WWW.EXFILE.COM, INC. -- 888-775-4789 -- ZAP -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
QUARTERLY
REPORT PURSUANT SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2008
Commission
File Number 001-32534
ZAP
(Name of
small business issuer in its charter)
CALIFORNIA
|
94-3210624
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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incorporation
or organization)
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501
Fourth Street
Santa
Rosa, CA 95401
(707)
525-8658
(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 check mark whether the registrant is a large accelerated filer, a
non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated
filer o |
Accelerated
filer o
|
|
|
Non-accelerated
filer o (Do
not check if a smaller reporting company) |
Smaller reporting
company x
|
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
o No x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
58,449,379 shares of common stock
as of May 12, 2008.
Transitional
Small Business Disclosure
Format Yes o No
x
ZAP
FORM
10-Q
INDEX
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Page
No.
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PART
I.
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Financial
Information
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Item
1.
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Condensed
Consolidated Financial Statements (unaudited) :
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1
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Condensed
Consolidated Balance Sheets as of March 31, 2008, unaudited and
December 31, 2007,audited.
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1
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Condensed
Consolidated Statements of Operations for the Three Months Ended March 31,
2008 and 2007, unaudited.
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2
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2008 and 2007, unaudited.
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3
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Notes
to Condensed Consolidated Financial Statements
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4
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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11
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Item
4T.
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Controls
and Procedures
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23
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PART
II.
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Other
Information
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Item
1.
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Legal
Proceedings
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24
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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26
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Item
3.
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Defaults
Upon Senior Securities
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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26
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Item
5.
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Other
Information
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26
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Item
6.
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Exhibits
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26
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SIGNATURES
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30
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Part
I. FINANCIAL INFORMATION
Item
1. Financial Statements
ZAP AND
SUBSIDARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
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|
March 31,
2008
Unaudited
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December
31, 2007
Audited
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ASSETS
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CURRENT
ASSETS
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Cash
and cash equivalents
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$ |
2,514 |
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$ |
4,339 |
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Accounts
receivable, net of allowance for doubtful accounts of $169 and
$172
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157 |
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373 |
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Inventories,
net
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1,959 |
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1,437 |
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Prepaid
non-cash professional fees
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170 |
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283 |
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Other
prepaid expenses and other current assets
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806 |
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747 |
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Total current
assets
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5,606 |
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7,179 |
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Property
and equipment, net of accumulated depreciation
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4,282 |
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4,471 |
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OTHER
ASSETS
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|
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Patents
and trademarks, net
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8 |
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10 |
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Prepaid
non-cash professional fees, less current portion
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82 |
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82 |
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Deferred
offering costs
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17 |
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20 |
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Deposits
and other assets
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318 |
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176 |
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Total
Other Assets
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425 |
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288 |
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TOTAL
ASSETS
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$ |
10,313 |
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$ |
11,938 |
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
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CURRENT
LIABILITIES
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Current
portion of secured convertible note
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$ |
104 |
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$ |
104 |
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8%
Senior convertible notes, net of discount of $74 and $136
|
|
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357 |
|
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546 |
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Accounts
payable
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76 |
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128 |
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Accrued
liabilities
|
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1,648 |
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2,259 |
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Deferred
revenue
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710 |
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752 |
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Total
Current Liabilities
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2,895 |
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3,789 |
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LONG-TERM
LIABILITIES
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Secured
convertible note, less current portion
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1,696 |
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1,724 |
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Total
liabilities
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4,591 |
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5,513 |
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SHAREHOLDERS’
EQUITY
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Common
stock, authorized 400 million shares; no par value; 58,089,853 shares issued and
outstanding
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122,777 |
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122,672 |
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Common
stock issued as loan collateral
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— |
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(1,549
|
) |
Accumulated
deficit
|
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(117,055 |
) |
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(114,698 |
)
) |
Total
shareholders’ equity
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5,722 |
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6,425 |
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Total
liabilities and shareholders’ equity
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$ |
10,313 |
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$ |
11,938 |
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See
accompanying notes to condensed consolidated financial statements
(unaudited).
ZAP
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Thousands,
except per share data)
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|
Three
Months
Ended
March
31,
2008
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Three
Months
ended
March
31,
2007
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NET
SALES
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|
$ |
1,056 |
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$ |
1,137 |
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COST
OF GOODS SOLD
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962 |
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1,083 |
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GROSS
PROFIT
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94 |
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54 |
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OPERATING
EXPENSES
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Sales
and marketing
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390 |
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371 |
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General
and administrative (non-cash of $1.5 million and $12.9 million for the
three
months
ended March 31, 2008 and 2007)
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1,999 |
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13,990 |
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Research
and development
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15 |
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335 |
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2,404 |
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14,696 |
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LOSS
FROM OPERATIONS
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(2,310 |
) |
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(14,642 |
) |
OTHER
INCOME (EXPENSE)
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Interest
expense, net
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(46 |
) |
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(216 |
) |
Other
income
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1 |
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23 |
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(45 |
) |
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(193 |
) |
LOSS
BEFORE INCOME TAXES
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(2,355 |
) |
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(14,835 |
) |
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PROVISION
FOR INCOME TAXES
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|
(4 |
) |
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(4 |
) |
NET LOSS
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$ |
(2,359 |
) |
|
$ |
(
14,839 |
) |
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NET
LOSS PER COMMON SHARE
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BASIC
and DILUTED
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$ |
(0.04 |
) |
|
$ |
(0.36 |
) |
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WEIGHTED
AVERAGE OF COMMON SHARES OUTSTANDING — BASIC
AND
DILUTED
|
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|
57,355 |
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|
41,526 |
|
The accompanying notes to condensed
consolidated financial statements (unaudited).
ZAP
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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|
Three
months ended March 31
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2008
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2007
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$ |
(2,359 |
) |
|
$ |
(14,839 |
) |
Items
not requiring the use of cash:
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Amortization
of note discount
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65 |
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85 |
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Stock-based
compensation for consulting and other services
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1,209 |
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|
887 |
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Stock-based
employee compensation
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|
318 |
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|
12,040 |
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Depreciation
and amortization
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|
60 |
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|
114 |
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Allowance
for doubtful accounts
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(3 |
) |
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20 |
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Changes
in other items affecting operations:
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Receivables
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219 |
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|
|
(38 |
) |
Inventories
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(522 |
) |
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330 |
|
Prepaid
expenses and other assets
|
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|
(211 |
) |
|
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79 |
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Accounts
payable
|
|
|
(53 |
) |
|
|
(66 |
) |
Accrued
liabilities
|
|
|
(610 |
) |
|
|
(217 |
) |
Deferred
revenue
|
|
|
(42 |
) |
|
|
(164 |
) |
Net
cash used for operating activities
|
|
|
(1,929 |
) |
|
|
(1,769 |
) |
CASH
FLOWS FROM INVESTING ACTIVITES
|
|
|
|
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|
Purchase
of equipment
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(18 |
) |
Proceeds
from sale of equipment
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|
130 |
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|
- |
|
Net
cash provided by ( used for) investing activities
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|
130 |
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(18 |
) |
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CASH
FLOWS FROM FINANCING ACTIVITIES
|
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|
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|
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Issuance
of common stock and warrants, net of offering costs
|
|
|
|
|
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1,045 |
|
Borrowings
of long-term debt, net of offering costs
|
|
|
|
|
|
|
1,185 |
|
Repayments
of long term debt
|
|
|
(26 |
) |
|
|
(42 |
) |
Net
cash provided by (used by) financing activities
|
|
|
(26 |
) |
|
|
2,188 |
|
NET
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(1,825 |
) |
|
|
401 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
beginning of period
|
|
|
4,339 |
|
|
|
2,160 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
end of period
|
|
|
2,514 |
|
|
|
2,561 |
|
See
accompanying notes to condensed consolidated financial statements
(Unaudited)
ZAP
AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1 BASIS OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements. All
adjustments (all of which are of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 2008 are not indicative of the results that may be
expected for the year ending December 31, 2008 or for any other future period.
These condensed consolidated financial statements and the notes thereto should
be read in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form 10-KSB for the year ended December 31,
2007 filed with the Securities and Exchange Commission (the “SEC”) on April 14,
2008 (our “2007 10-K”).
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 upon protecting
our intellectual property rights.
NOTE
2 SIGNIFICANT ACCOUNTING POLICIES
NET
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and
diluted net income (loss) per common share is based on net income (loss) for the
relevant period, divided by the weighted average number of common shares
outstanding in each period. Diluted net income per share gives effect to all
potentially dilutive common shares outstanding during the period such as
options, warrants, convertible preferred stock, and contingently issuable
shares. Potentially dilutive securities associated with stock options, warrants
and convertible preferred stock and debt have been excluded from the diluted net
loss per share amounts, since the effect of these securities would be
anti-dilutive. At March 31, 2008, these potentially dilutive securities include
options for 9 million shares of common stock, warrants for 48 million shares of
common stock and debt convertible into 4 million 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. As the Company
collects monies related to these agreements, it is classified as deferred
revenue until the Company begins delivering a substantial number of vehicles to
these dealerships on a regular basis over the terms of the agreement.
The Company has recognized approximately $13,200 of license revenue and other
adjustments for the three month period ended March 31, 2008, resulting in an
ending balance of $707,000.
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 consolidated financial
statements and accompanying notes. Estimates were made relating to
the useful lives of fixed assets, valuation allowances, impairment of assets and
valuation of stock-based compensation and contingencies. Actual results could
differ materially from those estimates.
