Don't let this one Zap your portfolio
I ran into a snag with this week's edition of "Who's Filing Now?" Sorry about that. Rest assured, the feature will return next week. In the meantime, here's some juicy stuff I dug up. I've also included all the needed links so you can see how I found what I found.
My favorite 8-K this week comes from electric car specialist Zap (OTC BB: ZAAP.OB), which announced that company president Max Scheder-Bieschin had resigned but that "he did not have any disputes with the Company."
Then, in the same filing, Zap said that financial consultant Michael Ringstad would become operations controller and that Sherri Haskell would be director of investor relations. Call it the "hey, our president resigned, but we're still doing fine, thanks" 8-K.
But I don't believe that for a second. Neither should you. Let's rewind to Zap's announcement of Scheder-Bieschin's hiring in October of 2005. Quoting CEO Steve Schneider from back then:
"The Board and I look forward to having Max help us manage the roll-out of our high-efficiency automotive portal as well as solidify our recognized position in the personal transportation market...With Max on board, we broaden our management team and enhance our ability to execute on our business model."
Business model? For as much cash as Zap has burned through -- $5.1 million through the last 12 months alone -- I wondered if there was one. But then I looked at Scheder-Bieschin's bio. From a recent 10-K filing:
"Prior to joining ZAP, Mr. Scheder-Bieschin served as Managing Director of Corporate Finance for Deutsche Bank in Frankfurt, Germany from 2001 to 2004. From 1995 to 2001, Mr. Scheder-Bieschin led the mergers and acquisitions practice group at ING BHF Bank in Frankfurt and New York as Managing Director of Corporate Finance. Earlier in his career, he was a Principal with Fredericks Michael & Co., a New York-based mergers and acquisitions boutique investment banking firm; Associate Director in the Real Estate Investment Banking Group with Bear Stearns & Co. in New York; and a Staff Accountant with Peat, Marwick, Mitchell & Co. in New York."
Notice the multiple references to mergers and acquisitions. Could the business model have been to develop the technology, inflate the valuation, and sell the company at a premium? Tell you what, let's get back to that.
Let's first review Zap's recent $1.2 million convertible debt offering. What I find interesting is that the notes can be converted to stock at Zap's discretion. Quoting from the text:
"The Company may, after December 31, 2007, require the conversion of the Notes provided that (a) certain equity conditions are met, which include, among other things, the effectiveness of the Registration Statement and that (b) daily volume weighted average price exceeds the lesser of (i) $2.00 (as appropriately adjusted for any stock dividend, stock split, reverse stock split or other similar transaction) and (ii) two hundred percent (200%) of the conversion price, for 20 trading days during any period of 30 consecutive trading days."
Translation: if the stock moves up enough, either through the normal push-and-pull of market forces or through financial gamesmanship, we can force debtors to take shares instead of cash.
Which brings us to the last piece of this puzzle: Zap's new director of IR, who really isn't new at all. Haskell was the contact on a press release from January in which Zap claimed there was reasonable evidence of a naked short position in its stock.
No doubt, naked shorting is a serious problem. But I've seen too many firms use it as a crutch for poor performance. I can't be entirely sure that Zap fits the mold but knowing the firm is paying stock promoters does nothing to assuage my fears.
According to Invesorideas.com, Zap is a "featured company," which means it is paying no less than $2,000 per month -- and maybe as much as $5,000 -- for services designed solely to boost its share price.
Here's my point. Zap may very well be on the up-and-up but the business is bleeding cash, losing key executives, and pumping its stock so that, as far as I can tell, management doesn't have to go deeper into debt to stay afloat. That's why I think Zap is doing 110 on a highway to the abyss.
Zap 8-K timestamp:
Background on Scheder-Bieschin:
Original press announcement for Scheder-Bieschin:
Investor Ideas -- ZAP as a featured company:
Costs and benefits of being a featured company:
Zap's financial statements at Morningstar:
BONUS -- Zap's TV chef board member resigns:
Haskell and naked shorting press release: