Unaudited)
2
ZAP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET SALES $ 1,165 $ 1,625 $ 3,557 $ 4,519
COST OF GOODS SOLD 917 1,147 2,734 3,542
---------- ---------- ---------- ----------
GROSS PROFIT 248 478 823 977
---------- ---------- ---------- ----------
OPERATING EXPENSES
Sales and marketing 219 232 627 574
General and administrative
(non-cash of $2,867 and $39 for the three
months ended September 30, 2004 and 2003 and
$4,145 and $247 for the nine months ended
September 30, 2004 and 2003.) 4,416 1,473 7,608 2,791
Loss on disposals of fixed assets 271 -- 334 100
---------- ---------- ---------- ----------
4,906 1,705 8,569 3,465
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS BEFORE
REORGANIZATION ITEMS, OTHER
INCOME(EXPENSE)AND INCOME TAXES (4,658) (1,227) (7,746) (2,488)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) (45) (24) (105) (31)
Other income (expense) 16 (239) 409 (446)
---------- ---------- ---------- ----------
(29) (263) 304 (477)
---------- ---------- ---------- ----------
LOSS BEFORE REORGANIZATION ITEMS
AND INCOME TAXES (4,687) (1,490) (7,442) (2,965)
REORGANIZATION ITEMS:
Professional fees -- 7 13 22
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (4,687) -- (7,455) (2,987)
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES 5 -- 5 --
---------- ---------- ---------- ----------
NET LOSS $ (4,692) $ (1,497) $ (7,460) $ (2,987)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED (RESTATED FOR 2003) $ (0.25) $ (0.12) $ (0.49) $ (0.27)
========== ========== ========== ==========
WEIGHTED AVERAGE OF
COMMON SHARES OUTSTANDING
BASIC AND DILUTED (RESTATED FOR 2003) 18,568 12,154 15,320 10,959
---------- ---------- ---------- ----------
See accompanying notes to condensed consolidated financial statements (unaudited).
3
ZAP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
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2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,460) $ (2,987)
Adjustments to reconcile net loss to net cash used for
operating activities:
Issuance of stock and warrants for services 4,145 290
Loss on disposal of assets 334 100
Amortization on note discount 60 --
Depreciation and amortization 491 247
Allowance for notes receivable 111 --
Allowance for doubtful accounts 112 (140)
Changes in other items affecting operations
Receivables 20 221
Inventories 387 337
Prepaid expenses and other assets (509) (25)
Accounts payable (439) 239
Advances from related party -- (56)
Accrued liabilities (357) 663
Deferred revenue 250 --
---------- ----------
Net cash used in operating activities (2,855) (1,111)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITES
Acquisition of Distribution license (1,000) (8)
Purchase of equipment (39) --
---------- ----------
Net cash used for investing activities (1,039) (8)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock 1,128 --
Sale of common stock and warrants, net of offering costs 3,184 838
Proceeds from issuance of debt 1,000 228
Repayments on debt (10) (141)
---------- ----------
Net cash provided by financing activities 5,302 925
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,408 (194)
CASH AND CASH EQUIVALENTS, beginning of period 551 350
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,959 $ 156
========== ==========
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,
without audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, 2003.
The financial statements presented herein, for the three and nine months ended
September 30, 2004 and 2003 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 the
Company might not achieve and or maintain profitability. The Company's
continuation as a going concern is directly dependent upon our ability to
increase sales and obtain additional financing. The Company has raised
approximately $4 million in new capital thus far in 2004 but will require
substantial additional capital in the short term to realize its business
objectives, in particular the creation of a distribution network for and sales
of advanced transportation and SMART(R) Cars. There can be no assurance that
additional capital would be available, or if it is available, that it would be
on acceptable terms. A substantial portion of the Company's growth in the past
three 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.
On July 29, 2004 ZAP entered into a $24.5 million common stock purchase
agreement with Fusion Capital Fund II, LLC, a Chicago based institutional
investor, whereby Fusion Capital has initially purchased 200,000 shares of ZAP's
common stock at a price of $2.50 per share. Fusion Capital has committed to
purchase an additional $24 million of common stock over a 40-month period at a
purchase price based upon the market price of ZAP's common stock on the date of
each sale without any fixed discount to the market price. In exchange for Fusion
signing the initial Term Sheet, the Company issued 45,000 shares of common stock
to Fusion. The Company also issued 255,000 shares of common stock as a
commitment fee for the foregoing arrangement. The proceeds will be utilized to
accelerate the development and commercialization of the Company's full-line of
advanced technology vehicles and to purchase additional inventory of Smart Cars.
(2) SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, establishes a fair-value method of
accounting for stock options and similar equity instruments. The fair-value
method requires that compensation cost be measured on the value of the award at
the grant date, and recognized over the service period. SFAS No.123 as amended
allows companies to either account for stock-based compensation to employees
under the provisions of SFAS No. 123 as amended or under the provisions of
Accounting Principles Board (APB) Opinion No. 25 or its related interpretations.
The company accounts for its stock-based compensation to employees in accordance
with the provisions of APB opinion No. 25.
The Company has recorded deferred compensation for the difference, if any,
between the exercise price and the deemed fair market value of the common stock
for financial reporting purposes of stock options granted to
5
employees. The compensation expense related to such grants is amortized over the
vesting period of the related stock options on a straight-line basis.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issues No.96-18 Accounting for Equity Instruments that Are
Issued to other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Had the Company determined compensation cost based on the fair value at the
grant date for its employee stock options and purchase rights under SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below for the three and nine-month periods ended September 30.