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. Inventories consist primarily of
vehicles, both gas and electric, parts and supplies, and finished goods and are
carried at the lower of cost (first-in, first-out method) or
market.
RECOVERY OF GOODWILL AND LONG-LIVED
ASSETS - The Company evaluates the recovery of its goodwill and
long-lived assets at least annually 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.
The
Company has provided a 6 month warranty for the Xebra® vehicles. At March 31,
2008, the Company has recorded a warranty liability for $277,000 for estimated
repair costs.
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.
NOTE 3 STOCK ISSUED AS
COLLATERAL – The collateral stock was returned to the Company in January
of 2008, as the result of an agreement reached in December, 2007. In
connection with the settlement of this matter International Monetary Group,
Inc., a Delaware corporation; and Michael C. Sher dba the Law Offices of Michael
C. Sher v. ZAP Corporation, a California corporation; and Steven Schneider, an
individual, Sher returned stock certificates representing 1,291,176 shares of
ZAP’s common
stock to Company for cancellation and ZAP issued 387,500 shares of ZAP common
stock to IMG.
NOTE
4 STOCK-BASED COMPENSATION
We have
stock compensation plans for employees and directors. We recognize the
stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting period. All of our
stock-based compensation is accounted for as an equity instrument.
On
January 26, 2007, the Company extended the expiration date of 21.8 million
warrants previously issued to employees and officers by five years to July 1,
2012, with new exercise prices ranging from $1.00 to $1.20. As a result of the
modification of the warrants, the Company determined the fair value of the
warrants immediately prior to and after the modification. The incremental
difference in value resulted in the recognition of $11.7 million in non-cash
compensation expense during the first quarter of 2007. The Company valued the
modified warrants at $0.57 per share using a Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 4.98%; dividend rate
of 0.00%; volatility of 123%, and expected term of 2.7 years.
Under the
provisions of SFAS 123R, we recorded $ 249,000 of stock compensation, net of
estimated forfeitures, in general and administrative expenses, in our
unaudited condensed consolidated statement of operations for the three months
ended March 31, 2008 . 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 range of assumptions for the three months ended
March 31, 2008:
|
|
2008
|
|
Expected
Dividend yield
|
|
0%
|
|
Expected
volatility
|
|
|
114.34-126.16
|
|
Risk-free
interest rate
|
|
|
2.64-3.06
|
|
Expected
life (in years) from grant date
|
|
|
2.5
to 5.00
|
|
Exercise
price
|
|
|
$0.81
to $1.20
|
|
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 ended March 31, 2008
was $0.84. We 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 adjusted to actual forfeiture experience as needed.
A summary
of options under the Company’s stock option plans from December 31, 2007 through
March 31, 2008 is as follows:
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic
Value
|
Outstanding
December 31, 2007
|
11,276,000
|
|
$
|
1.03
|
|
8.32
|
|
Options
granted under the plan
|
104,000
|
|
$
|
0.84
|
|
9.75
|
|
Options
exercised
|
—
|
|
|
|
|
|
|
Options
forfeited and expired
|
|
|
|
—
|
|
|
|
Outstanding
March 31, 2008
|
11,380,000
|
|
|
|
|
|
|
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 March 31, 2008, for
those options for which the quoted market price was in excess of the exercise
price (“in-the-money-options”). There were no options in the money at March 31,
2008.
As of
March 31, 2008, total compensation cost of unvested employee stock options is
$1.2 million. This cost is expected to be recognized through March 2011. We
recorded no income tax benefits for stock-based compensation expense
arrangements for the three months ended March 31, 2008, as we have cumulative
operating losses, for which a valuation allowance has been
established.
NOTE 5 INVENTORIES, NET-
Inventories at March 31, 2008 are summarized as follows
(thousands):
Vehicles
- conventional
|
|
$
|
258
|
|
Advanced
transportation vehicles
|
|
|
1,052
|
|
Parts
and supplies
|
|
|
598
|
|
Finished
goods
|
|
|
353
|
|
|
|
|
2,261
|
|
Less-inventory
reserve
|
|
|
(302
|
)
|
|
|
$
|
1,959
|
|
NOTE
6 LONG-TERM DEBT
CONVERTIBLE
DEBT
8% Senior
Convertible Notes
On
December 5, 2006, when the market price of the Company’s common stock was $0.89
per share, the Company entered into a Securities Purchase Agreement with three
institutional and accredited investors or purchasers pursuant to which the
Company sold to the purchasers $1.5 million aggregate principal amount of 8%
senior convertible notes due December 5, 2008 (the “Notes due 2008”) and
warrants to purchase 450,000 shares of common stock of the Company (the “Initial
Warrants”) in a private placement. The Notes due 2008 were originally
convertible at $1.00 per share (the “Conversion Price”) into 1,500,000 shares of
the Company’s common stock, subject to anti-dilution and other adjustments. The
Initial Warrants, each immediately exercisable and expiring on December 5, 2011,
are exercisable at $1.10 per share, subject to anti-dilution and other
adjustments.
On
February 20, 2007, when the market price of the Company’s common stock was $1.08
per share, the Company entered into a Purchase and Amendment Agreement (the
“Amendment”), amending the Securities Purchase Agreement entered into by the
Company on December 5, 2006 (the “Original Agreement” and as amended by the
Amendment,
the “Agreement”), with several institutional and accredited investors or
purchasers pursuant to which the Company sold to the purchasers $1.2 million
aggregate principal amount of 8% senior convertible notes due February 2009 (the
“Notes due 2009” and with the Notes due 2008, the “Notes”) and warrants to
purchase 360,000 shares of the common stock of the Company (the “Additional
Warrants” and with the Initial Warrants, the “Warrants”), in a private
placement. The transaction closed on February 22, 2007 (the “February 2007
financing”).
The Notes due 2009 were originally convertible at $1.00 per share into 1,200,000
shares of the Company’s common stock, subject to anti-dilution and other
adjustments.
On June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion price of the
Notes was reduced to $0.72 per share.
The Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing shares of common stock. If the Company is eligible and
elects to pay quarterly interest in stock, the price per share used
to
calculate the number of shares due for interest will be calculated by reducing
the market price of the shares by 5% (as defined).
The
Company used the proceeds from the issuance of the Notes for general
working capital purposes and to increase the capacity of its product
distribution network.
The
Company paid fees of $40,000 related to the Notes. These cash fees have been
recorded as deferred offering costs and are being amortized over the life of the
Notes.
The note
holders have converted approximately $2.2 million of the debt into common shares
of ZAP, leaving an unpaid balance of approximately $430,000 at March 31,
2008.
On May 7,
2008, the Company entered into a settlement with Gemini Master Fund, LTD and
Gemini Strategies,LLC, the holders of the 8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash, provided by a related party, and 100,000
common shares of ZAP common stock. See Note:11, subsequent events for a further
description of the transaction.
SECURED
CONVERTIBLE DEBT
The
Company has a $2 million convertible note due in March 2025, with annual
interest at 7.5%, the note is payable with equal principal and interest payments
over 240 months. The note holder has the option to convert some or all of the
unpaid principal and accrued interest to shares of ZAP’s common stock at $2.15
per share or an agreed upon conversion price (as defined). The note was issued
in exchange for the purchase of the Company’s new corporate headquarters and is
secured by this property. The note has a balance of $1.7 million at March 31,
2008.
NOTE
7 INCOME TAXES
We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109, or FIN 48, on
January 1, 2007. Upon adoption of FIN 48, we commenced a review of our
tax position taken in our tax returns that remain subject to examination. Based
upon our review, we do not believe we have any unrecognized tax benefits or that
there is a material impact on our financial condition or results of operations
as a result of implementing FIN 48.
We file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. We are subject to U.S. federal or state income tax
examinations by tax authorities for all years in which we reported net operating
losses that are being carried forward. We do not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.
We
recognize interest and penalties accrued on any unrecognized tax benefits as a
component of income tax expense. As of the date of adoption of FIN 48, we did
not have any accrued interest or penalties associated with any unrecognized tax
benefits, nor was any interest expense recognized for the period ended March 31,
2008.
NOTE
8 SHAREHOLDERS’ 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
stock symbol of “ZAPZ.” In 2006, the Company briefly traded on the ACRAEX under
the symbol “ZP”. In November, 2006, since the Company could not meet the listing
requirements of the ARCEX, ZAP’s common stock was approved for quotation on the
OTC Bulletin Board under the symbol “ZAAP.”
NOTE
9 RELATED PARTY TRANSACTIONS
Consulting
Agreement
On
September 1, 2007, the Company and Mr. Albert Lam, who became a director of the
Company in October 2007, entered into an Independent Consulting Agreement
(“Consulting Agreement”). Pursuant to the Consulting Agreement, Mr.
Lam was to consult and advise the Company in the areas of Chinese manufacturing,
facilities, tooling, financing, and contract negotiations on an independent
consultant basis. Mr. Lam’s compensation under the Consulting
Agreement was: 200,000 shares of the Company’s common stock valued at $194,000,
issued under the Company’s 2007 Consultant Stock Plan (the “Plan”); a warrant to
purchase 200,000 shares of the Company’s common stock valued at $131,000,
expiring five years after grant, with an exercise price of $1.00 per share,
issued under the Plan; and a warrant to purchase 1,000,000 shares of the
Company’s common stock valued at $654,000, expiring five years after grant, with
an exercise price of $1.00 per share and a net exercise provision.
The
Consulting Agreement expired on September 30, 2007, and expense totaling
$979,000 related to the consulting agreement was recorded in the third quarter
of 2007.
