Item 1. Business
Overview
ZAP designs, develops, manufactures and sells fully electric and advanced technology vehicles. With our new product offerings and our acquisition of 51% of the equity shares of Zhejiang Jonway Automobile Co. Ltd., or Jonway, in January 2011, we believe we are positioned to be a leader in the electric vehicle industry.
We believe our acquisition of a majority interest in Jonway will give us the ISO9000 compliant production manufacturing facility we need to mass produce our electric vehicle products and allow us to expand our distribution network for ZAP electric vehicles internationally and provide access to the rapidly growing market for gasoline and electric vehicles in China and internationally. We also believe our acquisition will allow us to leverage ZAP’s expertise in advanced automotive technologies to jointly develop electric and advanced technology vehicles with Jonway. We already have jointly developed an electric version of Jonway’s A380 SUV, and we plan to sell this vehicle in China and internationally. We also believe this acquisition will allow Jonway to expand its distribution network for its conventional fuel A380 SUVs internationally. We plan to leverage the volume manufacturing capability of Jonway to produce both Jonway’s upgraded A380 5-door and 3-door SUVs and shuttle van as well as our jointly developed electric A380, shuttle van and ZAP’s electric Alias car at Jonway’s manufacturing facility in Sanmen, China
Our strategy is to serve the growing fleet and taxi market, especially for electric and fuel efficient vehicles. While many electric vehicle companies are focused on passenger cars and sedans for mainstream consumers, ZAP Jonway believes government and corporate fleets can more quickly and more successfully implement electric vehicle technologies as adequate charging infrastructure, service and support can be more easily managed in fleet operations where the vehicles may travel along predictable routes and have a central point of operation. We also believe that volatile oil prices as well as government regulations and incentives have created opportunities for producers of electric and fuel efficient vehicles to serve the global fleet and taxi markets.
ZAP has twenty years of experience inventing, designing, manufacturing and selling innovative products. In 1995, we began marketing electric transportation on the internet through our website www.zapworld.com. We have been a pioneer in developing and marketing electric vehicles such as the zero-emission ZAP® electric bicycle, the ZAP Power System, which adapts to most bicycles and the ZAPPY® folding electric scooter. In 2003, we announced our first electric automobiles, including an electric automobile imported from our Chinese supplier. And in 2004, we introduced electric all-terrain vehicles. In 2005, we introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline. From 2006 to 2009, we introduced the all-electric Xebra Truck, ZAP Truck XL and ZAPVAN Shuttle.
ZAP was incorporated in 1994 under the name “ZAP Power Systems,” and changed its name to “ZAPWORLD.COM” in 1999 and ZAP in 2001. ZAP’s principal executive offices are located at 501 Fourth Street, Santa Rosa, California 95401. ZAP’s telephone number is (707) 525-8658. ZAP’s main company website is www.zapworld.com. Information contained on the website is not incorporated by reference herein and you should not consider information on the website to be part of this annual report on Form 10-K.
Business
ZAP has twenty years of experience designing, developing, manufacturing and selling innovative electric transportation products and Jonway has more than 2.6 million square feet of manufacturing space, with the ability to produce up to 50,000 automobiles per year, and an extensive distribution network in China. Leveraging ZAP’s experience in electric and alternative fuel vehicles and Jonway’s volume manufacturing capabilities and distribution network in China and internationally, ZAP Jonway intends to continue to develop technology and products in the electric vehicle market and increase its electric vehicle production. ZAP Jonway also intends to continue its production of conventional fuel vehicles and to expand its distribution network in both China and internationally.
China Taxi Market. ZAP Jonway intends to focus on the rapidly growing market for electric vehicles in China and abroad through the sale of plug in electric SUV and Van models to large taxi and corporate fleets in China and internationally. ZAP Jonway received type approval of its E380 in January 2013. A lead acid version of the minivan EV is being offered for the low end market and the plan is to have the lithium acid version of the minivan launched for the international markets this year. The use of plug in electric for taxis will be limited to cities that have a lower range of no more than 200 km traveled per shift, and would need to have swappable batteries to ensure quick turnaround between shifts. Currently, Hangzhou already has full electric taxis in operations, and many other cities are also beginning to launch full electric taxis with swappable batteries supported by the China National Grid. The E380 S has swappable batteries compatible with China’s National Grid.
Fleet Market. ZAP Jonway also intends to market its vehicles to government and corporate fleets. ZAP believes that the adoption of electric vehicles continues to be limited by the lack of adequate charging infrastructure, service and support. ZAP believes that these limitations can be more easily managed in fleet operations where vehicles may travel along predictable routes and have a central point of operation. Accordingly, ZAP markets its vehicles to fleet customers. In February 2010, ZAP was selected in a competitive bid process held nationwide by the United States Postal Service, USPS. ZAP is still working in cooperation with USPS on this project with continuing testing and refinement and upgrade of the design. The USPS operates a large automotive fleet, with over one hundred and forty thousand vehicles. ZAP converted a gas powered mail truck to an electric drive train, as specified by the USPS, and this vehicle, along with vehicles from the other selected firms currently being tested by the USPS.
Electric Charge Stations. ZAP Jonway partners with Better World International Limited in the providing of electric charge station.
Conventional Fuel Vehicles. ZAP Jonway has been expanding the distribution of the Jonway A380 SUVs and the E380 SUV internationally to South America, South East Asia and Middle East and African countries. .
Our Vehicles and Products
Jonway Automotive Products: Gasoline Model
Jonway’s current automotive product line includes the gas fueled A380 Five-Door SUV and the A380 Three-Door SUV.
Jonway A380 Five-Door. The Jonway A380 Five-Door is a gasoline powered 4-speed sport utility vehicle available in 1.6, 1.8 and 2.0 liter engines and available in automatic and manual transmission.
Jonway A380 Three-Door. The Jonway A380 Three-Door is a gasoline powered sport utility vehicle available in 1.6, 1.8 and 2.0 liter engines and available in automatic and manual transmission.
Jonway Van. The Jonway Van is a conventional fuel small van. This product was launched in 2012.
ZAP Automotive Products: Electric Vehicles
ZAP Jonway SUV A380, E380 and E380-S. ZAP’s current automotive product line includes the all-electric E-380 SUV and the E-380 which supports swappable lithium batteries. The E-380 SUV has a range of 200km and speed of up to 130km per hour. It has a 45 kwatt hour engine, with peak performance of over 70kwatt hour. This has been type approved for China and is available for international markets.
ZAP Jonway MiniVan. The MiniVan which was introduced in 2012 is offered in the traditional gasoline model with a 1.1 liter engine. This minivan will be offered as EV with two options in 2014: one with lead acid for the low end market where range is limited to 80km and speed is no more than 100km per hour and a high end model with lithium batteries where speed is 130km per hour and range is 200 km distance.
ZAPTRUCK XL. The ZAPTRUCK XL is a plug-in-electric vehicle targeted for the US low speed vehicle market, principally designed for fleet operations for city and campus markets. The XL can hold up to of two passengers and has a convertible bed/platform for moving up to 625 lbs. of cargo in accordance with U.S. Safety Guidelines for on-road vehicles. The XL is designed for corporate and university campuses, airports, warehouses, factories, military bases, municipal operations and ranches or farms. As it is classified as a Neighborhood Electric Vehicle, or NEV, the XL is limited by its controller to travel at speeds up to 25 mph (the maximum speed for an NEV) and provides a range of up to 40 miles per charge under ideal driving conditions.
ZAP Jonway Launches HYBRID CNG SUV Targeting Alternative Fuel Markets
HYBRID Compressed Natural Gas (CNG) as an additional product in its line of New Energy Vehicles. ZAP Jonway is launching its first HYBRID CNG vehicle with Jonway Auto’s A 380 SUV. This new CNG SUV, named CN 380 will be available in 2014 for the international markets, focused on the accelerating growth in CNG vehicles in many developing countries and in the United States. CNG stations for refueling are not yet widely available in China, and will only be introduced in China to cities that currently support CNG refueling stations. However, CNG is widely available in many international markets, and so the initial target markets will be outside of China.
The HYBRID CNG engine in the CN 380 seamlessly allows the driver to utilize the regular gasoline engine when the CNG fuel is depleted, and also automatically uses the gasoline as fuel to run the engine when it is in a cold start state and the engine is warming up. The CNG tank capacity is the same as the gasoline tank, thus offering the driver double the amount of fuel available, inclusive of the existing gasoline tank which is used as the backup.
ZAP Jonway is leveraging on the mature A380 SUV platform to offer two models for its CN 380. CN 380 SUV comes in either 1.6 L or 2.0L for manual transmission or the 1.8L for both automatic as well as manual transmission. There is a growing demand for alternative energy vehicles in many South American countries, especially with the escalating cost of gasoline fuel. The savings in fuel cost by going to CNG is estimated to be around 60% to 65%. China is also opening up the market for CNG in many of its southern provinces.
ZAP Jonway is now marketing and promoting this CNG product line for its international market, targeting South America initially where CNG fueling stations are popular; with the goal of addressing the U.S. market at some time in the future when the vehicle is fully type approved for the U.S.
Jonway Auto was issued the EV Catalogue License and factory certification for EV production manufacturing
China was issued the EV Catalogue License and factory certification for EV production manufacturing, and also received E380 SUV China type approval and Catalogue License. The EV Catalogue License issued to Jonway's factory for production manufacturing of Electrical Vehicles allows their factory in Sanmen, Zhejiang to manufacture and produce all current and future Electrical Vehicle products. This certification process rigorously verifies the factory's safety procedures in handling production of EV products, and reviews the production processes, testing and handling of lithium battery packaging and installation.
ZAP Jonway also received the type approval for its E380 SUV. The E380 SUV represents the first international EV to receive Chinese type approval. The E380 SUV is the first electric vehicle allowed to be produced and sold in China from an international company, ZAP. The electric power train for the E380 SUV was designed by ZAP Hangzhou Joint Venture; a joint venture company formed to do engineering design for electric vehicles, and was principally responsible for achieving the type approval, working in conjunction with the factory engineers at Jonway Auto. This long arduous testing process took more than one year, and required extensive endurance and safety testing, as well as detailed engineering documentation of both the design and the test
Other ZAP Products
ZAPPY3 Personal Transporters. The ZAPPY3 Pro Flex is designed to meet the requirements of material handling, warehousing, fabrication and construction industries. For the mobility market, ZAP makes the ZAPPY3 EZ and ZAPPY3 Standard.
ZAP Powerbikes. The ZAP Powerbike with a wagon hooked to the back of a motor bike is designed to meet the small cargo local transportation needs of carrying materials in factories or farms, warehousing and personal goods transportation in a campus or local community settings.
Jonway and other Strategic Relationships
Jonway.
We acquired 51% of the equity shares of Jonway in January 2011.
Jonway is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China, or PRC, in April 2004 by Jonway Group Co., Ltd., or Jonway Group, and three individuals.
Under the laws of the People’s Republic of China, only an enterprise approved by Ministry of Industry and Information Technology and listed in the National Catalog for Whole Automobile Manufacturing Enterprises and Products, or the National Catalog, is allowed to manufacture whole automobiles and is limited to the models designated therein for each manufacturer. The National Catalog functions as a manufacturing permit or license to allow the enterprises to manufacture specified automobile models under specified brands, as listed in therein.
Neither Jonway nor Jonway Group is in the National Catalog or qualified to produce whole automobiles. Zhejiang UFO Automobile Manufacturing Co., Ltd., or Zhejiang UFO, is listed in the National Catalog as a qualified manufacturer of certain UFO-brand cars. Jonway currently has authorization from Zhejiang UFO to use Zhejiang UFO’s manufacturing permits and licenses to assemble and sell the automobiles manufactured by Jonway at the Sanmen branch of Zhejiang UFO, or the Sanmen Branch, pursuant to the Contractual Operation Agreement entered into among Zhejiang UFO, Jonway and Jonway Group on January 1, 2006, or the Operations Agreement. Pursuant to the Operations Agreement:
·
Zhejiang UFO granted Jonway the full power to operate and manage the Sanmen Branch and manufacture the SUV products for which Zhejiang UFO has manufacturing permits or licenses, except for certain professional matters;
·
the parties agreed that the Sanmen Branch shall not manufacture or sell other automobiles or products without Zhejiang UFO’s authorization or conduct any business with a third party other than Jonway; and
·
Jonway agreed to pay certain contracting fees to Zhejiang UFO. The Operations Agreement is valid for 10 years and expires on December 31, 2015, subject to renewal, which Jonway intends to obtain prior to its expiration.
We understand that laws of the People’s Republic of China do not expressly prohibit the aforementioned arrangements. However, it is possible that the government of the People’s Republic of China may decide that manufacturing Jonway automobiles under Zhejiang UFO’s license or the manufacturing of vehicles with a brand name other than the UFO brand listed in the National Catalog is not in full compliance with laws of the People’s Republic of China. In this case, Jonway could face sanctions from the government, including fines, an order to cease operations, and revocation of Jonway’s general business license. To be a qualified automobile manufacturer, Jonway may apply to the government of the People’s Republic of China to be separately listed on the National Catalog. However, due to the current industry policies of the government of the People’s Republic of China, new manufacturing permits and licenses are rarely, if ever, granted and even then, applying for new models is likely to be a time-consuming process. Also, if the government revokes Zhejiang UFO's license or if Zhejiang UFO refuses to apply for Jonway models under the National Catalog, Jonway may have to cease manufacturing automobiles.
Jonway has a general business license issued by the company registration authority of the People’s Republic of China, indicating that it is duly incorporated, validly existing and has an operation term of 10 years, or until 2014, which term may be extended, subject to government approval.
Under the laws of the People’s Republic of China, a foreign investor is not allowed to acquire more than a 50% equity interest in a company which is qualified to manufacture whole automobiles. As Jonway is not in the National Catalog and is not qualified to produce whole automobiles, ZAP’s acquisition of 51% of the equity shares of Jonway has been approved by the relevant governmental authorities.