IN THOUSANDS EXCEPT PER SHARE AMOUNTS THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
----------------------------- -----------------------------
2004 2003 2004 2003
----------------------------- -----------------------------
Net loss $ (4,692) $ (1,497) $ (7,460) $ (2,987)
Deduct: Employee stock-based compensation expense
determined under fair value (31) (10) (73) (70)
----------------------------- -----------------------------
Pro forma $ (4,723) $ (1,507) $ (7,533) $ (3,057)
============================= =============================
Basic and diluted per share:
As reported $ (0.25) $ (0.12) $ (0.49) $ (0.27)
============================= =============================
Pro forma $ (0.25) $ (0.12) $ (0.49) $ (0.28)
============================= =============================
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted earnings 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 conversion of debt have
been excluded from the diluted per share amounts, since the effect of these
securities would be anti-dilutive. At September 30, 2004, these potentially
dilutive securities include options for 3,373,367 common shares, warrants for
39,320,438 shares of common stock, debt convertible into 930,000 shares of
common stock and preferred shares that can be converted into 8,000,000 common
shares.
The Company has also approximately 2.9 million shares of common stock
outstanding that were pledged as collateral for a long-term loan that has not
funded. The prospective lender notified the Company in December 2003 that the
shares have been lost, however they have not been cancelled to date. Thus the
net loss per common share and weighted average number of common shares
outstanding have been restated for 2003 to exclude the 2.9 million shares.
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.
USE OF ESTIMATES -The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
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.
6
LEGAL ACCOUNTS-The Company estimates the amount of potential exposure it may
have with respect to litigation claims and assessments.
RECOVERY OF LONG-LIVED ASSETS- The Company evaluates the recovery of its
long-lived assets periodically by analyzing its operating results and
considering significant events or changes in the business environment.
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.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2003, the Securities and Exchange Commission (SEC) issue Staff
Accounting Bulletin No.104, Revenue Recognition (SAB 104), which superceded
Staff Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101).
SAB 104 rescinds accounting guidance contained in SAB 101 related to multiple
elements revenue arrangement, superceded as a result of the issuance of Emerging
Issues Task Force Issue No. 00-21 (EITF 00-21), Accounting for Revenue
Arrangement with Multiple Deliverables. Additionally, SAB 104 rescinds the SEC's
Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC topic 13,
Revenue Recognition. While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The Company adopted SAB 104 on the
first day of 2004. The adoption of SAB 104 did not have an impact on the
Company's condensed consolidated financial statements.
In April 2003, FASB issued SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends and clarifies the
financial accounting and reporting requirements, as were originally establishing
in SFAS 133, for derivative instruments and hedging activities. SFAS 149
provides greater clarification of the characteristics of a derivative instrument
so that contracts with similar characteristics will be accounted for
consistently. This statement is effective for contracts entered into or modified
after June 30, 2003, as well as for hedging relationships designated after June
30,2003, excluding certain implementation issues that have been effective prior
to this date under SFAS 133. The Company's adoption of this statement has not
had a material impact on our results of operations or financial condition.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. FIN 46 provides guidance on how to apply the controlling financial
interest criteria in ARB 51 to variable interest entities ("VIE"). Given the
complexity of FIN 46 and implementation issues after its original issuance,
particularly respect to its scope and application of the consolidation model,
FASB staff issued several FASB staff positions throughout 2003 to clarify the
Board's intent on certain of the interpretation's provisions. In December 2003,
the Board issued FIN 46R to address certain technical corrections and clarify
the implementation issues that had arisen.
In general, a VIE is subject to consolidation if it has (1) an insufficient
amount of equity for the entity to carry on its principle operations without
additional subordinated financial support provided by any parties, (2) a group
of equity owners that are unable to make decisions about the entity's activities
or (3) equity that does not absorb the entity's losses or receive the entity's
benefits. Variable interest entities are to be evaluated for consolidation based
on all contractual, ownership or other interest that expose their holder to the
risk and rewards of the entity. These interests may include equity investments,
loans, leases, derivatives, guarantees, service and management contracts and
other instruments whose values change with changes in the VIE. Any of these
interests may require its holder to consolidate the entity. The holder of a
variable interest that receives the majority of the potential variability in
gains or losses of the VIE is the VIE's primary beneficiary and is required to
consolidate the VIE. FIN 46R became effective immediately for entities created
after January 31, 2003. It applies in the first fiscal year or interim period
beginning after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003.The Company has determined that the adoption of the provisions of FIN 46
will not have an impact upon its financial condition or results of operations.
7
(3) INVENTORIES- The Inventories at September 30, 2004 are summarized as follows
(thousands):
Vehicles $ 602
Raw Materials 476
Finished Goods 936
-------
2,014
Less-inventory reserve (409)
-------
$ 1,605
=======
(4) LICENSE AND DISTRIBUTION FEE
On April 19, 2004, ZAP entered into an Exclusive Purchase, License and Supply
Agreement with Smart-Automobile LLC, a California limited liability company, to
distribute and manufacture "smart" cars. Smart cars is the brand name of
3-cyclinder gas turbo engine cars manufactured by Daimler Chrysler AG, which can
achieve an estimated fuel economy up to 60 miles per gallon. Smart Automobile
LLC is not affiliated with Damler Chrysler, but is a direct importer.
Under the agreement ZAP will be the exclusive distributor and licensee of the
right to manufacture and distribute Smart(R) cars in the United States and the
non-exclusive distributor and licensee outside of the United States for a period
of ten years from Smart-Automobile LLC. However, it is rumored that in 2006
Mercedes Benz plans to import a 4- door version of the Smart(R) Car that is
produced in Brazil. Subject to the terms of the agreement, ZAP will pay
Smart-Auto 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 common agreement was signed and completed on October 25, 2004.
Under this agreement Smart Automobile, LLC (SA) will exchange 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, allow
the holder of 500 shares of preferred stock SA to convert 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 2006, or when all the preferred have been
converted. Upon EPA compliance, and the legal right to sell the first 98
vehicles currently in inventory, the holder can convert 500 preferred shares to
$500,000 of common stock immediately.
The issuance of the preferred shares are subject to the filing of the amended
and restated articles of incorporation and a certificate of designation with the
State of California.