The
Company also paid Mr.Lam $65,000 in the first quarter of 2008 for consulting
services. In addition his travel expenses were also reimbursed.
On
October 22, 2007, the Board of Directors (“Board”) of ZAP (“Company”) appointed
Albert Lam as a director of the Company.
Rental
agreements
The
Company rents office space, land and warehouse space from Mr. Steven Schneider,
its CEO and major shareholder. These properties are used to operate the car
outlet and to store inventory. Rental expense was approximately $21,000 for both
the three months ended March 31, 2008 and 2007.
Financing provided
to the Company
On May 7,
2008, the Company entered into a settlement with Gemini Master Fund, LTD and
Gemini Strategies,LLC, the holders of the 8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common
stock. In connection with the aforementioned, ZAP received the
necessary funds of $475,000 through a note payable to Al Yousuf LLC . The note
bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per
annum and may be converted into securities of the Company at the option of the
noteholder in accordance with the terms of the note. The
note is scheduled to mature on November 8, 2008. Eqbal Al Yousuf, who is a
director of ZAP, is also the President of Al-Yousuf, LLC.
Sale of Portable Energy
Product Line
In March
2008, ZAP signed a draft agreement with Al-Yousuf LLC for the sale of the
portable energy product line for $1,000,000 in exchange for a 50% ownership in a
new company. Both ZAP and Al-Yousuf will each own 50%. Eqbal Al Yousuf, who is a
director of ZAP, is also the President of Al-Yousuf LLC. The Company also had an
independent valuation of the portable energy line prepared where the value
determined approximated the selling price. The final arrangements for the sale
of the portable energy line are being completed as of May 14, 2008 and the
Company anticipates receiving the funds shortly.
Note
10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
Three
Months Ended
|
|
|
|
March 31,
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Cash
paid during the period for interest
|
|
$ |
15 |
|
|
$ |
16 |
|
Cash
paid during the period for income taxes
|
|
$ |
4 |
|
|
$ |
4 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Stock
and warrants issued for:
|
|
|
|
|
|
|
|
|
Re-payment
of 8% Senior debt
|
|
$ |
250 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
NOTE
11 - SUBSEQUENT EVENTS
On May 7,
2008, the Company entered into a settlement with Gemini Master Fund, LTD and
Gemini Strategies, LLC, the holders of the 8% Senior Convertible
Notes. The agreement reached requires the termination and cancellation of the
notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common
stock. In connection with the aforementioned agreement ZAP has obtained the
funds of $475,000 through a note payable to Al Yousuf, LLC. The note
bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per
annum and may be converted into securities of the Company at the option of the
Note Holder in accordance with the terms of the note. Eqbal Al Yousuf
who is a director of ZAP, is also the President of Al-Yousulf, LLC.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
THIS
QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT’S DISCUSSION
AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH
THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE “FILINGS”) CONTAIN
FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR
PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE
OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS.
THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS
AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND
INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND
PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE
DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE
CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH
WORDS AND PHRASES SUCH AS “SEEK”, “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “EXPECT”,
“INTEND”, “PLAN”, “BUDGET”, “PROJECT”, “MAY BE”, “MAY CONTINUE”, “MAY LIKELY
RESULT”, AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU
SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY
UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING
FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS,
UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND
RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING
FACTORS:
-
WHETHER
THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOR OUR
PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH
IT MAY
GROW;
-
OUR
ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO
IMPLEMENT OUR
GROWTH STRATEGIES,
-
OUR
ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR
OUR PRODUCTS;
-
OUR
ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;
-
OUR
ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;
-
OUR
ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY
CHANGING MARKET
FOR ELECTRIC AND GAS-EFFICIENT VEHICLES;
-
CHANGES
IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND
-
OTHER
RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN
VARIOUS SECTIONS
OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED “RISK
FACTORS.”
SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR
PLANNED.
EACH
FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN
UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR
BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT
REQUIRED BY APPLICABLE LAW.
In this
quarterly report on Form 10-Q the terms “ZAP,” “Company,” “we,” “us” and “our”
refer to ZAP and its subsidiaries.
Overview
GENERAL
ZAP
stands for Zero Air Pollution(R). With its new product offerings, the Company is
positioned to become a leading brand and distribution portal of electric and
other advanced technology vehicles. ZAP is committed to running its business
based on a strong philosophical foundation that supports the environment, social
responsibility and profitability.
ZAP’s
strategy is to serve the growing and underrepresented consumer and fleet buyer
that seeks electric and fuel efficient vehicles. With the recent increases in
the cost of oil and increasing concern about the environment and the effects of
global warming,
we believe there is a large and untapped demand in the areas of transportation
and consumer products. During the energy crisis of the 1970s, Japanese
automobile manufacturers penetrated the United States market when domestic
automobile manufacturers failed to anticipate changes. ZAP believes a similar
opportunity is present today, enhanced by heightened environmental awareness,
climate changes and economic pressures. ZAP has assembled a complete line of
products to meet the growing demands of the environmentally conscious
consumer
focused on two primary businesses: ZAP Automotive and ZAP Power
Systems.
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. Our website is www.zapworld.com. Please refer to it for further
information on ZAP.
SUBSIDIARIES
We have
the following wholly owned subsidiaries : Voltage Vehicles, a Nevada company
(“Voltage Vehicles”), 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; ZAP
Stores is engaged primarily in consumer sales of ZAP products and ZAP
Manufacturing is engaged primarily in the distribution of ZAP products. ZAP
World Outlet and ZAP Rental Outlet are not currently operating subsidiaries. RAP
Group and Voltage Vehicles were acquired by the Company in July 2002. On October
1, 2006, the RAP Group surrendered its Dealer Vehicle License and ceased
operations. A new Electric Vehicle Dealership opened on the old automobile lot
location. All subsidiaries are 100% owned by ZAP.
Recent
Developments
Some of
the noteworthy events for the Company that occurred during the first quarter of
2008 and through the date of this report are as follows:
1.
|
In
February, we added six new electric car dealers at our first dealer sales
and service training of 2008. In addition, we received signed purchase
orders totaling 614 Xebra sedans and trucks. The signed purchase
order agreements were for a mixture of ZAP Xebra electric sedans and
trucks. The orders also include the Zapino, ZAPPY3 PRO, ZAPPY3 EZ and the
ZAP Mid-Sized ATV. Overall, through April 15, the purchase orders
including all the different vehicles total $6.8 million. Dealers are
expected to take delivery of a minimum of ten cars a month over the next
twelve months.
|
2.
|
With
gasoline prices predicted to reach new records in 2008 and government and
corporate fleets seeking to reduce costs. We are introducing a
new electric truck for fleets with a greater payload rating. A
prototype of the ZAP XL Truck has been completed and production models are
expected for delivery to customers by the fall of this year. In the United
States, the XL Truck will meet full Department of Transportation
requirements for Low Speed Vehicles. As part of ZAP’s global distribution
strategy, the ZAP Truck XL will be designed to meet or exceed government
certifications that would allow for distribution throughout most of the
world.
|
3.
|
We
signed an agreement with The Coca-Cola Company to use 30 of its
compact trucks for a new beverage distribution system in Montevideo,
Uruguay. Officials say that the new distribution model using these trucks
averages about one-fifth the fuel consumption of the former model. Recently
Coca-Cola announced a pledge to the environment as part of its policy of
corporate social responsibility.
|
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
March
31,
|
|
|
2008
|
|
|
2007
|
|
Statements of
Operations Data:
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales
|
|
|
(91.1 |
)% |
|
|
(95.3 |
)% |
Operating
expenses
|
|
|
(227.6 |
)% |
|
|
(1,292.5 |
)% |
Loss
from operations
|
|
|
(218.7 |
)% |
|
|
(1,287.8 |
)% |
Net loss
|
|
|
(223.2 |
)% |
|
|
(1,305.1 |
)% |
Quarter
Ended March 31, 2008 Compared to Quarter Ended March 31, 2007
Net sales for the quarter
ended March 31, 2008 were $1 million compared to $1.1 million for the
period ended March 31, 2007. Sales of vehicles were $927,000 versus
$964,000 in 2007. The slight decrease was due to changes in factory locations.
The consumer products decreased from $173,000 in 2007 to $120,000 for
the three months ended March 31, 2008 due to changes in production
mix.
Gross profit the overall gross
profit increased from $54,000 for the first quarter ended March 31,
2007 to $94,000 for the quarter ended March 31, 2008. The primary
reason for the increase was due to less quality control issues with the Xebra
Electric vehicles and portable energy.
Sales and marketing expenses
increased by $19,000 from $371,000 for the quarter ended March 31, 2007 to
$390,000 in 2008. As a percentage of sales, total selling expenses
also increased from 33% of sales in 2007 to 37% in
2008. The increase was due to higher sales and marketing expenses for
outside consultants.
General and
administrative expenses decreased by $12
million from $14 million for the quarter ended March 31, 2007 to $2 million in
2008. The primary decrease was due to non-cash expenses of $12
million of expense to account for the modification and extension of certain
expiring warrants that were issued to shareholders per the plan of
reorganization in June of 2002 and also to current ZAP employees for
compensation purposes. The warrants were extended by five years until July, 2012
with the exercise prices also adjusted. This modification was a one-time expense
that occurred in 2007. Many of the other operating expenses for the quarter
ended March 31, 2008 remained comparable with the first quarter of
2007.