In July 2010, ZAP entered into that Certain Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd, as amended with Jonway Group, or the Jonway Acquisition Agreement, for the acquisition of 51% of the total equity shares of Jonway, for a total purchase price of $31.75 million of which $29 million in cash and 8 million shares of stock valued at $2.72million have been paid. On January 21, 2011, ZAP completed the acquisition of 51% of the equity shares of Jonway, which transaction was approved by the Department of Commerce of Zhejiang Province in September 2010. As of December 31, 2013, ZAP, Jonway Group, Wang Gang and Wang Xiao Ying held 51%, 39%, 8% and 2% of Jonway’s equity shares, respectively. In June 2010, ZAP issued 40 million shares of stock valued at $10 million to Cathaya Capital, L.P., or Cathaya, in order to pay $10 million of the purchase price under the Jonway Acquisition Agreement. In January 2011, ZAP issued $19 million of convertible debt to an affiliate of Cathaya in order to pay an additional $19,030,000 under the Jonway Acquisition Agreement, including a foreign currency adjustment of $30,000. In March 2012, the convertible debt was extended to August 2013 with no interest payments. This convertible note has been extended until August 12, 2014 with interest accrual as determined by the auditors, at 8% per annum. CEVC would likely renew this convertible note and in the event that CEVC decides to call on the repayment, the repayment would likely be paid in full or in part in Jonway Auto shares or ZAP shares unless there is a breach by the Company on the covenant of the convertible note.
Jonway is located at the Da Tang industry zone of Jiangtiao Village, Sanmen County, Zhejiang Province in China. Jonway has more than 2.6million square feet of manufacturing space, with the ability to produce up to 50,000 automobiles per year. Jonway distributes its vehicles through a network of more than three hundred factory and authorized dealers. Jonway has begun developing international distribution channels in Peru, Brazil, South East Asia and certain African and Middle Eastern countries. Jonway sold over 433 vehicles and over 820 vehicles internationally in 2012 and in 2013 respectively. Jonway Auto sells its vehicles in China through its direct dealership distribution network of over 70 dealers, and over 200 customer service support centers in China.
Since September 2007, Jonway has been designing and producing the three-door A380 SUV. A new model of the three-door A380 SUV was launched in 2013. The target market for the new three door model is international. Jonway launched the five-door manual transmission A380 SUV and the five-door automatic transmission A380 SUV in March 2009 and in October 2010, respectively. This is the main product line for Jonway Auto. Jonway sold 4,217 SUV’s and 367 minivans for a total of 4,584 vehicles in 2012 and 3,794 SUV’s and 503 minivans for a total of 4,297 vehicles in 2013.
In October 2010, ZAP entered into an International Distribution Agreement with Goldenstone Worldwide Limited, which has international distribution rights for all of Jonway Group’s products in the United States and internationally, in exchange for 30 million shares of ZAP’s common stock valued at $14.4 million. ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the worldwide distribution rights for Jonway products. Therefore it was necessary for ZAP to acquire distribution rights for Jonway products.
Jonway’s strategy is to serve the growing SUV market in China and to expand internationally. In addition to conventional fuel vehicles, ZAP Jonway intends to develop and market all-electric Jonway vehicles. In 2009 and 2010, working jointly with ZAP, Jonway successfully researched, developed and produced electric A380 SUV prototypes.
In May 2012, Jonway started the sales of its gasoline mini-vans. During the last 7 months in 2012, Jonway sold 394 mini-vans in the Chinese and international market. The minivans in China are sold primarily to commercial customers for passenger transportation or goods transportation. In 2013, Jonway sold 503 minivans in the Chinese and international market. Generally, this is focused at the low end market and the target customer is price sensitive. Currently, this market is dominated by two to three Chinese auto manufacturers that sell several million vehicles per year each. Therefore, the ability for Jonway Auto to penetrate this market would depend on its ability to differentiate by quality, performance as well as pricing. Due to the start-up phase of the minivan, the gross margins of the product have been low and will improve with volume.
ZAP Hangzhou. As part of ZAP’s plan to deliver quality, cost effective electric vehicles to the fleet vehicle market, in December 2009, ZAP and the Holley Group, the world’s largest volume producer of electric power meters according to the Wenhui-Xinmin United Press Group, established ZAP Hangzhou, a joint venture company in China with financial support from Better World International Limited to target the electric vehicle market in China. . In 2011, Jonway Group took over Holley Group’s interest in the joint venture. Currently, the joint venture is 37.5% owned by ZAP, 25% owned by Jonway Group, and 37.5% owned by Better World. The joint venture is proportionally capitalized to support the R&D of electric vehicle power train and to provide the technical support for type approval and certification required for the new energy vehicles developed by ZAP and Jonway. Better World provide on board charging technology and charge station expertise and standards compliancy know-how. ZAP Jonway and ZAP Hangzhou also plan to use their knowledge of the local Chinese market to target opportunities for electric vehicle growth within China’s vehicle fleets. ZAP Hangzhou is located at a facility in Hangzhou provided by the Holley Group. The facility has conducted engineering and integration of electric drive trains in the Jonway A380 5-door SUV.
Better World sales and distribution of Z-Chargers. ZAP USA has exclusive sales and distribution rights on Better World’s Z-Charger stations. Better World completed the development of these chargers in 2011 and now has the US approved charge stations available for sales in the US market and internationally. ZAP will begin to sell and market these charge stations in the US along with the EV products to its customers. There are three models available for sales in the US - out door chargers that can be installed on the curbs, wall mount for in-door garages and home chargers that can be installed in the home garages. The former two are designed for public places, and has independent meters for measuring usage and billing. The home chargers are designed for private use and can be connected to the metering within the house. Better World’s charge stations are connected by a mobile network that can communicate to user’s cell phone to track charge levels, determine if users can travel the range with the charge level in the EV, show charge usage, place reservations of chargers in the network and determine availability of the chargers for use by the customers.
Shanghai Zapple Electric Vehicle Technologies Co., Ltd. (Shanghai Zapple). In November 2011, Jonway Auto and ZAP Hangzhou jointly set up this company with the registered capital of RMB 20 million. As of December 31, 2013 and December 31, 2012, Jonway Auto has funded RMB 5 million into this joint venture and ZAP Hangzhou has funded RMB 3 million. Shanghai Zapple’s approved scope of business includes: technical advice, technical development, technical services, technology transfer regarding electric vehicle technology, auto technology, energy technology, material science and technology, sale of commercial vehicle and vehicle for nine seats or more, auto parts, auto supplies, lubricant, mechanical equipment and accessories, business management consulting, industrial investment, exhibition services, business marketing planning, car rental (shall not be engaged in financial leasing), import and export of goods and technologies. Shanghai Zapple has suspended operation.
Technology
ZAP has developed expertise in electric drive train integration and ZAP Hangzhou JV has filed more than 10 patents, and has key technologies in the area of vehicle management system (VMS). This is the control system that manages and coordinates the functions between the motor, the battery management system and the auxiliary systems that require power from the batteries, such as power steering, power brakes, air conditioning and heating, power windows and locks.
During 2013 and 2012, ZAP expended approximately $0.2 million and $0.2 million, respectively, in research and development activities. No significant portion of such expenses was borne directly by our customers.