The Company has preliminarily recorded the License and Distribution based upon
the agreed value between the parties as outlined in the "Exclusive Purchase,
License and Supply Agreement" dated April 19, 2004 with Smart Automobile LLC to
manufacture and distribute the Smart(R) Car. An independent appraisal of the
fair value of the License and Distribution Fee,and consideration payable under
the agreement has not yet been obtained. The Company may experience an
adjustment to the value recorded of the License and Distribution Fee and equity
at year end depending on the outcome of an independent appraisal. The License
and Distribution Fee is currently being amortized monthly over ten years which
is the term of the agreement.
Sales of the Smart (R) Car cannot be made by the Company until approval is
received by the U. S. Environmental Protection Agency (EPA) who is presently
testing the automobile. Management is anticipating that approval will be
received in late November of 2004.
(5) STOCKHOLDERS' EQUITY-On July 1, 2002 ZAP's stock began trading on the
National Association of Securities Dealers, Inc. Electronic Bulletin Board (the"
OTC Bulletin Board") under the new stock symbol of ZAPZ.
8
While the Company was in the process of amending and restating its articles of
incorporation, the Secretary of State of California noted that the confirmed
plan of reorganization of June 20, 2002, did not provide the Board the right to
designate its preferred shares, so the Board amended the articles through
shareholder vote which equaled or exceeded the votes required, which gave the
Board this authority. The record date for this vote was on September 30, 2004.
The Amended and Restated Articles of Incorporation provide, among other things,
for the authorization of the Company to issue 100,000,000 shares of Common Stock
and 50,000,000 shares of Preferred Stock, as well as for the elimination of all
prior classes and series of preferred stock. The Board of Directors was further
authorized , subject to limitations prescribed by law, to fix the designations,
determinations, powers, preference and rights, and the qualifications,
limitations or restrictions thereof, of any wholly unissued series of Preferred
Stock. The Company has has filed a Schedule 14C Information with the SEC
regarding the Amended and Restated Articles of Incorporation.
The Company issued 6,153,562 shares of restricted common stock during the
quarter ending September 30, 2004. The stock was issued for the following:
4,873,772 shares for the conversion of preferred stock ,which also includes the
conversion of $1million in short-term debt to equity; 500,625 shares in exchange
for investment funds by shareholders; 326,211 shares from the exercise of
shareholder warrants; 106,611 shares were issued to purchase inventory and
selected assets; 91,912 shares for rentals and vehicle dealership matters;
199,680 shares for legal and advertising; 31,745 for employee bonuses and 23,006
for building improvements at corporate headquarters.
On July 1, 2004, when the market price of the Company's common stock was $2.25
per share, the Company modified its series B and C warrants previously issued to
shareholders in connection with its Chapter 11 reorganization. The terms of the
series B and C warrants were extended six and twelve months, respectively, to
January 1, 2005 and July 1, 2005, and the exercise price was increased to $1.26
per share for the series B warrants and to $5.00 for the series C warrants. The
Company has series B warrants outstanding to purchase approximately 5.6 million
shares of common stock, and series C warrants outstanding to purchase
approximately 7.4 million shares of common stock.
Also on July 1, 2004, when the market price of the Company's common stock was
$2.25 per share, the Company modified its series B2 and C2 warrants that were
previously issued to consultants and vendors in connection with purchase of
goods and services. These warrants were issued subsequent to the Company's
emerging from Chapter 11. The terms of the series B2 and C2 warrants were
extended six and twelve months, respectively, to January 1, 2005 and July 1,
2005, and the exercise price was increased to $1.26 per share for the series B2
warrants outstanding and to $5.00 for the series C2 warrants. The Company has
series B2 warrants outstanding to purchase approximately 8.6 million shares of
common stock, and series C2 warrants outstanding to purchase approximately 1.6
million shares of common stock. The Company valued the warrants at that date,
July 1, 2004, using the Black-Scholes option pricing model with the following
assumptions: for the series B2 warrants -- risk free interest rate of 1.64%,
expected dividend rate of 0.00%; volatility of 163%; and expected term of six
months; and for the series C2 warrants -- risk free interest rate of 1.64%,
expected dividend rate of 0.00%; volatility of 163%; and expected term, of one
year. The series B2 and C2 warrants were valued at $1.35 per share and $.81 per
share respectively.
The calculated value of the modified series B2 and C2 warrants for consulting
contracts under which services have not been completed has been recognized as an
adjustment to the unamortized cost of the consulting contracts. The unamortized
cost will be recognized as an expense over the remaining service period as the
consulting services are performed.
During the third quarter ended September 30, 2004, the Company issued 500,208 of
Series K-2 warrants at an exercise price of $1.00 for employee (including CEO)
bonuses. An employee and a director of the Company were also issued a total of
150,000 stock options priced at $0.96 during the quarter. All of these warrants
and options have an exercise price that was above the market price on the date
of issuance.
In September of 2004, the Board of Directors established the Series $2.50
warrants which expire on July 7, 2009. A total of 263,625 of these warrants were
issued in September in for exchange investments funds matters.
During the second quarter ended June 30, 2004, the Company issued approximately
9,200 shares of preferred stock, which is convertible into 9.1 million shares of
Common Stock. The preferred stock was issued for the following: 8,000 shares
were issued to Smart-Automobile, Inc. for a license and distribution fee for the
Smart Car, 500 shares for the purchase of automobile inventory and 700 shares to
investors in exchange for cash.
The Company issued approximately 999,000 shares of restricted common stock
during the second quarter ended June 30, 2004. The stock was issued for the
following: 557,000 shares for the conversion of preferred into common, 102,000
shares were issued in exchange for investment funds by shareholders, 41,000
shares for rental expenses, 62,000 shares for repairs on the corporate building,
182,000 shares for legal, consulting and advertising, 22,000 for inventory
purchases and 33,000 for Employee bonuses and severance.