Research and development
expenses decreased
from $335,000 in 2007 to $15,000 in the first quarter of 2008. In 2007, the
Company’s spent $335,000 for a project with Lotus
Engineering to develop a new electric car based on the APX (Aluminum
Performance Crossover) concept, which showcases Lotus Engineering’s Versatile
Vehicle Architecture technology . The vehicle, the ZAPX, will be a
production-ready electric all-wheel drive crossover high performance vehicle for
ZAP in the USA market.
Interest expense, net
decreased from $216,000 in first quarter 2007 to $46,000 in
first quarter 2008. The decrease was due to lower interest expense for the
senior convertible notes since most of the debt had been converted in
2007.
Other income,
net decreased from $23,000 for the first quarter of
2007 to $1,000 in the first quarter of 2008. The decrease was due to less
miscellaneous fees earned by the company.
Net Loss the
Company reported a net loss of $2.4 million for the quarter ended March 31, 2008
as compared to a net loss of $14.9 million for period ended March 31, 2007.The
additional losses in 2007 were primarily due to the modification and extension
of certain expiring warrants that were issued by the Company to selected
shareholders and current ZAP employees.
Liquidity
and Capital Resources
In the
first three months of 2008 net cash used for operating activities was $1.9
million as compared to $1.8 million in 2007. Cash used in the first three months
of 2008 was comprised of the net loss incurred for the first three months of
$2.4 million plus net non-cash expenses of $1.7 million plus the net change in
operating assets and liabilities resulting in a use of cash of $1.2 million.
Cash used in operations in the first three months of 2007 was comprised of the
net loss of $14.8 million plus net non-cash expenses of $13.1 million, and the
net change in operating assets and liabilities resulting in a use of cash of
$76,000.
Investing
activities provided cash of $130,000 in the first three months ended
March 31, 2008 while cash of
$18,000 was used in the first three months ended March 31,
2007.
Financing
activities used cash of $26,000 during the first three months ended March 31,
2008 for the repayment of long-term debt. In 2007 cash of $2.2
million was provided during the first three months ended March 31,
2007 due to the issuance of common stock and borrowings of
funds.
The
Company had cash of $2.5 million at March 31, 2008 as compared to
$4.3 million at December 31, 2007 and $2.6 million at March 31, 2007. At March
31, 2008, the Company had a working capital of $2.7 million compared to $3.4
million at December 31, 2007 and working capital of $415,000 at March
31, 2007.
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.
CRITICAL
ACCOUNTING POLICIES
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.
Allowance for Doubtful
Accounts
The
Company performs ongoing credit evaluations of its customers’ financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at March 31, 2008 and 2007, respectively. 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
Valuation
We adjust
the value of our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions and
development of new products by our competitors. Inventories consist
primarily of vehicles, both gas and electric, parts and supplies, and finished
goods, and are carried at the lower of cost (first-in, first-out method) or
market.
Deferred Tax Asset
Realization
We record
a full valuation allowance to reduce our deferred tax assets to the amount that
is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
BUSINESS
DEVELOPMENT
Founded
in 1994, ZAP has invented, designed, manufactured, and marketed numerous
innovative products since the Company’s inception. In 1995, ZAP began marketing
electric transportation on the Internet through our website, www.zapworld.com. ZAP
has been a pioneer in developing and marketing electric vehicles such as a
zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most
bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998, we
continued to add to our product line; in 1999, ZAP added electric motorbikes; in
2001, it added electric dive scooters; in 2003, ZAP announced its first electric
automobiles, including the first-ever production electric automobile imported
from its manufacturing partner in China; in 2004 ZAP introduced electric
all-terrain vehicles and the fuel-efficient Smart Car; and in 2005 ZAP
introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline.
To date, we have delivered more than 100,000 electric vehicles and consumer
products to customers in more than 75 countries, which we believe establishes us
as one of the leaders in the alternative transportation
marketplace.
Today,
ZAP is continuing its focus as one of the pioneers of advanced transportation
technologies and leveraging its place in the market as a magnet for new
technologies. The Company believes there is a growing and underrepresented
market for fuel efficient transportation vehicles and we are capitalizing on the
opportunities, enhanced by heightened environmental awareness, climate changes
and economic pressures. The technology is available to deliver transportation
solutions that are practical and affordable. With our products such as the
XEBRA, ZAPPY 3, and Zapino Scooter, ZAP is already delivering such solutions to
the market. Our goal is to become one of the largest and most complete brand and
distribution portals in the United States for advanced technology
vehicles.
To
distribute our practical, affordable and advanced transportation technologies,
we have established and are growing both our portal of qualified automotive
dealers and our relationships with specialty dealers/distributors for
our power
system products. Through these distribution channels, coupled with the continued
establishment of partnerships with select manufacturers, we intend to expand our
market recognition by building awareness of the evolving technologies available
for automotive transportation and in reducing our nation’s
dependency
on
foreign oil.
PRODUCT
SUMMARY
Our
existing product line, which includes completed, market ready products and
planned introductions, is as follows:
ZAP
AUTOMOTIVE
ZAP
believes it is positioned to become one of the leading distributors of fuel
efficient alternative energy vehicles in the United States. We believe that we
are one of only a few companies distributing a 100% production electric vehicle
capable of speeds up to 40 mph in 2007. Within the next twelve to thirty-six
months, we hope to have distribution agreements in place with three to four
vehicle manufacturers whose products fit ZAP’s mission. To distribute our
product to end consumers and fleets, we have established more than 40 licensed
automotive dealers and intend to grow this base significantly over the next
several years.
XEBRA
We
believe that XEBRA is the only series production electric vehicle in the United
States that can legally travel faster than 25 mph. The car’s suggested retail
price of $11,000 is significantly less expensive than most of its competitors,
some of which cost more than $100,000 and are not yet widely available today.
XEBRA has three wheels and is being imported as a motor-driven cycle, yet,
unlike most other motor-driven cycles, the XEBRA is enclosed with windows and a
roof, affording it protection from inclement weather.
Working
with our Chinese manufacturing partner, we have designed two XEBRA models: a
sedan and a utility pick-up truck. The Chinese manufacturer’s current
manufacturing capacity is approximately 1,000 vehicles per month. Subject in
large part to the level of financing secured, our current target is to
distribute approximately 200 vehicles per month in the future.
Initial market demand has been strong, both from end consumers using
the vehicle as a “city-car” and from fleet managers of municipalities, states,
green friendly corporations,
and universities who have a preference or mandate to purchase zero emission
vehicles.
We are
working closely with our manufacturing partner to continually upgrade the XEBRA,
adding features while balancing the goal of maintaining an affordable price
level. We are in the process of looking into incorporating options to enhance
the consumer’s experience, including providing lithium battery packs for
additional (up to 100 mile) range and solar panels for low cost and true zero
air pollution charging. Solar options were introduced in the current
quarter.
XEBRA
Sedan (ZAPCAR (R))
ZAP
launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The sedan has a
seating capacity for four and is being targeted for city/commuter use. Based on
initial feedback, ZAP will be marketing the XEBRA sedan to government and
corporate fleets as well as to families with two or more cars, but with plenty
of occasion to use their vehicles for short, city drives.
XEBRA PK
( ZAPTRUCK(R))
ZAP
launched its utility pick-up truck version of the XEBRA, the XEBRA ZAPTRUCK,
on August
24, 2006. This electric vehicle seats two with a multi-purpose platform
behind the passenger compartment that serves as a hauler, dump truck or
flatbed.
The XEBRA ZAPTRUCK is targeted to municipalities, maintenance facilities,
universities, ranches and warehouses. Since its launch, we have received
overwhelming inquiries for test drives. To date, we have focused on our
west
coast market and sales have exceeded our initial distribution and sales
plans.
Smart
Car
The Smart
Car was our initial automotive product. The project provided us with an
excellent entry level opportunity in the micro-car market in the United States
and confirmed our belief that there is a sizable demand for smaller,
more fuel
efficient (or alternatively fueled) vehicles. The Smart Car was manufactured by
Daimler Chrysler, who we believe failed to identify the United States as a
potential market. In Daimler Chrysler’s absence, we contracted with a third
party unaffiliated with Daimler Chrysler to have the Smart Car imported and
“Americanized” to meet the growing demand for micro-cars. The process of
Americanizing the Smart Car involved having the car modified to meet all Federal
Motor Vehicle Safety Standards, United States Department of Transportation
requirements, and Environmental Protection Agency regulations and applicable
state requirements.
We proved
that we could introduce and sell the Smart Car Americanized by ZAP by
taking purchase orders for tens of thousands of vehicles and received
a credit line of $425 million to purchase them. We consequently sold
approximately 300 Smart Cars, but due to the legal conflict with
Daimler-Chrysler and others, and the uncertainty of auto supply, we discontinued
distribution of the Smart Car in September of 2006.
OBVIO!
In
September 2005, we entered into an exclusive (in North America) distribution
contract with the Brazilian automobile manufacturer OBVIO! for the future
importation of two models of micro-cars - an economy 828 model and a full
performance 012 model. The cars will have butterfly doors, seating capacity to
accommodate three persons, up to 250 horsepower output and accessories such as
iMobile and air conditioning. This car will function on multi-fuel technology,
meaning they will have the ability to be powered by ethanol, gasoline, or any
combination thereof. We are also working with OBVIO! to produce a 100% electric
version. Although the prototype was completed, we are awaiting a firm production
schedule from the manufacturer.
LOTUS
In 2007,
we announced and entered into a development contract with Lotus Engineering to
develop a electric all-wheel drive crossover high performance vehicle for the
U.S. market. A combination of the lightweight aluminum vehicle architecture, a
new efficient drive and advanced battery management systems is intended to
enable a range of up to 350 miles between charges, with a rapid 10-minute
recharging time. An auxiliary power unit is planned to support longer distance
journeys.
The ZAP-X
is proposed to be powered by revolutionary in-hub electric motors, delivering
644 horsepower in all wheel drive mode, theoretically capable of powering the
ZAP-X to a potential top speed of 155mph. A new, strong, lightweight
and highly efficient structure based on the Lotus technology is planned to give
the car a very attractive power-to-weight ratio. We are in the midst of the
development plan for the ZAP-X.
We are
also developing a $32,000 all electric vehicle with a targeted 100 mile range,
the ZAP Alias (TM), which has a goal launch date of 2009.
Future
Automotive Offerings
Over the
next 36 months, we hope to establish relationships with two to four additional
manufacturers who can supply automobiles and related vehicles that meet our
mission of affordable, advanced transportation technologies that are socially
responsible and environmentally sustainable. In 2007, we have identified the
following products as potential future offerings for the Company: (1) an
affordable 100% electric two-seater sports coupe; (2) a high performance highway
all electric vehicle, and (3) electric trucks.
ZAP
Power Systems
We
launched the Company in 1994 with the invention of the ZAPPY electric scooter
and quickly established a presence as one of the market leaders in the electric
“personal” transportation product segment. Since inception, the Company has been
able to maintain a steady business and committed buyers in this segment. In
keeping with our initial product offerings, at the beginning of 2006, we
revitalized our consumer products line (recently renamed “Power Systems”),
including an updated version of the electric scooter. As part of the segment’s
revitalization, we reduced the number of suppliers and placed more emphasis on
upgrading existing models with newer component technology and more robust
features in order to provide a higher quality consumer experience and
product.
Our
current product offerings include:
-
Three-wheeled
personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3 EZ);
-
Off-road
vehicles (electric quads and motorcycles); and
-
Portable
energy (universal recharge-it-all batteries and auxiliary batteries).
The
ZAPPY3 Personal Transporters
Segway’s
highly publicized “human transporter to change the world” unearthed a growing
need for a “scooter for adults,” better known as personal electric
transportation. The Company responded to this demand by designing the ZAPPY3.
Unlike the Segway, the ZAPPY3’s 3-wheeled vehicle design provides stability and
maneuverability allowing just about anyone to ride this vehicle without
training. It has a top speed of 15 mph, and the Pro has the farthest range of
any personal transporter available today at 25 miles range per
charge.
The
Company initially thought that the ZAPPY3 would be great for the consumer
market. Over the past year, the Company has revisited its sales strategy and
come to recognize that the largest market opportunities are in the industrial
and commercial applications. The Company’s primary sales channels are now more
clearly defined as security, sporting goods and material handling.
With the
increased emphasis on homeland security, there are several product competitors
in the security and police market segment. Segway, the most well known, can be
found in select police departments and airports and sells for about
$5,500. American Chariot, which is a chariot-like transporter, has entered the
market selling between $1,500 to $2,500. Newest to the security transporter
business is T3Motion, which is built like a small tank and priced at up to
$8,000. The ZAPPY3 meets the need of a majority of the security transportation
needs and with an selling price range of $530 to $900, depending on the model
purchased, which we believe is the most economical of all
offerings.
The
ZAPPY3 retail focus has continued strong in 2007. As the product line has gained
momentum and market acceptance,
we plan to grow distribution in the retail channel through larger regional and
specialized chain stores.
The
material handling, warehousing, fabrication, and construction industries are the
ideal markets for the ZAPPY3 Pro. We are not currently aware of any major
competitors in this market. The traditional solution for short distance
transportation
has been bicycles. The ZAPPY Pro offers the perfect utility vehicle for
shuttling, picking and packing and getting into small areas like elevators.
While the Company’s entrance into this market is still in the early stages, the
product response has been very favorable, demonstrated by our newly established
relationship with Indoff, the largest distributor of material handling equipment
in the United States.
The
Zapino is an electric scooter that is a great link between ZAP’s personal
transporters and electric cars. Not only economical and eco-friendly, the Zapino
is powerful with an advanced 3000-watt brushless DC hub motor, perfect for city
commuting. Able to reach speeds of 30 MPH, the Zapino is able to keep up with
city traffic without contributing to city pollution. The rear wheel hub motor on
the Zapino creates more room on board for additional batteries and performance.
This innovative drive system eliminates the need for belts or chains with lower
overall
maintenance. It also delivers a more enjoyable ride because it is nearly silent,
accelerates smoothly with no shifting, has no engine vibration, no tailpipe or
heat exhaust -- just good, clean fun.
Off-Road
Vehicles
All
terrain vehicle (“ATV”) manufacturers recognized in excess of $5.0 billion in
revenues in 2006 with the market for ATVs. In the United States alone,
approximately 800,000 units were sold in 2006. To date, all of the ATV’s on the
market are gas-powered. We believe electric ATV’s have practical environmental
benefits over their gas-powered counterparts: they are silent and generate no
emissions. Moreover, there are now over 8,000 organic farms in the United States
which are committed to reducing pollutants that may put organic certification at
risk. The electric ATVs can provide the ruggedness of the traditional ATV in
areas never before accessible, while being more versatile than golf
carts.
We
entered the electric ATV market in 2006 with our ZAP Buzzz mini ATV. The Buzzz
has a 450 watt geared-motor and a top speed of 15 mph with a range of
approximately 20 miles. In the 1st quarter of 2007, we introduced the 800 watt
“mid size” ATV for sale in the United States and some of our existing ZAP
dealers already have placed
preorders.
We hope to launch a heavy duty ATV in the 3rd quarter 2008 with product features
and styling comparable to existing gas-models. We believe our position as an
innovator in the electric vehicle market, coupled with first-mover advantage in
the electric ATV market, will allow us to capitalize on this market segment. If
we are able to capture 1% of the all terrain vehicle market share, it could
equate to over $40 million in revenues per year. However, there can be no
assurances that we will be able to achieve such market share.
Portable
Energy - Recharge-It -All Batteries
We
believe we were one of the first and now one of the leading producers of
rechargeable battery sources using lithium-ion and lithium polymer technology.
Through our Recharge-It-All line, we sell battery packs to power or charge a
wide range of mobile electronics such as cellular phones, digital cameras and
laptops, providing significantly more charge time than currently available
technologies. Our Portable Energy devices fall under two product lines:
universal chargers and made-for iPOD models. The universal chargers are
rechargeable battery packs that extend the use of most small and medium-sized
electronic devices up to 2 to 5 times their normal battery life. The made-for
iPOD models are a series of portable energy devices designed to work
specifically with all the major iPOD products, including the iPOD, iPOD nano,
iPOD shuffle and the iPOD with video.
We
launched our Portable Energy products at the end of 2006 with marketing targeted
to large electronic retailers. Market statistics indicate that there will be
over two billion users of mobile electronic devices by the end of 2007.
Our goal
with Portable Energy is to provide a solution that helps solve the energy
management challenge for electronic and mobile internet users. Today, there are
only a few companies that have begun to address the mobile device backup
power/charge market. The currently available products include Energizer’s
“Energi to Go”, Charge 2 Go, Cell Boost, and Medis Power Pack. We believe that
no manufacturer offers rechargeable devices that offer the ability to re-charge
a myriad of electronic devices from the same device as effectively as ZAP’s
Portable Energy.
Risk
factors
We have a
history of losses and our future profitability on a quarterly or annual basis is
uncertain, which could have a harmful effect on our business and the value of
ZAP’s common stock.
We
incurred net losses of $2.4 million, $28 million, $11.9 million for the three
months ended March 31, 2008 and the years ended December 31, 2007, 2006
respectively. We can give no assurance that we will be able to
operate profitably in the future.
We
may face liquidity challenges and need additional financing in the
future.
We
currently expect to be able to fund our working capital requirements from our
existing cash and cash flows from operations through at least December 31, 2008.
However, we could experience unforeseen circumstances, such as an economic
downturn, unforeseen difficulties in manufacturing/ distribution, or other
factors that could increase our use of available cash and require us to seek
additional financing. We may find it necessary to obtain equity or debt
financing due to the factors listed above or in order to support our expansion,
develop new or enhanced products, respond to competitive pressures, or respond
to unanticipated requirements.
We may
seek to raise additional funds through private or public sales of securities,
strategic relationships, bank debt, or otherwise. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience additional dilution or
any equity securities we sell may have rights, preferences or privileges senior
to those of the holders of our common stock. We expect that if we are unable to
obtain additional financing on acceptable terms, we may be unable to pay our
debts as they become due, develop our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
which could have a material effect on our business, financial condition and
future operating results.
We
face intense competition which could cause us to lose market
share.
In the
advanced technology vehicle market in the United States, we compete with large
manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have more
significant financial resources, established market positions, long-standing
relationships with customers and dealers, and who have more significant name
recognition, technical, marketing, sales, manufacturing, distribution, financial
and other resources than we do. Each of these companies is currently
working to develop, market, and sell advanced technology vehicles in the United
States market. The resources available to our competitors to develop
new products and introduce them into the marketplace exceed the
resources
currently available to us. We also face competition from smaller
companies with respect to our consumer products, such as our electric bicycle
and scooter. We expect to face competition from the makers of
consumer batteries and small electronics with respect to the ZAP Portable Energy
line. This intense competitive environment may require us to make
changes in our products, pricing, licensing, services, distribution, or
marketing to develop, maintain, and extend our current technology and market
position.
Changes in the market for electric
vehicles could cause our products to become obsolete or lose
popularity.
The
electric vehicle industry is in its infancy and has experienced substantial
change in the last few years. To-date, demand for and interest in
electric vehicles has been sporadic. As a result, growth in the
electric vehicle industry depends on many factors, including:
·
|
continued
development of product
technology;
|
·
|
the
environmental consciousness of
customers;
|
·
|
the
ability of electric vehicles to successfully compete with vehicles powered
by internal combustion engines;
|
·
|
widespread
electricity shortages and the resultant increase in electricity prices,
especially in our primary market, California, which could derail our past
and present efforts to promote electric vehicles as a practical solution
to vehicles which require gasoline;
and
|
·
|
whether
future regulation and legislation requiring increased use of nonpolluting
vehicles is enacted.
|
We cannot
assure you that growth in the electric vehicle industry will
continue. Our business may suffer if the electric vehicle industry
does not grow or grows more slowly than it has in recent years or if we are
unable to maintain the pace of industry demands.
We
may be unable to keep up with changes in electric vehicle technology and, as a
result, may suffer a decline in our competitive
position.
Our
current products are designed for use with, and are dependent upon, existing
electric vehicle technology. As technologies change, we plan to
upgrade or adapt our products in order to continue to provide products with the
latest technology. However, our products may become obsolete or our
research and development efforts may not be sufficient to adapt to changes in or
create necessary technology. As a result, our potential inability to
adapt and develop the necessary technology may harm our competitive
position.
The
failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business.
We rely
on a small group of suppliers to provide us with components for our products,
some of whom are located outside of the United States. If these
suppliers become unwilling or unable to provide components, there are a limited
number of alternative suppliers who could provide them. Changes in
business conditions, wars, governmental changes, and other factors beyond our
control or which we do not presently anticipate could affect our ability to
receive components from our suppliers. Further, it could be difficult
to find replacement components if our current suppliers fail to provide the
parts needed for these products. A failure by our major suppliers to
provide these components could severely restrict our ability to manufacture our
products and prevent us from fulfilling customer orders in a timely
fashion.
As
described elsewhere, we have entered into a contract with a Brazilian automobile
manufacturer, OBVIO, for the delivery of 50,000 flex-fuel vehicles in two
different models. We may not be able to obtain the vehicles that we
expect to obtain from OBVIO because OBVIO is a new developer and manufacturer of
automobiles in Brazil and there are many risks associated with its design and
manufacturing of cars for us, including, but not limited to, risks associated
with constructing its factory, hiring personnel, acquiring equipment, assembling
a network of suppliers and developing the vehicle assembly
process. If we cannot get the vehicles from OBVIO that we expect to,
some of our business will be affected.
Product
liability or other claims could have a material adverse effect on our
business.
The risk
of product liability claims, product recalls, and associated adverse publicity
is inherent in the manufacturing, marketing, and sale of electrical
vehicles. Although we have product liability insurance for our
consumer products for risks of up to an aggregate of $5,000,000, that insurance
may be inadequate to cover all potential product claims. We also
carry liability insurance on our automobile products. Any product
recall or lawsuit seeking significant monetary damages either in excess of our
coverage, or outside of our coverage, may have a material adverse effect on our
business and financial condition. We may not be able to secure
additional product liability insurance coverage on acceptable terms or at
reasonable costs when needed. A successful product liability claim
against us could require us to pay a substantial monetary
award. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates. We cannot
assure you that such claims and/or recalls will not be made in the
future.
We
must devote substantial resources to implementing a product distribution
network.
Our
dealers are often hesitant to provide their own financing to contribute to our
product distribution network. As a result, we anticipate that we may
have to provide financing or other consignment sale arrangements for dealers who
would like to participate as our regional distribution
centers.
The
further expansion of our product distribution network will require a significant
capital investment and will require extensive amounts of time from our
management. A capital investment such as this presents many risks,
foremost among them being that we may not realize a significant return on our
investment if the network is not profitable. Our inability to collect
receivables from our dealers could cause us to suffer losses. Lastly,
the amount of time that our management will need to devote to this project may
divert them from performing other functions necessary to assure the success of
our business.
Failure to manage our growth
effectively could adversely affect our business.
We plan
to increase sales and expand our operations substantially during the next
several years through internally-generated growth and the acquisition of
businesses and products.
To manage
our growth, we believe we must continue to implement and improve our
operational, manufacturing, and research and development
departments. We may not have adequately evaluated the costs and risks
associated with this expansion, and our systems, procedures, and controls may
not be adequate to support our operations. In addition, our
management may not be able to achieve the rapid execution necessary to
successfully offer our products and services and implement our business plan on
a profitable basis. The success of our future operating activities
will also depend upon our ability to expand our support system to meet the
demands of our growing business. Any failure by our management to
effectively anticipate, implement, and manage changes required to sustain our
growth would have a material adverse effect on our business, financial
condition, and results of operations. We cannot assure you that we
will be able to successfully operate acquired businesses, become profitable in
the future, or effectively manage any other change. An inability to
successfully operate recently acquired businesses and manage existing business
would harm our operations.
The loss of certain key personnel
could significantly harm our business.
The
Company’s performance is substantially dependent upon the services of its
executive officers and other key employees, as well as on its ability to
recruit, retain, and motivate other officers and key employees. Competition for
qualified personnel is intense and there are a limited number of people with
knowledge of and experience in the advanced technology vehicle industry. The
loss of services of any of our officers or key employees, or our inability to
hire and retain a sufficient number of qualified employees, will harm our
business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer
or Mr. Starr, our Chairman of the Board, whose specialized knowledge of the
electric vehicle industry is essential to our business, would be detrimental. We
have employment agreements with Mr. Schneider and Mr. Starr that provide for
their continued service to the Company until October 1, 2013.
Regulatory
requirements may have a negative impact upon our business.
While our
products are subject to substantial regulation under federal, state, and local
laws, we believe that the products we have sold are materially in compliance
with all applicable laws. However, to the extent the laws change, or
if we introduce new products in the future, some or all of our products may not
comply with applicable federal, state, or local laws. Further,
certain federal, state, and local laws and industrial standards currently
regulate electrical and electronics equipment. Although standards for
electric vehicles are not yet generally available or accepted as industry
standards, our products may become subject to federal, state, and local
regulation in the future. Compliance with this regulation could be
burdensome, time consuming, and expensive.
Our
automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and Air Resource Board of the State of California, and compliance
certification is required for each new model year. The cost of these
compliance activities and the delays and risks associated with obtaining
approval can be substantial. Although the Company had marketed its
Smart Car product in the United States, the car must be certified by the
California Air Resources Board before it can be sold in California, New York,
and three other states. In addition, the two models of our OBVIO
products will need to satisfy all regulatory requirements before they can be
sold in the United States. The risks, delays, and expenses incurred
in connection with such compliance could be
substantial.
Manufacturing
overseas may cause problems for us.
We have
been shifting our manufacturing overseas, including contracting with OBVIO, a
Brazilian company, for the manufacture of 50,000 vehicles over three
years. There are many risks associated with international
business. These risks include, but are not limited to, language
barriers, fluctuations in currency exchange rates, political and economic
instability, regulatory compliance difficulties, problems enforcing agreements,
and greater exposure of our intellectual property to markets where a high
probability of unlawful appropriation may occur. A failure to
successfully mitigate any of these potential risks could damage our
business.
We
may not be able to protect our internet address.
We
currently hold the internet address, http://www.zapworld.com, a portal through
which we sell our products. We may not be able to prevent third
parties from acquiring internet addresses that are confusingly similar to our
address, which could adversely affect our business. Governmental
agencies and their designees generally regulate the acquisition and maintenance
of internet addresses. However, the regulation of internet addresses
in the United States and in foreign countries is subject to
change. As a result, we may not be able to acquire or maintain
relevant internet addresses in all countries where we conduct
business.
Our
success is heavily dependent on protecting our intellectual property
rights.
We rely
on a combination of patent, copyright, trademark, and trade secret protections
to protect our proprietary technology. Our success will, in part,
depend on our ability to obtain trademarks and patents. We hold
several patents registered with the United States Patent and Trademark
Office. These registrations include both design patents and utility
patents. In addition, we have recently submitted provisional patents
which may or may not be afforded the limited protection associated with
provisional patents. We have also registered numerous trademarks with
the United States Patent and Trademark Office, and have several pending at this
time. We cannot assure you that the trademarks and patents issued to
us will not be challenged, invalidated, or circumvented, or that the rights
granted under those registrations will provide competitive advantages to
us.
We also
rely on trade secrets and new technologies to maintain our competitive
position. Although we have entered into confidentiality agreements
with our employees and consultants, we cannot be certain that others will not
gain access to these trade secrets. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets.
We
may be exposed to liability for infringing intellectual property rights of other
companies.
Our
success will, in part, depend on our ability to operate without infringing on
the proprietary rights of others. Although we have conducted searches
and are not aware of any patents and trademarks which our products or their use
might infringe, we cannot be certain that infringement has not or will not
occur. We could incur substantial costs, in addition to the great
amount of time lost, in defending any patent or trademark infringement suits or
in asserting any patent or trademark rights, in a suit with another
party.
Risk
of Unregistered Securities Offering.
In the
past, we have had numerous sales of our securities which were not registered
under federal or state securities laws. We have strived to comply
with all applicable Federal and state securities laws in connection with our
issuances of unregistered securities. However, to the extent we have
not complied, there may be liability for the purchase price of the securities
sold together with interest and the potential of regulatory
sanctions.
Our
stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.