ZAP Hangzhou Joint Venture has built a technical research center and a research and development team composed of 6 engineers developing new energy vehicles and the engineering work to support type approval of the E380 SUV. Hangzhou JV spent $329,000 in R&D in 2013.
Jonway’s research and development expenses were $0.4 million in 2013 and $2.3 million in 2012.
Sales and Marketing
ZAP currently markets and sells ZAP Jonway products internationally and to dealers in the U.S. ZAP Jonway intends to leverage Jonway’s existing distribution channels in China and internationally, which include about 70 direct dealerships and over 200 customer support centers in China. Jonway’s SUVs are being sold in South America, to the European Union, Africa and the Middle East.
Jonway’s principal marketing goals are to serve the growing SUV market in China, to expand the international market in SUVs, and to explore the technical development and market development mode of new energy vehicles supported by ZAP. By advertising on annual auto shows, through Jonway’s website, through media advertisements and other matters, Jonway has focused on building a good public image for its SUV products. In addition, Jonway has driven sales by offering sales rebate incentives to dealers for effective Jonway advertising and promotion activities.
Jonway’s advertising and marketing expenses were $0.9 million and $2.3 million for the years ended December 31, 2013 and 2012, respectively. ZAP’s advertising and marketing expenses were approximately $13,000 and $98,000 for the years ended December 31, 2013 and 2012, respectively.
A number of Chinese manufacturers have launched new SUV models in China in 2012. As a result, Jonway has had very stiff competition in the local markets. This increased competition and tougher customer demands for more luxury in the vehicles have led Jonway to upgrade the interior design of its products.
After several reorganization of the sales and marketing team due to management changes, the sales organization is now relocated from Hangzhou to Taizhou, the home town of Jonway Group in order to allow closer collaboration between Jonway Auto’s sales organization and Jonway Group’s management.
The market conditions with demand for more new models and luxury in the vehicles, and the changes in sales management contributed to challenges for the company to increase its sales revenues. The company introduced additional new models in the Shanghai Auto show in April 2013. The sales organization is now separated into two regional organizations, Northern and Southern China team in order to allow each of the regional managers to be able to focus more rigorously on their regions’ growth and customer support.
After-Sales Services
ZAP currently offers a limited one-year warranty on its fleet and utility vehicles and six- and three-month warranties on its consumer electric scooters and bicycles, respectively. ZAP offers factory-training for dealer and distributor service technicians. Currently, ZAP works with dealers to provide replacement parts and in certain situations may repair the vehicle at its headquarters in Santa Rosa or send a specialist to repair a vehicle. ZAP is pursuing partnerships with nationwide companies to provide after-sales services at their locations.
Jonway currently offers a 2-year or 60,000 kilometer warranty for the SUVs and minivans; it has built and continues to improve on its after-sales service network. Jonway’s had over 200 after-sales service centers and 10 vehicle spare parts centers in China for logistics and distribution as of December 31, 2013. Jonway has set up an after-sales services department to follow up and timely deal with quality claims from after-sales service stations or end-customers. Jonway has also set up a quality department to focus on making claims to vehicle components suppliers for defective products, as well as taking responsibility of Jonway’s overall quality control.
Manufacturing
ZAP Jonway manufactures the A380 electric SUV and the minivan at Jonway’s manufacturing facility in Sanmen, Zhejiang China. This facility has the capacity to produce up to 50,000 vehicles per year. Jonway produces the three-door and five-door A380 SUVs and spare parts at this facility. Jonway’s facility is certified under the ISO 9000 quality standards promulgated by the International Organization for Standardization.
Jonway’s manufacturing operations include pressing, welding, painting and assembling lines. Jonway has also obtained the following certifications: the Gulf Cooperation Certification, the Saudi Arabian Standards Organization, and the Standards Organization of Nigeria Conformity Assessment Programme, certifying Jonway to homologate and distribute in the Gulf, Saudi Arabia and Nigeria, and Jonway’s vehicles have received China Compulsory Certification required for industrial production in China
Sources and Availability of Parts and Supplies
Materials, parts, supplies and services used in ZAP Jonway’s business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our general operations, or our manufacturer’s operations and production of ZAP Jonway’s products. ZAP Jonway strives to have at least two sources for parts and supplies. ZAP Jonway continues to forge partnerships with top tier suppliers in the automotive and electric vehicle component business. Mitsubishi currently supplies a complete drive train for the Jonway A380 SUV.
Customers
Since 1994, ZAP has sold electric vehicles in 75 countries. Most of our sales are to military, government and corporate fleets. ZAP has contracts to provide vehicles to the State of California, Presidio National Park, Federal Aviation Administration, Department of Energy, U.S. Army, United Parcel Service, City of Riverside, the City of Monterey and others. Leveraging Jonway’s access to the China market, ZAP Jonway intends to focus on business development to create new markets within China. Jonway sells its vehicles through a network of 70 dealerships in China and has started a distribution network in South America in Brazil and Peru, and Vietnam and Turkey for the European markets.
Regulation
Vehicle Safety and Testing
In China, the vehicles sold have to undergo type approval for safety and compliance to local regulatory requirements for both gasoline and electric vehicles. These type approvals are granted only for vehicles that have been authorized as one of the catalogued registered license vehicles that the automobile manufacturer is allowed to manufacture and sell in China. Jonway Auto’s A-380 SUV and E-380 SUV have both received the catalogue licenses, and any new models or variation from these models, such as the E-380 S with battery swap configuration, would require additional extension of the type approval for that model. The minivan that was released in 2012 also received type approval from the Chinese government. All the type approvals are for highway speed safety and compliance.
In the U.S., our vehicles are subject to numerous regulatory requirements established by the National Highway Traffic Safety Administration, or NHTSA, including all applicable United States federal motor vehicle safety standards, or FMVSS. As a manufacturer, we must self-certify that a vehicle meets or otherwise obtain an exemption from all applicable FMVSSs, as well as the NHTSA bumper standard, before the vehicle can be imported into or sold in the United States. There are numerous FMVSSs that apply to our vehicles. Examples of these requirements include:
•
Crash-worthiness requirements-including applicable and appropriate level of vehicle structure and occupant protection in frontal, side and interior impacts including through use of equipment such as seat belts and airbags which must satisfy applicable requirements;
•
Crash avoidance requirements-including appropriate steering, braking, electronic stability control and equipment requirements, such as, headlamps, tail lamps, and other required lamps, all of which must conform to various photometric and performance requirements;
•
Electric vehicle requirements-limitations on electrolyte spillage, battery retention, and avoidance of electric shock following specified crash tests;
•
Windshield defrosting and defogging-defined zones of the windshield must be cleared within a specified timeframe; and
•
Rearview mirror requirements-rearward areas that must be visible to the driver via the mirrors.
Several FMVSS regulations that NHTSA has promulgated or amended recently contain phase-in provisions requiring increasing percentages of a manufacturer’s vehicles to comply over a period of several model years. Those FMVSSs generally allow low volume manufacturers (those who manufacture fewer than 5,000 vehicles annually for sale in the United States) and limited line manufacturers (those who sell three or fewer vehicle lines in the United States) to defer compliance until the end of the phase-in period. Under U.S. law, we are required to certify compliance with, or obtain exemption from, all applicable federal motor vehicle safety standards.
We are also required to comply with other NHTSA requirements of federal laws administered by NHTSA, including the Corporate Average Fuel Economy standards, consumer information labeling requirements, early warning reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls, and owner’s manual requirements.
Our vehicles sold in Europe are subject to European Union safety testing regulations. Many of those regulations, referred to as European Union Whole Vehicle Type Approval, or WVTA, are different from the federal motor vehicle safety standards applicable in the United States and may require redesign and/or retesting. The Small Series WVTA permits the manufacture and sale in the European Union of no more than 1,000 vehicles per year. ZAP Jonway plans to keep European sales of ZAP Jonway vehicles at less than 1,000 vehicles per year, and has no plans to commence testing of ZAP Jonway vehicles for the WVTA to assure compliance with the European Union requirements to permit unlimited sales. Similarly, Japan has additional testing regulations applicable to high volume manufacturers, in addition to import rules. We also plan to keep Japanese sales of ZAP Jonway vehicles at a low volume, and have no plans to comply with the Japanese requirements to permit high volume sales in these jurisdictions.
The EPA requires us to calculate and display the range of our electric vehicles on a label we affix to the vehicle’s window. The EPA specifies that we follow testing requirements set forth by the Society of Automotive Engineers, or SAE, which further requires that we test using the United States EPA’s combined city and highway testing cycles. The EPA announced in November 2009 that it would develop and establish new energy efficiency testing methodologies for electric vehicles. Based on initial indications from the EPA, we believe it is likely that the EPA will modify its testing cycles in a manner that, when applied to our vehicles, could reduce the advertised range of our vehicles. To the extent that the EPA adopts these procedures in place of the current procedures from the SAE, this could impair our ability to advertise ZAP vehicles at their current advertised range. Moreover, such changes could impair our ability to deliver the Alias and the electric Jonway A380 SUV with the initially advertised range. Although the real life customer experience of the range of our electric vehicles will not change due to the changes in the EPA standards, the reduction in the advertised range could negatively impact our sales and harm our business.
The Automobile Information and Disclosure Act require manufacturers of motor vehicles to disclose certain information regarding the manufacturer’s suggested retail price, optional equipment and pricing. In addition, the Act allows inclusion of city and highway fuel economy ratings, as determined by EPA, as well as crash test ratings as determined by NHTSA if such tests are conducted. As a manufacturer of only electric vehicles, compliance with the EPA labeling requirements on fuel economy is currently optional for ZAP.
EPA Emissions & Certificate of Conformity
For ZAP Business
The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by the California Air Resources Board, or CARB, with respect to emissions for our vehicles, particularly greenhouse gasses. The Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and both the Certificate of Conformity and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales of vehicles. The EPA and CARB are both moving forward with more stringent regulations regarding greenhouse gases for future model years and ZAP may face increased cost in complying with these regulations for conventional fuel vehicles.
Manufacturers who sell vehicles without a Certificate of Conformity may be subject to penalties of up to $37,500 per violation and be required to recall and remedy any vehicles sold with emissions in excess of Clean Air Act standards.
For Jonway Business
The China government has adopted various measures to institute a uniform supervision and administration system with respect to vehicle emissions, including an automobile product authentication procedure and a network of testing centers across China. The State Environmental Protection Administration from time to time publishes notices to inform the public of new vehicle models that comply with its regulatory emission standards. Automobile manufacturers are not allowed to produce or register vehicle model or automobile product that failed to comply with such regulatory emission standards.
The State Environmental Protection Administration limits exhaust emission on the basis of China I, II, and IV. Different limits of exhaust emission and testing measures in these standards shall be applied to different types of vehicles.
As of September 1, 2003, the PRC government ceased to follow China I Standards and began to implement China II standards. The PRC government began implementation China III Standards in selected cities, such as in Beijing in December 2005 and Guangzhou in September 2006 respectively. In 2008, China III standards were complied with by all newly produced vehicles in China. From January 1, 2010, China IV standards were implemented. These emission standards imposed substantially higher compliance expenditures on the PRC automobile manufacturers, including R&D costs, to satisfy engine and vehicle design and engineering requirements.
Battery Safety and Testing
Our battery pack conforms to mandatory regulations that govern transport of “dangerous goods” that may present a risk in transportation, which includes lithium-ion batteries. The governing regulations, which are issued by the Pipeline and Hazardous Materials Safety Administration, or PHMSA, are based on the UN Recommendations on the Safe Transport of Dangerous Goods Model Regulations, and related UN Manual Tests and Criteria. The regulations vary by mode of transportation when these items are shipped such as by ocean vessel, rail, truck, or by air.
We have completed the applicable transportation tests for our prototype and production battery packs demonstrating our compliance with the UN Manual of Tests and Criteria, including:
·
Altitude simulation-simulating air transport;
·
Thermal cycling-assessing cell and battery seal integrity;
·
Vibration-simulating vibration during transport;
·
Shock-simulating possible impacts during transport;
·
External short circuit-simulating an external short circuit; and
·
Overcharge-evaluating the ability of a rechargeable battery to withstand overcharging.
The cells in our battery packs are composed mainly of lithium metal oxides. The cells do not contain any lead, mercury, cadmium, or other hazardous materials, heavy metals, or any toxic materials. In addition, our battery packs include packaging for the lithium-ion cells. This packaging includes trace amounts of various hazardous chemicals whose use, storage and disposal is regulated under federal law. The NHTSA is likely to issue regulations regarding lithium ion batteries and electronic control systems in the future and ZAP will face the cost of complying with such regulations.
Automobile Manufacturer and Dealer Regulation
State law regulates the manufacture, distribution and sale of automobiles, and generally requires motor vehicle manufacturers and dealers to be licensed. We are registered as both a motor vehicle manufacturer and dealer in California and are obtaining or have obtained certification in other states.
To the extent possible, we plan to secure dealer licenses (or the equivalent of a dealer license) and engage in activities as a motor vehicle dealer in other states as appropriate and necessary. Some states, such as Texas, do not permit automobile manufacturers to be licensed as dealers or to act in the capacity of a dealer. To sell vehicles to residents of states where we are not licensed as a dealer, to the extent permitted by local law, both the actual sale and all activities related to the sale would generally have to occur out of state. In this scenario, it is possible that activities related to marketing, advertising, taking orders, taking reservations and reservation payments, and delivering vehicles could be viewed by a state as conducting unlicensed activities in the state or otherwise violating the state’s motor vehicle industry laws. Regulators in these states may require us to hold and meet the requirements of appropriate dealer or other licenses and, in states in which manufacturers are prohibited from acting as dealers, may otherwise prohibit or impact our planned activities.
In jurisdictions other than California, a customer may try to purchase our vehicles over the internet. However, some states, such as Kansas, have laws providing that a manufacturer cannot deliver a vehicle to a resident of such state except through a dealer licensed to do business in that state which may be interpreted to require us to open a store in the state of Kansas in order to sell vehicles to Kansas residents. Such laws may be interpreted to require us to open a store in such state before we sell vehicles to residents of such states. If we sell vehicles to such a state without having opened a store there, the state could take action against us; including levying fines or requiring that we refrain from certain activities at that location. In addition, some states have requirements that service facilities be available with respect to vehicles sold in the state, which may be interpreted to also require that service facilities be available with respect to vehicles sold over the internet to residents of the state, thereby limiting our ability to sell vehicles in states other than California.