During the second quarter of 2004, the company issued approximately 3,960,000 of
Series B Restricted Warrants with an exercise price of $1.07. The warrants were
issued for the following: 2,200,000 warrants for consulting, 1,260,000 warrants
in conjunction with investment funds received and 500,000 warrants for inventory
purchases. The warrants issued to consultants were valued between $0.15 and
$1.54 based on the stock price on the date of grant as valued under the
Black-Scholes pricing model. General and Administrative expenses of $190,000
have been recorded during the second quarter of 2004 related to these warrant
issuances.
9
The Company issued at an exercise price of $1.00 approximately 1,150,000 Series
K Warrants during the second quarter of 2004. The Warrants were issued for the
following:1,000,000 warrants for consulting and 150,000 warrants for employee
bonuses. The warrants issued to consultants were valued at $0.51 based on the
stock price on the date of grant as valued under the Black-Scholes pricing
model. General and Administrative expenses of $85,000 have been recorded during
the second quarter of 2004 related to these warrant issuances.
Employees of the Company were also granted a total of 1.8 million stock options
under the 2002 ZAP Employee Stock Option Plan. The options are priced at $0.56
and $1.26 and vest ratably over a period of three years.
The Company issued 1,035 shares of preferred stock in the first quarter ended
March 31, 2004, which is convertible into 1.0 million shares of common stock.
ZAP received $460,000 from investors in exchange for 460 shares of preferred
stock. Approximately 316 shares of preferred stock were issued in payment for
legal, consulting and professional services. In addition, 259 preferred shares
were issued to purchase inventory and selected assets.
During the first quarter of 2004 the Company issued approximately 3.8 million
Series B restricted Warrants priced at $1.07. The warrants were issued for the
following: 2.0 million for preferred investors mentioned above, 1.6 million for
consulting services and 200,000 for the purchase of inventory and electric
automobiles. The warrants issued to consultants were valued between $0.30 and
$0.39 based on the stock price on the date of grant as valued under the
Black-Scholes pricing model. General and Administration expenses of $530,000
have been recorded during the first quarter of 2004 related to these warrant
issuances.
The Company has also approximately 2.9 million shares of common stock
outstanding that were pledged as collateral for a long-term loan that has not
funded. The prospective lender notified the Company in December 2003 that the
shares have been lost, however they have not been cancelled to date. These
shares were not included in the weighted average shares outstanding calculation.
The Company is still holding notes receivable from shareholders of $864,170,
less a reserve of $807,900 resulting in a net balance due of $56,270 at
September 30, 2004. The notes were given to the Company last year by three
shareholders in exchange for restricted and unrestricted common stock. Reserves
were established for two of the shareholder notes, since one of the shareholders
has not met the agreed upon payment terms and the other shareholder has not
assigned collateral as required by the notes. The Company has hired an attorney
to pursue collection from the shareholders.
(6) LITIGATION- From time to time, the Company is subject to legal proceedings
and claims in the ordinary course of business, including employment-related and
trade related claims.
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider (CEO
of ZAP) individually was reactivated by the plaintiff ( Jim Arnold Trucking ).
The Compliant alleges Breach of Contract, Promisssory Estoppel and Fraud and
seeks contract damages in the amount $71,000 plus monthly storage fees and
punitive damages of $750,000. Management believes that the ultimate resolution
of this claim will not have a material adverse effect on our financial position
or on results of operations.
The RAP Group has been on probation with the California Department of Motor
Vehicles (DMV)for a period of two years that ended on June 12, 2004. The
probationary action was primarily due to the RAP Group's untimely transfers of
documents for sales of vehicles and lack of compliance with Motor Vehicle
Pollution Control guidelines on certain automobile sales. In June of 2004, the
California Department of Motor Vehicles filed an Accusation and Petition To
Revoke Probation and at present the RAP's Group probation has been extended
until the matters are resolved with the DMV. The Company has requested a hearing
date with the DMV and intends to refute the accusations. As part of ZAP's
original business plan, management is considering converting, depending upon the
sales volume, the dealership into a wholesale distributor for its electric cars.
10
(7) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Nine Months Ended
September 30,
--------------------
2004 2003
------ ------
Cash paid during the period for interest $ 2 --
Cash paid during the period for income taxes $ 5 5
Non-cash investing and financing activities:
Stock issued to acquire distribution license $8,000 --
Note and stock issued to purchase land and
building $ -- 3,292
Stock issued for:
Purchase of equipment $ 111 1,208
Inventory purchases $ 564 576
Prepaid expenses $3,583 370
Repayment of short term debt $1,000 --
Other assets $ 60 --
Repayment of long-term debt $ -- 342
Notes receivable $ -- 56
Advance on future inventory purchases $ -- 326
(8) RELATED PARTY TRANSACTION
On August 6, 2004 ,Voltage Vehicles Corporation, a subsidiary of ZAP signed a
$100 million exclusive agreement with Apollo Energy Corporation to purchase
7,000 Fuel Cell Electric Propulsion Systems through August 5, 2009. The Company
filed a Form 8-K on October 6, 2004. Steve Schneider, ZAP's Chief Executive
Officer, is a member of the Advisory Board of Apollo Energy Corporation. As of
November 12, 2004 none of the Propulsion Systems are available for shipment.
(9) SUBSEQUENT EVENTS
On November 5, 2004 the Company filed an SEC Form 8-K to report the signing of a
Definitive Stock Stock Agreement for Smart Car. The agreement outlines the
formula for converting the $8 million of ZAP Preferred Stock into Common Stock
by Smart-Automobile based upon certain performance objectives.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Special Note Regarding Forward-Looking Statements- Certain statements in this
Form 10-QSB, including information set forth under this Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). We desire to avail
ourselves of certain "safe harbor" provisions of the Act and are therefore
including this special note to enable us to do so. Forward-looking statements
included in this Form 10-QSB or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to our
stockholders and other publicly available statements issued or released by us
involve known and unknown risks, uncertainties, and other factors which could
cause our actual results, performance (financial or operating), or achievements
to differ from the future results, performance (financial or operating), or
achievements expressed or implied by such forward looking statements. Such
future results reflect our best estimates based upon current conditions and the
most recent results of operations.