The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity
securities. The market price of our common stock could change in ways
that may or may not be related to our business, our industry or our operating
performance and financial condition. In addition, the trading volume
in our common stock may fluctuate and cause significant price variations to
occur. We have experienced significant volatility in the price of our
stock over the past few years. We cannot assure you that the market
price of our common stock will not fluctuate or decline significantly in the
future. In addition, the stock markets in general can experience considerable
price and volume fluctuations.
We have
not paid cash dividends on our common stock and do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
We have
not achieved profitable operations and if we do realize a profit in the future,
we anticipate that we will retain all future earnings and other cash resources
for the future operation and development of our
business. Accordingly, we do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future. Payment of
any future dividends will be at the direction of our board of directors after
taking into account many factors, including our operating results, financial
conditions, current and anticipated cash needs and plans for
expansion.
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.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Our
management, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) as of the end of the period covered by this
report. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports filed, furnished or submitted under the Exchange
Act. Our Chief Executive Officer and Chief Financial Officer also concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
Changes
in Internal Control over Financial Reporting
There
were no significant changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
identified in management's evaluation during the first quarter of fiscal year
2008 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. The Company
estimates the amount of potential exposure it may have with respect to
litigation claims and assessments.
ZAP v.
Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, ZAP filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court in
excess of $500 million.. 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 Daimler Chrysler 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. Daimler Chrysler has successfully filed a motion to quash that
complaint for lack of personal jurisdiction, and the court’s ruling on that
matter is in the process of being appealed to the State of California Supreme
Court.
ZAP v.
Norm Alvis, et al., Superior Court of California, County of Sonoma, Case No.
SCV-238419, complaint filed March 27, 2006. Mr. Alvis was engaged by the Company
and Rotoblock Corporation (“Rotoblock”) as a consultant to perform public
relations work on behalf of the Company and Rotoblock. As consideration for Mr.
Alvis’ consent to the contract with the Company, the Company provided Mr. Alvis
with use of a motor home worth approximately $306,000. The Company then sued Mr.
Alvis, claiming he failed to perform his obligations under the contract
and refused to return the consideration he received therefore (i.e. the motor
home). The Company is seeking either the return of the motor home or $500,000 in
damages. Mr. Alvis initially did not respond to the complaint, which prompted
the Company to take his default on May 9, 2006. The court then entered a default
judgment on May 16, 2006, on which date the Company obtained a writ of
possession allowing it to reclaim possession of the disputed motor home. On June
18, 2006, Mr. Alvis moved the court to set aside the default and default
judgment and to vacate its order authorizing issuance of the writ of possession.
The court agreed to set aside the default judgments, but it left intact the writ
of possession. The court also required Mr. Alvis to pay the Company $1,000 as
compensation for forcing the Company to initially take his default. Mr. Alvis
has paid the Company the required $1,000. Mr. Alvis then filed (1) an answer
denying the Company’s allegations, and (2) a cross-claim against the Company,
Steve Schneider in his individual capacity, and Rotoblock, alleging two counts
of breach of contract, one common count of work, labor, and services
received,and one count of fraud. All of Mr. Alvis’ claims relate to the two
contracts he executed with the Company and Rotoblock. Mr. Alvis claims he
provided services to the Company and Rotoblock pursuant to these contracts but
received no consideration in exchange therefore. For the fraud claim, the
defendant claims the Company and Schneider executed the contracts with no intent
to perform. Mr.Alvis has prayed for damages of $2,000,000, interest according to
proof, punitive damages, and an order directing the Company to perfect title to
the motor home. Mr. Alvis then moved the court to quash the writ of possession.
The parties
attended mediation on March 4, 2008 and reached a tentative settlement by which
the matter would be resolved according to the following terms: (1) a mutual
release of all claims; (2) ZAP would pay $25,000 to Mr. Alvis;. (3) ZAP would
issue to Alvis $25,000 worth of shares of restricted ZAP common stock; (4) ZAP
would issue Alvis warrants for 100,000 shares of restricted ZAP common stock, at
a strike price of $.70 per share; and (5) ZAP would transfer title of disputed
motor home to Alvis. A written agreement has now been executed
by Alvis and will be presented to ZAP’s Board of Directors for
approval. The next case management conference is scheduled for July
3, 2008 to allow the parties time to negotiate a settlement. In the
meantime, discovery is on-going.
Robert
Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of
Reno, dba ZAP of Sparks (“Robert Chauvin, et al.”) v. Voltage Vehicles; ZAP; ZAP
Power Systems Inc.; ZAPWORLDCOM; Elliot Winfield; Steven Schneider; Phillip
Terrazzi; Max Scheder-Breschin; Renay Cude; [sic] and Does I-XX, Second Judicial
District
Court State of Nevada, County of Washoe, Case No. CV06 02767. On November 17,
2006, Robert Chauvin, et al. filed a complaint alleging breach of contract,
breach of the covenant of good faith and fair dealing, breach of warranties,
fraud/misrepresentation, negligent misrepresentation, quantum merit or unjust
enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and
Voltage Vehicles. The complaint seeks general damages in an amount in excess of
$10,000, special damages in an amount in excess of $10,000, punitive damages in
an amount in excess of $10,000, attorneys’ fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. On January 19, 2007, defendants Voltage Vehicles and ZAP
filed a Motion to Dismiss on the grounds that the License Agreement entered into
between Rajun Cajun and Voltage contains a forum selection clause designating
Sonoma County, State of California as the only appropriate forum. The court
granted that Motion on April 13, 2007. In its order on that motion, the court
also
found that all other motions pending in the Nevada court in this matter are now
moot. (As of that time, the following motions were still pending: (1) Chauvin,
et al.’s Notices of Intent to Take Default against two of the named corporate
defendants and against the individual defendants, except Renay Cude; (2) a
Motion to Quash Service of Process or Alternatively for Dismissal by each of the
individual defendants and both of the defunct corporate defendants; and (3)
Chauvin, et al.’s Motion for Publication of Summons against the named individual
defendants.)
Voltage
Vehicles v. Rajun Cajun, et al., Superior Court of California, County of Sonoma,
Case No. SCV 240179, filed February 9, 2007. (This suit is related to the Nevada
case of Robert Chauvin, et al. v. Voltage Vehicles, et al. discussed immediately
above.) In its complaint, Voltage Vehicles requests Declaratory Relief against
Rajun Cajun, asking the Court to declare that the License Agreement between
those two parties does not grant Rajun Cajun an exclusive dealership in northern
Nevada to distribute Voltage Vehicle products and that Voltage Vehicles has
performed its obligations under the License Agreement. On May 24, 2007, Rajun
Cajun filed a Cross-Complaint in substantially the same form as the Complaint
filed in Nevada, alleging breach of contract, breach of the covenant of the good
faith, etc. The Cross-Complaint seeks general damages in an amount in excess of
$25,000, special damages in an amount in excess of $25,000, punitive damages in
an amount in excess of $25,000, attorneys’ fees and cost of suit, for
judgment in the amount equal to treble actual damages, and rescission in the
amounts of $397,900 and $120,000, plus interest. Cross-Defendants intend to
vigorously defend against the claims set forth in the Cross-Complaint and so,on
August 22, 2007, Cross-Defendants filed both a special demurrer for abatement to
prohibit Cross-Complainants from maintaining a cross-complaint and a demurrer to
the Cross-Complaint itself. On February 11, 2008 ZAP and Voltage Vehicles filed
a demurrer to Cross-complainants’ third through fifteenth causes of action. A
hearing on that demurer is currently set for June 11, 2008. The next case
management conference is scheduled for July 23, 2008.
CIT
Communications Finance Corporation v. ZAP, formerly known as ZapWorld.com and as
Zap Power Systems, and DOES 1-20, complaint filed on February 26, 2008, Case No.
242445, in the Superior Court of California, County of Sonoma. CIT
Communications Finance Corporation (“CIT”) has served ZAP with a complaint, an
application for writ of possession, and an application for writ of
attachment. CIT’s complaint and its applications for the two writs are
based on three telephone equipment leases CIT alleges it has with ZAP, through
predecessors in interest. The Complaint includes five causes of
action: (1) breach of written lease agreements; (2) recovery of personal
property; (3) conversion; (4) quantum valebant; and (5) quantum meruit or unjust
enrichment. For each of those claims, CIT alleges that ZAP entered into
the leases, never returned the equipment, and, in or about June 2002, ceased
payment of amounts owed under the leases. CIT is now seeking both return
of the equipment and a monetary award covering amounts owed under the
leases. More particularly, for its breach of contract claim, CIT is
seeking recovery of $108,967.26 allegedly owed on the leases. On its
recovery of personal property claim, CIT is seeking either return of
all the leased equipment or a monetary damages to cover the value of
the leased equipment. On the conversion claim, CIT is seeking general
damages for ZAP’s continued possession and use of the equipment, as well as
punitive damages based on a claim that ZAP’s actions were malicious,
willful, and oppressive. On its quantum valebant and quantum meruit
claims, CIT is seeking general damages for the value of ZAP’s continued use and
possession of the equipment since June 24, 2002. CIT is also seeking
reimbursement of all of its attorneys’ fees and costs of suit, as well as any
additional legal and equitable relief that the court may deem proper.