The foregoing examples of state laws governing the sale of motor vehicles are just some of the regulations we will face as we sell our vehicles. In many states, the application of state motor vehicle laws to our specific sales model is largely without precedent, particularly with respect to sales over the internet, and would be determined by a fact specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, state legal prohibitions may prevent us from selling to consumers in such state.
California laws, and potentially the laws of other states, restrict the ability of licensed dealers to advertise or take deposits for vehicles before they are available. We have not received any communications on our Alias reservations from the New Motor Vehicle Board or the Department of Motor Vehicles, or DMV, which has the power to enforce these laws. There can be no assurance that the DMV will not take the position that our vehicle reservation or advertising practices violate the law. We expect that if the DMV determines that we may have violated the law, it would initially discuss its concerns with us and request voluntary compliance. If we are ultimately found to be in violation of California law, we might be precluded from taking reservation payments, and the DMV could take other actions against us, including levying fines and requiring us to refund reservation payments. Resolution of any inquiry may also involve restructuring certain aspects of the reservation program. The DMV also has the power to suspend licenses to manufacture and sell vehicles in California, following a hearing on the merits, which it has typically exercised only in cases of significant or repeat violations and/or a refusal to comply with DMV directions.
Certain states may have specific laws which apply to dealers, or manufacturers selling directly to consumers, or both. For example, the state of Washington requires that reservation payments or other payment received from residents in the state of Washington must be placed in a segregated account until delivery of the vehicle, which account must be unencumbered by any liens from creditors of the dealer and may not be used by the dealer. We do not have a segregated account for reservations of Washington residents, but the reservations are freely refundable and ZAP has not used the capital provided by such reservations. Our failure to comply with this requirement could require us to return or refund the reservation, or result in other fines or penalties. There can be no assurance that other state or foreign jurisdictions will not require similar segregation of reservation payment received from customers. Our inability to access these funds for working capital purposes could harm our liquidity.
Furthermore, while we have performed an analysis of the principal laws in the European Union relating to our distribution model and believe we comply with such laws, we have not performed a complete analysis in all foreign jurisdictions in which we may sell vehicles. Accordingly, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our vehicle reservation practices or other business practices. Even for those jurisdictions we have analyzed, the laws in this area can be complex, difficult to interpret and may change over time.
In addition to licensing laws, specific laws and regulations in each of the states and their interpretation by regulators may limit or determine how we sell, market, advertise, and otherwise solicit sales, take orders, take reservations and reservation payments, deliver, and service vehicles for consumers and engage in other activities in that state. We have not performed a complete analysis in all jurisdictions in which we may sell vehicles. Accordingly, there may be laws in jurisdictions where we sell vehicles that may restrict our vehicle reservation practices or other business practices.
Warranties
Under the Magnuson-Moss Warranty Act, our written warranties must disclose, fully and conspicuously, in simple and readily understood language, the terms and conditions of the warranty to the extent required by rules of the Federal Trade Commission. Our warranties must comply with certain federal and state mandated requirements. We currently offer three and six-month warranties on our products.
Non-Highway Vehicle Regulations
The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of certain of our products. The federal government is currently the primary regulator of product safety. The NHTSA has federal oversight over product safety issues related to NEVs and low speed vehicles. We have regulated the speed of our NEVs to comply with NHTSA requirements.
China Regulations for Jonway Vehicles
Filing or Approval Requirement for Automobile Manufacturing Projects
On May 21, 2004, the People’s Republic of China’s National Development and Reform Commission, or NDRC, promulgated the Policy on Developing the Automotive Industry, or the Developing Policy, which requires certain investment projects for automobile manufacturing to obtain an approval from the NDRC at the proper level and meet certain requirements regarding parts manufactured, technology development capacity, total investment and production scale. For example, to establish a new auto manufacturing company, the total investment shall be no less than RMB 2 billion, among which the self-owned capital shall be no less than RMB 800 million. The project must establish a research and development center and the investment in the research and development centre shall be no less than RMB 500 million. Investment projects of newly established passenger car or heavy-cargo vehicle manufacturer shall also manufacture engines that match the complete vehicles.
Under the laws of the People’s Republic of China, a foreign investor may not acquire more than a 50% equity interest in a company qualified to manufacture whole automobiles. A foreign investor-backed automobile manufacturer must also be structured such that the Chinese party owns not less than 50% of the equity shares of such a joint venture. The State Council, through the national NDRC and the Ministry of Commerce or its competent local delegate, must approve newly established projects for manufacturing automobiles with foreign investment.
National Catalog
Under the law of the People's Republic of China, only an enterprise approved by Ministry of Industry and Information Technology and listed in the National Catalog is allowed to manufacture whole automobiles and is limited to the models listed therein. Any new vehicle model must be listed in the National Catalog. At December 31, 2013 ZAP Jonway was not an approved enterprise. However, based on a contract by and among the Sanmen Branch of Zhejiang UFO Automobile Manufacturing Co., Ltd. (“Zhejiang UFO”), Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006.
According to the Developing Policy, an investment project for manufacturing automobile components and parts must be filed with the provincial NDRC and a company with foreign investment must be approved by the Ministry of Commerce, or its competent local delegate. Jonway has complied with all the government regulations.
China Compulsory Certification
The Provisions on the Administration of Compulsory Product Certification promulgated by the People’s Republic of China’s State Administration on Quality Supervision, Inspection and Quarantine require the compulsory product certification, or CCC, for certain products, such as automobiles, which must be so marked before they leave the factory, are sold, are imported or are used in other business activities shall administer the compulsory product certification throughout the country. The SUVs manufactured by Jonway at the Sanmen Branch have this certification.
Competition
ZAP Jonway currently faces strong competition from established automobile manufacturers, including manufacturers of all-electric vehicles such as the Nissan LEAF. The electric vehicles from Tesla and other models from Mitsubishi are already on the market or will be introduced soon. In addition, several manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles, such as the Chevrolet Volt, which is a plug-in hybrid vehicle that operates purely on electric power for a limited number of miles, at which time an internal combustion engine engages to recharge the battery.
Moreover, it has been reported that Daimler, Lexus, Audi, Renault, Mitsubishi, Volkswagen and Subaru are also developing electric vehicles. Several other companies have also announced plans to enter the market for performance electric vehicles, although none of these have yet come to market. Finally, electric vehicles have already been brought to market in China and other foreign countries where ZAP Jonway operates or hopes to operate and we also expect a number of those manufacturers to enter the United States market as well.
ZAP Jonway faces competition on its conventional fuel vehicles in China from established automobile manufacturers Honda and Ford, and from China-based manufacturers Chery, Zongtai and Great Wall Auto.