11
OVERVIEW
ZAP (the "Company" or "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. The Company has grown from a single product line to a
full line of electric vehicle and advanced transportation products. Most of the
Company's domestic manufacturing has been transferred to lower-cost overseas
contract manufacturers.
The Company's business strategy has been to develop, acquire and commercialize
advanced transportation including electric vehicles, electric vehicle power
systems, low emission vehicles and fuel efficient cars, such as the SMART(R)
Car, which have fundamental, practical and environmental advantages over
available internal combustion modes of transportation that can be produced
commercially on an economically competitive basis. In 2004, the Company
continued to enhance and broaden its electric vehicle and fuel-efficient product
line. The Company intends to further expand its technological expertise through
an aggressive plan of acquisitions of companies with exciting new products in
the advanced transportation industry and strategic alliances with certain
manufacturers, distributors and sales organizations.
The Company's business goal is to become the largest and most complete
distribution portal for advanced transportation (fuel efficient) and electric
vehicles. In 2004, the Company continued to accelerate its market positioning in
the electric vehicle industry. The Company is now focused on creating a
distribution channel for its vehicles, with special emphasis on entrepreneurs in
the power-sport and independent auto industry.
According to various sources, the Company has developed perhaps the strongest
brand names in the electric vehicle industry.
PRODUCT SUMMARY- ZAP markets many forms of advanced transportation, including
electric automobiles, motorcycles, bicycles, scooters, personal watercraft,
neighborhood electric vehicles, commercial vehicles and gas fuel economy
vehicles. Additionally, the Company produces the electric scooter, known as the
ZAPPY(R), which is manufactured by the Company, using parts supplied by various
subcontractors.
ELECTRIC VEHICLE RENTAL PROGRAM- ZAP established ZAP Rental Outlet in 2002 to
rent neighborhood electric vehicles in tourist locations. ZAP plans to solicit
the participation of rental agencies and other locations for the program.
Neighborhood electric cars are a new category of 25 MPH automobiles designed for
short trips in urban areas, planned communities, commercial zones or tourist
districts. The smaller, low-speed electric cars are a new alternative in places
concerned with air and noise pollution, high fuel prices, traffic congestion or
parking shortages. In September 2003 the Company acquired a fleet of electric
cars, at present there are 50 electric vehicles which are being rented to the
public at two locations on the main Casino strip in Las Vegas. The purchase was
completed in exchange for stock and warrants.
VEHICLE DEALERSHIP PROGRAM - The Company began establishing Electric Vehicle
Dealerships in various locations in the United States in the fourth quarter of
2003. The new car dealer pays the Company a fee and in return may apply with the
respective state to become a licensed new car electric vehicle dealership. The
Company also receives a commitment from the new car dealer to purchase a minimum
number of electric automobiles annually. The Company intends to expand this
network to include the gasoline fuel efficient SMART(R) Car.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has primarily become a marketer and distributor of products and is
only involved in the manufacturing of the ZAPPY Scooters. Thus, we do not
require large expenditures for internal research and development costs. In order
to maintain our competitive advantage the Company searches globally for the
latest technological advances in electric transportation and then determines the
feasibility of including the new item into our product.
12
CURRENT PRODUCT LINE
The Company's existing product line, which includes new and planned
introductions, is as follows:
Smart Cars-This vehicle has a gas turbo engine with estimated fuel economy of 60
miles per gallon. This car is a two-passenger coupe that is eight feet in length
that provides ample room for two adult passengers. Other "smart" features and
options of the Smart(R) car include a 61-hp, 3-cyclinder turbocharged engine,
equipped with an advanced electronic stabilization program, or ESP, an anti-skid
design that throttles the engine torque along with an anti-lock braking system.
The unique 6-speed automatic gear transmission with kick down function allows
the user to switch between "automatic" and "manual" gear shifting via a control
program that changes gears in response to varying driving characteristics.
ZAPCAR (TM) - This electric vehicle is made in China and is the first of its
kind to utilize an advanced drive train powered by an asynchronous AC motor
system delivering up to four times the horsepower of other models in its class.
The Company signed an exclusive agreement to import this nearly completed
vehicle into the United States.
ZAP LIGHT UTILITY VEHICLE (LUV) - This vehicle is a new kind of automobile
called a Neighborhood Electric Vehicle (NEV). A new category of automobile was
created for the many car trips people take for inter-city transportation,
planned communities, commercial zones and tourist areas. The LUV sports a
European design that comes from Italy. The vehicle has speeds up to 25 mph, has
room for two and plugs into any normal household electric outlet. The LUV was
selected as a finalist for Tech-TV's Best of the Consumer Electronic Show held
in Las Vegas in January 2003.
ZAPPY(R)- This electric scooter is a stand-up, portable, lightweight scooter
featuring a 12-volt battery with a built-in charger and a collapsible frame. Its
patented design includes a unique folding mechanism and proprietary circuitry,
which increases the efficiency and range of the vehicle. We introduced a new
ZAPPY(R) Scooter, which offered significant upgrades over the previous design,
from performance and construction to look.
ZAPPY 3-This three-wheeled scooter uses a new, powerful drive technology built
into the hub of the front wheel which offers increased stability while enhancing
the maneuverability. The riding platform has two smaller wheels on either side
with the larger wheel motor in front, so a person can ride in standing position
with both feet placed side-by-side, rather than skateboard-style standing
sideways like on the original ZAPPY(R).
OTHER ELECTRIC VEHICLES - Commercial road and highway. Under various
distribution agreements, the Company has the rights to a wide spectrum of
personal and industrial electric vehicles.