ZAP’s Answer to the Complaint was filed on April 24, 2008. CIT has
also applied for both a writ of possession, seeking return of all of the leased
equipment, and a writ of attachment, seeking attachment of
$122,588.26 against ZAP. The hearing on CIT’s writ applications
is scheduled for June 3, 2008, and a Case Management Conference is set for June
30, 2008. ZAP intends to vigorously defend against these
claims.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The
following lists sales of unregistered securities during the quarter ended March
31, 2008 that were not previously included in a Quarterly Report on Form 10-QSB
or a Current Report on Form 8-K. We relied on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”) for the issuance of these
securities. Except as stated below, no underwriting discounts or
commissions were payable with respect to any of the following transactions. The
offer and sale of the following securities was exempt from the registration
requirements of the Securities Act under Rule 506 insofar as (1) except as
stated below, each of the investors was accredited within the meaning of Rule
501(a); (2) the transfer of the securities were restricted by the company in
accordance with Rule 502(d); (3) there were no more than 35 non-accredited
investors in any transaction within the meaning of Rule 506(b), after taking
into consideration all prior investors under Section 4(2) of the Securities Act
within the twelve months preceding the transaction; and (4) none of the offers
and sales were effected through any general solicitation or general advertising
within the meaning of Rule 502(c).
On January
10, 2008, the Company issued 146,883 shares of common stock for professional
services valued at $107,756.
On
February 15,2008 the Company issued the following : 80,282 shares of
common stock for professional services valued at $57,000, common stock of 25,000
shares valued at $17,500 in settlement of a dispute with an outside
party, 100,000 shares for an asset purchase valued at $71,000 and shares of
21,127 valued at $15,000 for a marketing and promotion event.
Item
3. Defaults Upon Senior
Securities
Not
Applicable
Item
4. Submission of Matters to a Vote of Security
Holders
Not
Applicable
Item
5. Other Information
Not
Applicable
Item
6. Exhibits
2.1
|
Approved
Second Amended Plan of Reorganization, dated as June 20, 2002.
(5)
|
3.1
|
Amended
and Restated Articles of Incorporation.
(4)
|
3.2
|
Certificate
of Determination of Series SA Convertible Preferred Stock.
(14)
|
4.1
|
Form
of common share purchase warrant of the Company held by
Fusion Capital
Fund II, L.P. (6)
|
4.2
|
Form
of Series B common stock purchase warrant of the Company.
(14)
|
4.3
|
Form
of Series K common stock purchase warrant of the Company.
(14)
|
10.1
|
Settlement
Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and
the Shareholders
dated June 27, 2001. (3)
|
10.3
|
2004
Consultant Stock Plan. (7)
|
10.4
|
Convertible
Promissory Note, dated April 26, 2004, issued to Banks Living
Trust. (1)
|
10.5
|
Purchase
and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP.
(3)
|
10.6
|
Promissory
Note $2,000,000 - Atocha Land LLC and ZAP.
(3)
|
10.7
|
Warrant
Agreement dated April 26, 2004, issued to Banks Living
Trust. (1)
|
10.8
|
Common
Stock Purchase Agreement between ZAP and Fusion Capital
Fund II, LLC. (6)
|
10.9
|
Registration
Rights Agreement between ZAP and Fusion Capital Fund II,LLC.
(6)
|
10.10
|
Form
of Common Stock Purchase Warrant between ZAP and Fusion Capital Fund II,
LLC (6)
|
10.11
|
Agreement
for Consulting Services with Evan Rapoport dated January 8, 2004.
(1)
|
10.12
|
Asset
Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of
various autos (1)
|
10.13
|
Agreement
for Private Placement Investment received dated April 14,2004 with
Phi-Nest Fund LLP (1)
|
10.14
|
Consulting
Agreement dated April 21, 2004 with Elexis
International(1)
|
10.15
|
Consulting
Agreement dated April 21, 2004 with Sunshine 511 Holdings
(1)
|
10.16
|
Definitive
Stock Agreement dated October 25, 2004 with Smart-Automobile, LLC
(2)
|
10.17
|
Master
Distribution Agreement between Apollo Energy Systems, Inc. and Voltage
Vehicles Corporation, a subsidiary of ZAP.
(8)
|
10.18
|
ZAP
Floor Line and Dealer Development Agreement with Clean Air
Motors, LLC for a $45 Million Floor Plan Line of Credit
for Qualified ZAP Dealers (9)
|
10.19
|
Exclusive
Purchase, License and Supply Agreement between
Smart Automobile, LLC and ZAP.
(10)
|
10.20
|
Amendment
dated November 15, 2004 to previous consulting agreement with
Sunshine Holdings 511 (14)
|
10.21
|
Secured
Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP.
(14)
|
10.22
|
ZAP
assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest
Fund, LLP as collateral on note payable
(14)
|
10.23
|
Promissory
note receivable dated January 6, 2005 for $1 million loan due
from Smart Automobile, LLC and Thomas Heidemann (President Smart
Automobile, LLC) (14)
|
10.24
|
Security
Agreement dated January 6, 2005 from Smart Automobile, LLC and
Thomas Heidemann (President Smart Automobile, LLC) to secure loan above.
(14)
|
10.25
|
Common
Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage
Fund LP (14)
|
10.26
|
Form
of Common Stock Purchase Warrant between ZAP and Platinum Partners Value
Arbitrage Fund LP (14)
|
10.27
|
Common
Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP
(14)
|
10.28
|
Form
of Common Stock Purchase Warrant between ZAP and
Lazarus Investment Partners LLP
(14)
|
10.29
|
Termination
of Common Stock Purchase Agreement between ZAP and
Fusion Capital Fund II, LLC
(11)
|
10.30
|
Financing
Agreement between ZAP and Surge Capital II, LLC
(12)
|
10.31
|
Exclusive
Purchase, License, and Supply Agreement between ZAP and Obvio!
Automotoveiculos S.P.E. Ltda (13)
|
10.36
|
Agreement
dated July 14, 2006 between ZAP, Thomas Heidemann and
Smart Automobile (15)
|
10.37
|
Amendment
Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC
(16)
|
10.38
|
Exclusive
Distribution Agreement dated May 1, 2005, as supplemented by a letter
dated June 9, 2006 (17)
|
10.40
|
Shandong
Jindalu Vehicle Co., Ltd. Guarantee
(19)
|
10.41
|
Joint
Venture Negotiations dated September 21, 2006
(20)
|
10.42
|
Security
Purchase Agreement between ZAP and Certain
Institutional Investors
(21)
|
10.43
|
Purchase
and Amendment Agreement between ZAP and Certain
Institutional Investors
(22)
|
10.44
|
Form
of Convertible
|
10.46
|
Purchase
order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its
Xebra 2007 model year electric
vehicles
|
10.47
|
Distribution
agreement this week with PML FlightLink Limited (PML) for the purchase of
an advanced wheel motor and control
system
|
10.48
|
Joint
Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market
and distribute electric a and hybrid vehicles for the worldwide passenger
car, truck and bus
|
10.49
|
Form
SB-2 Registration of Common Stock incorporated by reference
to SEC filing on September 24, 2007 effective on October 2,
2007.
|
10.50
|
Settlement
and Mutual Release Agreement with Gemini Master Fund,LTD and Gemini
Strategies,LLC dated May 7,
2008.(22)
|
10.51
|
Note
Purchase Agreement with Al Yousuf dated May
8,2008.(22)
|
10.52
|
Senior
Note Payable Al Yousuf LLC dated May
8,2008.(22)
|
21.1
|
List
of subsidiaries. (3)
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.(22)
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the
Exchange Act, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (22)
|
32.1
|
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (22)
|
32.2
|
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (22)
|
(1)
|
Previously
Filed as an exhibit to the Registrants’s Form 8-K for the quarter ended
March 31, 2004 and incorporated by
reference.
|
(2)
|
Previously
filed as an exhibit to the Registrant’s Form 8-K of November 6, 2004 and
incorporated by reference.
|
(3)
|
Previously
filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for
the year ended December 31, 2003 and incorporated by
reference.
|
(4)
|
Previously
filed with Pre-effective Amendment Number 3 to Form SB-2 registration
statement filed with the Securities and Exchange Commission on October 3,
2001.
|
(5)
|
Previously
filed as an exhibit to the Registrant’s Form 8-K of October 20, 2002 and
incorporated by reference.
|
(6)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K dated
July 22, 2004 and incorporated by
reference.
|
(7)
|
Previously
filed as an exhibit to the Registrant’s Registration Statement on Form S-8
(File No. 333-117560) on July 22,
2004.
|
(8)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on October 6, 2004 and
incorporated herein by reference.
|
(9)
|
Previously
filed as an exhibit to the Registrant’s Quarterly Report
on Form 10QSB for the period ended June 30, 2004 and
incorporated herein by reference.
|
(10)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on April 21, 2004 and
incorporated herein by reference.
|
(11)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on February 25, 2005 and
incorporated herein by reference.
|
(12)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on September 16, 2005 and
incorporated herein by reference.
|
(13)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on September 21, 2005 and
incorporated herein by reference.
|
(14)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on July 20, 2006 and
incorporated herein by reference.
|
(15)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on September 6, 2006 and
incorporated herein by reference.
|
(16)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(17)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(18)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(19)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on November 6,
2006 and incorporated herein by
reference.
|
(20)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on December 11, 2006 and
incorporated herein by reference.
|
(21)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on February 26, 2007and
incorporated herein by reference.
|
(22)
|
These
exhibits are attached to this Form
10Q.
|
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
|
|
|
|
Dated May 14,
2008
|
By:
|
/s/ Steven
Schneider
|
|
Name:
Steven Schneider
|
|
Title:
Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
ZAP
|
|
|
|
Dated May 14,
2008
|
By:
|
/s/ William
Hartman
|
|
Name:
William Hartman
|
|
Title:
Chief Financial Officer (Principal Financial and Accounting
Officer)
|