Our competitors generally have more significant financial resources, established market positions, longstanding relationships with customers and dealers, and more significant name recognition, technical, marketing, sales, manufacturing, distribution and other resources than ZAP Jonway does. The resources available to ZAP Jonway’s competitors to develop new products and introduce them into the marketplace exceed the resources currently available to ZAP Jonway. ZAP Jonway also faces competition from smaller companies with respect to ZAP’s consumer products, such as ZAP’s electric bicycle and scooter. ZAP Jonway expects 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 ZAP Jonway to make changes in our products, pricing, licensing, services, distribution or marketing to develop, maintain and improve ZAP Jonway’s current technology and market position.
Seasonal Variations
ZAP Jonway’s business is subject to seasonal influences for consumer products. Sales volumes in this industry typically slow down during the winter months from November to March in the United States and during the spring and summer months in China.
Inflation
ZAP and Jonway’s 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.
Intellectual Property
ZAP Jonway’s success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, ZAP Jonway relies on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. As of December 31, 2013, ZAP had 20 issued patents and approximately 28 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas. Our issued patents start expiring in 2014. We intend to continue to file additional patent applications with respect to our technology.
As of December 31, 2013, Jonway had 22 issued patents (including 11 utility model patents and 11 exterior design patents and one pending patent applications with the China Patent and Trademark Bureau) Jonway’s issued patents start expiring in 2019.
ZAP Jonway does not know whether any of ZAP or Jonway’s pending patent applications will result in the issuance of patents or whether the examination process will require ZAP or Jonway to narrow their claims. Even if granted, there can be no assurance that these pending patent applications will provide ZAP Jonway with protection.
Subsidiaries
ZAP has the following wholly-owned subsidiaries: Voltage Vehicles, a Nevada company, ZAP Hong Kong, a Hong Kong limited company. Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles, each reported as a segment; Voltage Vehicles is not currently an operating subsidiary. Voltage Vehicles stopped operations in October 2013. ZAP Hong Kong was established in 2011 as a wholly foreign owned enterprises (“WOFE”) and has no operation since incorporated.
We hold 51% of the equity shares of Jonway. As of December 31, 2013, Jonway has the following wholly-owned subsidiaries: Jonway Taizhou Selling Company, Jonway Taizhou Leasing Company and Taizhou Fuxing Vehicles Sale Co., Ltd. We also have 37.5% equity investment in ZAP Hangzhou Joint Venture and 50% equity investment in Shanghai Zapple Joint Venture.
Employees
As of April 12, 2014, ZAP had a total of 5 full-time employees. At present, there are two employment agreements with the officers of ZAP, Chuck Schillings, Co-CEO who was hired June 17, 2012; and Fung Chi Kwong, CFO who was hired August 1, 2013.
As of April 12, 2014, Jonway had a total of over 400 employees, all of whom are full-time employees.
Item 1A.
Item 1A. Risk Factors
If ZAP Jonway does not maintain proper disclosure controls and procedures, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, operating results, and financial condition.
While the audit of our financial statements by our independent registered public accounting firm has included a consideration of internal control over financial reporting as a basis of designing audit procedures, our independent registered public accounting firm has not considered internal controls over financial reporting for the purpose of expressing an opinion with respect to the effectiveness of our internal controls over financial reporting. If such an evaluation had been performed, material weaknesses or other control deficiencies may have been identified. In addition, material weaknesses and other control deficiencies may be identified when our management performs evaluations of internal controls in the future. Ensuring that ZAP has adequate internal financial and accounting controls and procedures that allows us to produce accurate financial statements on a timely basis is costly and time-consuming, and we are required to evaluate these controls frequently.
ZAP has a history of losses and ZAP Jonway’s future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on ZAP Jonway’s business and the value of ZAP’s common stock.
ZAP incurred net losses attributable to ZAP of $15.0 million, $21.8 million and $40.8 million, for years ended December 31, 2013, 2012 and 2011, respectively and has had net losses in each quarter since its inception. Jonway incurred net losses of $14.2 million, $ 19.1 million and $10.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
ZAP Jonway believes that it may continue to incur operating and net losses for our gas and electric vehicles until at least the time ZAP Jonway begins significant volume deliveries of the new models of Jonway’s gasoline vehicles and the electric vehicle models, and when the international sales of the gasoline vehicles picks up volume. We expect to begin international sales of the electric vehicles and the gasoline vehicles in limited quantities for key countries in 2014. However, due to the uncertainty of type approval processes in different countries, this international sales volume and the EV sales may be delayed in some of the countries if the testing process requires substantial investment and corrective changes to the vehicles. We performed limited trial production of the enhanced version of the gas A380 SUV in late 2013. Even if we are able to successfully obtain type approvals in all the required countries for the electric vehicle models, there can be no assurance that it will be commercially successful as it depends on market adoption of full electric vehicles in the sales regions that ZAP Jonway targeted. Our profitability will be dependent upon the successful development of new and additional sales dealership networks and successful commercial introduction and acceptance of our new gas and electric vehicles models, which may not reach our targeted volumes to achieve profitability. Gross margins were low in 2012 due to the low volume and the competitive pricing of new competitors into the SUV markets in China. Increased cost in sales and marketing also contributed to increased operating costs, which increased the net loss of the overall business. The rising RMB has created challenges in competitiveness of the Chinese products internationally, as a result, the gross margins of international sales also suffered as a result of the RMB float.
ZAP Jonway expects the rate at which we will incur losses to continue in the foreseeable future as we:
·
expand our marketing and sales to build branding and add additional new dealerships in China
·
increase our business development and manufacturing activities for the new van model and electric vehicles in China;
·
begin international business development, marketing and sales which requires expensive type approval testing
·
develop international semi-knock down kit (SKD) manufacturing activities that may be required in some of the countries to attain favorable import tax rates;
·
continue to design, develop new models to keep up with demands of the market and compete against new models from competitors and manufacture our follow on planned new gas and electric vehicles;
·
bolstering our after-sale services network especially internationally;
·
build inventories of parts and components for our new gas and electric vehicles;
·
develop and equip manufacturing facilities to produce our new gas and electric vehicle models;
·
expand our design, development, maintenance and repair capabilities;
·
increase our sales and marketing activities to support new models promotion;
·
increase our general and administrative functions to support our growing operations; and
·
Overall rising RMB is likely to continue which will increase the cost of operations in China.
Because ZAP Jonway will incur the costs and expenses from these efforts before we receive substantial incremental revenues to offset the operational costs with respect thereto, ZAP Jonway’s losses in future periods will likely to continue to incur. In addition, we may find that these efforts are more expensive than we currently anticipated or that these efforts may not result in increases in our revenues, which could further increase ZAP Jonway’s losses.
ZAP Jonway’s limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.
You must consider the risks and difficulties we face as a company with a limited operating history. If ZAP Jonway does not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. ZAP was formed in September 1994, but only began manufacturing electric automobiles in 2006. ZAP Jonway’s net losses attributable to ZAP were; $40.8 million for the year ended December 31, 2011, $21.8 million for the year ended December 31, 2012 and $15.0 million for the year ended December 31, 2013. ZAP acquired 51% of the equity shares of Jonway in January 2011. ZAP Jonway as a combined Company has a very limited operating history on which investors can base an evaluation of our business, operating results and prospects. To date, ZAP has derived revenues principally from sales of customized versions of our standard vehicles, and to a lesser extent on consumer products. Jonway has derived revenues principally from sales of its conventional fuel SUVs. ZAP Jonway intends in the longer term to derive substantial revenues from the sales of our planned electric and the upgraded conventional fuel vehicles which are currently developing. ZAP Jonway has no operating history with respect to its newer vehicles, which limits our ability to accurately forecast the cost of supporting the sales and customer service of the vehicles.