ZAP PORTABLE ENERGY(TM) -This product is a lithium-ion battery system designed
to extend the running time for various low-powered electronic devices like cell
phones, digital cameras and handheld computers, beyond traditional disposable
and rechargeable batteries.
MICROPROCESSOR DRIVE CONTROLLERS - The Company is working to develop a series of
low cost proprietary motor controller microprocessors for all of its electric
vehicles, which is believed to increase efficiency and lower costs of operation.
SUBSIDIARY BUSINESSES-The Company completed its acquisition of Voltage Vehicles
("VV") and RAP Group on July 1, 2002. Voltage Vehicles is a Sonoma County-based
Nevada Corporation with exclusive distribution contracts for advanced
transportation in the independent auto dealer network, including rights to one
of the only full-performance electric cars certified under federal safety
standards. The RAP Group ("RAP") owns an auto dealership focused on the
independent automotive and advanced technology vehicle markets. A Voltage
Vehicle authorized dealer, RAP showcases an array of advanced transportation at
its dealership in Fulton, California. Voltage Vehicles, which began business in
February 2001, is a relatively new enterprise.
The Company has a $67,582 backlog of orders and purchase contracts in hand for
various products and electric vehicles as of November 12, 2004. The Company
expects to fill these orders within the current fiscal year.
13
Significant events since the last quarterly report are as follows:
1. On July 29, 2004, the Company entered into a $24.5 million common stock
purchase agreement with Fusion Capital Fund II,LLC,a Chicago based
institutional investor. In accordance with the agreement, Fusion Capital
has initially purchased 200,000 shares of ZAP's common stock at a price of
$2.50 per share.
2. On August 6, 2004 ,Voltage Vehicles Corporation, a subsidiary of ZAP
signed a $100 million exclusive agreement with Apollo Energy Corporation
to purchase 7,000 Fuel Cell Electric Propulsion Systems through August 6,
2009.
3. In September, 2004 ZAP celebrated its Ten year business anniversary.
4. On October 19, 2004 ZAP signed an exclusive distribution contract with
Zibo Enterprises Co. Ltd., to provide advanced battery technology
products. The first new product the ZAP Portable Energy (TM) is a
lithium-ion battery system designed to extend the running time for various
low-powered electronic devices like cell phones,digital cameras and
handheld computers, beyond traditional disposable and rechargeable
batteries.
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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2004 2003 2004 2003
-------- -------- -------- --------
STATEMENTS OF OPERATIONS DATA:
------------------------------
Net sales ............................................... 100% 100% 100% 100%
Cost of sales ........................................... (78.7) (70.6) (76.7) (78.4)
Gross profit ............................................ 21.3 29.4 23.1 21.6
Operating expenses ...................................... 421.1 104.9 240.9 76.7
Loss from operations before other income and expense .... (399.8) (75.5) (217.8) (55.1)
Other income (expenses) ................................. (2.5) (16.2) 8.5 (10.6)
Loss before reorganization items ........................ (402.3) (91.7) (209.2) (65.7)
Reorganization items-professional fees .................. -- -- (0.4) (0.4)
Net loss ................................................ (402.7) (91.7) (209.7) (66.1)
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2003
NET SALES for the quarter ended September 30, 2004 were $1.1 million compared to
$1.6 million in 2003. RAP's net sales for the period were $906,000 versus $1.1
million in 2003. The net sales for ZAP were $258,000 versus $497,000 in 2003.
The sales were less than last year due to the slow economy for both consumer
goods and auto sales at RAP Group.
GROSS PROFIT was $248,000 for the third quarter ended September 30, 2004
compared to $478,000 for the quarter ended September 30, 2003. The RAP Group
accounted for $191,000 of the gross profit for the quarter ended September 30,
2004 versus $292,000 in 2003. ZAP's gross profit excluding the RAP Group,
decreased from $186,000 to $57,000 in 2004. The decrease in gross profit was due
to product mix and lower sales.
14
SALES AND MARKETING EXPENSES in the third quarter of 2004 were $219,000 as
compared to $232,000 in 2003. As a percentage of sales it represents an
increase, from 14% to 19% in 2004. RAP's expenses were $33,000 versus $54,000 in
2003. ZAP's expenses were $186,000 versus $178,000 in 2003. RAP's decrease was
due to lower advertising costs during the third quarter of 2004. While ZAP's
increase in expenses was due to higher salaries and marketing expenses.
GENERAL AND ADMINISTRATIVE expenses for 2004 were $4.4 million as compared to
$1.5 million in 2003. RAP's portion of the expenses was $267,000 versus $786,000
in 2003. For ZAP the expenses increased from $687,000 to $4.1 million. As a
percentage of sales, general and administration expenses increased from 90% of
sales to 379% of sales. RAP's decrease of $519,000 was primarily due to lower
professional and litigation fees. ZAP's increase of $3.5 million was due to
higher consulting, professional fees and bad debt estimates. The modification of
the life and price of the Series B and B-2 Restricted Warrants in the third
quarter of 2004 resulted in additional consulting expense of $2.6 million. The
warrants were revalued under the Black-Scholes pricing model.
LOSS ON DISPOSALS OF FIXED assets increased by $271,000 and represents
adjustments to various cars in the Las Vegas Rental Fleet that are not
operational and are in disrepair.
INTEREST EXPENSE increased by $45,000 in the third quarter of 2004 and is due to
interest on a short-term note that was entered into in April 2004 and converted
to equity in August 2004.
OTHER INCOME (EXPENSE) IMPROVED from an expense of $239,000 in the third
quarter of 2003 to $16,000 of income in third quarter ended September 30, 2004.
The reason for the net increase was that less expenses for reserves were needed
for repayment issues on shareholder notes receivable.
NET LOSS -The Net Loss before reorganization fees and income taxes was
$4,687,000 for the quarter ended September 30, 2004 as compared to a loss of
$1,490,000 for September 30, 2003. The loss for the quarter was higher due to
greater general and administration expenses for consulting, professional fees
and bad debt estimates. Approximately $2.6 million of the quarterly loss was due
to the revaluation of the Series B and B-2 Restricted Warrants. See comment
above in General and Administrative Expenses.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
NET SALES for the nine months ended September 30, 2004 were $3.6 million
compared to $4.5 million in 2003. RAP's net sales for the period accounted were
$2.6 million versus $3 million in 2003. The net sales for ZAP were $959,655
versus $1.5 million in 2003. The sales were less than last year due to the slow
economy.
GROSS PROFIT was $823,000 for the nine months ended September 30, 2004 compared
to $977,000 for the nine months ended September 30, 2003. The RAP Group
accounted for $573,000 of the gross profit for the period ended September 30,
2004 versus $561,000 in 2003. ZAP's gross profit excluding the RAP Group,
decreased from $416,000 to $249,000 in 2004. The change in gross profit was due
to product mix and lower sales.
SALES AND MARKETING EXPENSES in the first nine months of 2004 were $627,000 as
compared to $574,000 in 2003. RAP's expenses were $101,000 versus $166,000 in
2003. For ZAP the expenses were $ 525,000 versus $408,000 in 2003. As a
percentage of sales, total selling expenses increased from 13% of sales to 18%
of sales. RAP's decrease of $65,000 was due to less salaries and advertising
expenses. While ZAP's increase in expenses was due to higher salaries and
marketing expenses.
GENERAL AND ADMINISTRATIVE expenses through the period of September 30, 2004
were $7.6 million as compared to $2.8 million in 2003. RAP's portion of the
expenses was $655,000 versus $1.1 million in 2003. For ZAP the expenses
increased from $1.7 million to $6.9 million. As a percentage of sales, general
and administration expenses increased from 62% of sales to 214% of sales. RAP's
decrease of $445,000 was primarily due to lower professional fees that needed to
be recorded for potential legal settlements. ZAP's increase of $5.3 million was
due to higher consulting, professional fees and bad debt estimates. The
modification of the life and price of the Series B and B-2 Restricted Warrants
in the third quarter of 2004 resulted in additional consulting expense of $2.6
million. The warrants were revalued under the black-scholes pricing model.
15
LOSS ON DISPOSAL OF FIXED ASSETS was due to the write-off of certain leasehold
improvements. Also adjustments were made to various cars in the Las Vegas Rental
Fleet that are not operational and are in disrepair.
INTEREST EXPENSE increased by $74,000 from $31,000 for the period ending
September 30, 2003 to $105,000 for the period ended September 30, 2004, and is
due to nine months of interest expense for the note payable for the building
purchase on March 31, 2003. Also, in the third quarter, the Company accrued
interest on a short-term note that was converted to equity in August 2004.
OTHER INCOME IMPROVED from an expense of $446,000 for the nine months ended
2003 to income of $409,000. This change was primarily due to the reduction in
the litigation reserve resulting from the favorable resolution of a lawsuit
against the Company and the reserves on shareholders notes receivable.
NET LOSS -The Net Loss was $7.5 million for the nine months ended September 30,
2004 as compared to a loss of $3 million for September 30, 2003. The increase
was primarily due to higher General and Administration expenses for consulting,
stock promotion and estimates for bad debts on problem customer accounts.
Approximately $2.6 million of the loss through September 30, 2004 was due the
revaluation of the Series B and B-2 Restricted Warrants. See comment above in
General and Administrative Expenses.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2004 net cash used by the Company for operating
activities was $ 2,855,000. In the first nine months of 2003, the Company used
cash for operations of $1.1 million. Cash used in the first nine months of 2004
was comprised of the net loss incurred for the period of $7,460,000 plus net
non-cash expenses of $5,253,000 less the net change in operating assets and
liabilities of $648,000. Cash used in operations in the first nine months of
2003 was comprised of the net loss before reorganization items incurred for the
quarter of $3 million plus net non-cash expenses of $497,000, and the net change
in operating assets and liabilities resulting in a further increase of cash of
$1.4 million.
Investing activities used cash of $1,039,000 in the first nine months of 2004
and used $8,000 during the first nine months ended September 30, 2003. In 2004
the majority of this cash was used to acquire a distribution license fot the
Smart Cars and 2003 the cash was used to purchase equipment.
Financing activities provided cash of $5,302,000 and $925,000 during the first
nine months ended September 30, 2004 and 2003, respectively.
At September 30, 2004 the Company had cash of $1.9 million ($226,000 which is
restricted) compared to $156,000 at September 30, 2003. At September 30, 2004,
the Company had working capital of $6.9 million as compared to working capital
of $1.2 million at September 30, 2003. The Company, at present, does not have a
credit facility in place with a bank or other financial institution.
Even though we have raised approximately $4 million thus far in 2004, we will
need additional short term outside investments on a continuing basis to finance
our current operations. Our revenues for the foreseeable future may not be
sufficient to attain profitability. We expect to continue to experience losses
for the near future.
We do not have a bank operating line of credit 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.
On July 29, 2004 ZAP entered into a $24.5 million common stock purchase
agreement with Fusion Capital Fund II, LLC, a Chicago based institutional
investor, whereby Fusion Capital has initially purchased 200,000 shares of ZAP's
common stock at a price of $2.50 per share. Fusion Capital has committed to
purchase an additional $24 million of common stock over a 40-month period at a
purchase price based upon the market price of ZAP's common stock on the date of
each sale without any fixed discount to the market price. In exchange for Fusion
signing the initial Term Sheet, the Company issued 45,000 shares of common stock
to Fusion. The Company also issued 255,000 shares of common stock as a
commitment fee for the foregoing arrangement. The proceeds will be utilized to
accelerate the
16
development and commercialization of the Company's full-line of advanced
technology vehicles and to purchase additional inventory of Smart Cars.
In June of 2004, the Company also secured a $45 million floor plan line of
credit with Clean Air Motor, LLC (CAMCO) to provide financing to qualified ZAP
dealers to purchase their auto inventory. As part of this agreement, CAMCO will
enlist ZAP Dealers and arrange for initial Retail Floor Plan Lines for all
qualified ZAP dealers totaling approximately $45 million for the initial one
hundred fifty Dealers. Each Dealer would initially purchase a minimum of ten to
fifteen Smart Cars Americanized by ZAP per Dealer.
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(R) Car and electrical vehicles, increasing its internet shopping mall
presence, increasing distribution channels, establish company owned and
franchised ZAP stores, introducing new products, improving existing product
lines and development of a strong corporate infrastructure.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal influences. Sales volumes in this
industry typically slow down during the winter months, November to March in the
U.S. The Company intends to develop a wide auto distribution network to counter
any seasonality effects.
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.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-QSB, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in this Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect the internal controls subsequent
to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business, including employment-related and trade related
claims.
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider (CEO
of ZAP) individually was reactivated by the plaintiff ( Jim Arnold Trucking ).
The Compliant 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. Management believes that the ultimate resolution
of this claim will not have a material adverse effect on our financial position
or on results of operations.
The RAP Group has been on probation with the California Department of Motor
Vehicles (DMV) for a period of two years that ended on June 12, 2004. The
probationary action was primarily due to the RAP Group's untimely transfers of
documents for sales of vehicles and lack of compliance with Motor Vehicle
Pollution Control guidelines on certain automobile sales. In June of 2004, the
California Department of Motor Vehicles filed an Accusation and Petition To
Revoke Probation and at present the RAP's Group probation has been extended
until the matters are resolved with the DMV. The Company has requested a hearing
date with the DMV and intends to refute the accusations. As part of ZAP's
original business plan, management is considering converting, depending upon the
sales volume, the dealership into a wholesale distributor for its electric cars.
17
Item 2. Changes in Securities
There were no changes in rights of securities holders.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
On September 30, 2004, pursuant to the Written Consent of the shareholders of
the Company holding in excess of 50% of the outstanding shares of the Common
Stock of the Company approved a form of Amended and Restated Articles of
Corporation of the Company on October 14, 2004. The number of shares outstanding
as of September 30, 2004 (record date) for the action was 25,251,430. Holders of
13,068,474 shares, or 51.75% of the outstanding Common Stock voted in favor of
approving the Amended and Restated Articles of Incorporation. The Amended and
Restated Articles of Incorporation were submitted for filing with the Secretary
of the State of California on October 14, 2004. An information statement will be
mailed to all shareholders of the record date who did not vote on the action
taken by the shareholders.
The Amended and Restated Articles of Incorporation provide, among other things,
for the authorization of the Company to issue 100,000,000 shares of Common Stock
and 50,000,000 shares of Preferred Stock, as well as for the elimination of all
prior classes and series of preferred stock. The Board of Directors was further
authorized , subject to limitations prescribed by law, to fix the designations,
determinations, powers, preference and rights, and the qualifications,
limitations or restrictions thereof, of any wholly unissued series of Preferred
Stock.
At the Annual Meeting of Shareholders held on July 25, 2004, the following
proposals were requested and approved as follows:
(a) To elect five Directors, Louis Auletta, Renay Cude, Guy Fieri, Steve
Schneider and Gary Starr to serve until the next annual meeting and
until their successors are elected and qualified.
For: 9,754,823 Withheld: 217,341 Abstain: None
(b) To ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP
as the Company's independent accountant
For: 9,966,455 Against: 1,298 Abstain: 4,411
Item 5. Other Information
(a) Related Party Transaction
On August 5, 2004, Voltage Vehicles Corporation, a subsidiary of ZAP
signed a $100 million exclusive agreement with Apollo Energy
Corporation to purchase 7,000 Fuel Cell Electric Propulsion Systems
through August 5, 2009. The Company filed a Form 8-K on October 6,
2004. Steve Schneider, ZAP's Chief Executive Officer, is a member of
the Advisory Board of Apollo Energy Corporation. As of November 12,
2004 none of the Propulsion Systems are available for shipment.
(b) New Transfer Agent
On September 19, 2004, the Company terminated the services of
Computershare as the Transfer Agent
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and appointed Continential Stock Transfer & Trust Co as the new
Transfer Agent. Their address and phone is as follows: Contential
Stock Transfer & Trust Co.,17 Battery Place,8th floor,New York, New
York 10004, phone number (212) 845-3215 and fax (212) 509-5150.
(c) ZAP Advisory Board
On October 25, 2004, the Company's Board of Directors appointed
Thomas Heidemann, President of Smart-Automobile,LLC to be a member of
the Advisory Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certificate of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of the Chief Financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 29, 2004 the Company filed an SEC Form 8-K to report a
$24.5 common stock purchase agreement with Fusion Capital Fund
11, LLC . The Company also reported the extension of the
Company's Series B restricted warrants by an additional six
months from July 1, 2004 and to increase the exercise price
from $1.07 to $1.26. See comment on page 10 for C Warrants.
The Company filed an SEC Form 8-K on October 6, 2004 to report
the signing of a $100 million million exclusive agreement with
Apollo Energy Corporation to purchase 7,000 Fuel Cell Electric
Propulsion Systems through August 5, 2009. The Company filed a
Form 8-K on October 6, 2004. See also related party disclosed
above in Item 5 (c).
On November 5, 2004 the Company filed an SEC Form 8-K to report
the signing of a Definitive Stock Stock Agreement for Smart
Car. The agreement outlines the formula for converting the $8
million of ZAP Preferred Stock into Common Stock by
Smart-Automobile based upon certain performance objectives.
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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.
ZAP (Registrant)
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SIGNATURE TITLE DATE
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/s/ Steve Schneider Director / CEO November 12, 2004
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/s/ William Hartman CFO November 12, 2004
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