It is difficult to predict ZAP Jonway’s future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business, and what competition will likely introduced in the electric vehicle space. Despite wide interests in the major targeted countries, USA and China, in electric vehicles, the competition in this space is growing, with many new models offering plug-in hybrids which pose a more durable range compared to the full electric vehicles that ZAP Jonway plans to offer in its product plans.
ZAP’s primary revenue, sales and manufacturing is from Jonway Auto, based in China and Jonway’s sales revenues are mostly in China currently, and subject to the market conditions, economy, as well as regulations of the Chinese government.
Most of ZAP Jonway’s revenues and sales, as well as manufacturing production operations are in China, and is subject to the market and economic conditions as well as government regulations in China. Over the years, the Chinese government regulations and policies have tended to have very direct impact on the development of specific industry sectors, whether this is in the form of restrictions, or in the form of incentives and credit availability. Recently, the increased credit reserves placed on the banks in 2013 handicapped many small businesses in getting credit loans, and this has had some impact on the smaller direct dealerships Jonway Auto has in China. As a result, many smaller dealerships were unable to continue to get bank lines to support inventory purchases and display new products on their show room floors. This credit tightening by the Chinese government on the banks will continue this year. ZAP Jonway has replaced the smaller dealers with dealers that have a stronger financial backing in larger cities, in anticipation that bank credits will not loosen up much this year.
Automobile manufacturing is a strictly regulated industry and ZAP Jonway uses the valuable auto license granted from a subsidiary of its holding group Jonway Group that holds the UFO license (issued in Hangzhou). Regulations, policies and incentives from central and provincial government vary over time and could hinder or help the overall ZAP Jonway sales in China. This is especially the case with electric vehicles where the government has put forth incentives from both central and selective large provincial and city governments. These incentives which are substantial could be eliminated without warning and any business plans that rely on these incentives to succeed would be vulnerable to being severely impacted.
The Chinese government is exercising precaution in managing the economic growth of China. The GDP forecast for China for this year and the subsequent years will be lower than prior years, as the government puts control on escalating property value, restrictions on issuing licenses for new constructions and as well as restricting licenses for new auto ownerships in the major cities, in order to reduce traffic on the road for these large cities. However, the government has waived controls on full electric vehicles and also in some cities waived the auto license fees for EVs, which in Shanghai and Beijing can be as high as $7,000 or more. These incentives could be removed any time without warning and EVs would then be subject to the same dis-incentives as traditional gasoline vehicles.
Due to the continued losses incurred by both ZAP and Jonway Auto, Jonway Auto has been borrowing money from Chinese banks using the land and buildings from its factory in Sanmen. These loans are used for both working capital as well as supplementing the losses over the last few years.
As of December 31, 2013, Jonway Auto has outstanding loans of approximately $15.0 million and bank acceptance notes of approximately $15.7 million to support the losses incurred and $69.0 million in deficit working capital. These loans and bank acceptance notes are from multiple Chinese commercial banks. Interest rates for these loans range from 6% to 8% per annum and continue to be a burden on the profitability of the company.
ZAP Jonway’s financial results may vary significantly from period-to-period due to the seasonality of our business and fluctuations in our operating costs.
ZAP Jonway’s operating results may vary significantly from period-to-period due to many factors, including seasonal factors that may have an effect on the demand for our gas and electric vehicles. Demand for new cars in the automobile industry in general, and for electric vehicles in particular, typically decline over the winter season in the United States, while sales are generally higher as compared to the winter season during the spring and summer months. In China, sales declined over the spring, first quarter of the year due to holidays during Chinese New Year and summer months and were higher in the autumn and winter seasons, fourth quarter of the year due to promotions and year-end inventory clearance sales. ZAP Jonway expects sales of our vehicles to fluctuate on a seasonal basis and dependent on the country where the sales originated. However, ZAP Jonway’s limited operating history and its early entry into the international markets makes it difficult for us to judge the exact nature or extent of the seasonality of our business. Also, any unusually severe weather conditions in some markets may impact demand for ZAP Jonway’s vehicles. ZAP Jonway’s operating results could also suffer if we do not achieve revenue consistent with our expectations for this seasonal demand because many of our variable sales and marketing expenses are based on anticipated levels of annual revenue.
ZAP Jonway also expects our period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future periods as we, among other things, design, develop and manufacture our planned vehicles, build and equip new manufacturing facilities to produce them, type approval both in China and international for the new models, incur costs for spare parts provisioning, warranty repairs or product recalls, if any, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations.
As a result of these factors, ZAP Jonway believes that quarter-to-quarter comparisons of our operating results are not necessarily meaningful until there is more history built up of the combined companies’ performance and that these comparisons cannot be relied upon as indicators of future performance. Moreover, ZAP Jonway’s operating results may not meet expectations of equity research analysts or investors that may compare the results to established auto companies, since ZAP Jonway is in the early stages of building its business in the electric vehicle space, leveraging on the experience and resources available from its sales and manufacturing of gasoline vehicle business. If this occurs, the trading price of ZAP’s common stock could vary substantially depending on the results of the new business developments.
The future growth of our electric vehicle business is dependent upon consumers’ willingness to adopt electric vehicles.
ZAP Jonway’s growth is highly dependent upon the adoption by consumers of, and we are subject to an elevated risk of any reduced demand for, alternative fuel vehicles in general and electric vehicles in particular. If the market for electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed. The market for alternative fuel vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:
·
perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles;
·
perceptions about vehicle safety in general, in particular safety issues that may be attributed to the use of advanced technology, including vehicle electronics and regenerative braking systems, such as the possible perception that Toyota’s recent vehicle recalls may be attributable to these systems;
·
the limited range over which electric vehicles may be driven on a single battery charge;
·
the decline of an electric vehicle’s range resulting from deterioration over time in the battery’s ability to hold a charge;
·
Concerns about electric grid capacity and reliability, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline;
·
the availability of alternative fuel vehicles, including plug-in hybrid electric vehicles;
·
improvements in the fuel economy of the internal combustion engine;
·
the availability of service for electric vehicles;
·
the environmental consciousness of consumers;
·
volatility in the cost of oil and gasoline;
·
consumers’ perceptions of the dependency of the United States on oil from unstable or hostile countries;
·
government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
·
access to charging stations, standardization of electric vehicle charging systems and consumers’ perceptions about convenience and cost of charging an electric vehicle;
·
the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation requiring increased use of nonpolluting vehicles;
·
perceptions about and the actual overall cost of electric vehicles; and
·
macroeconomic factors.
In addition, recent reports have suggested the potential for extreme temperatures to affect the range or performance of electric vehicles. To the extent customers have concerns about such reductions or third party reports which suggest reductions in range greater than our estimates gain widespread acceptance, ZAP Jonway’s ability to market and sell our vehicles, particularly in colder climates, may be adversely impacted.
Additionally, ZAP Jonway may become subject to regulations that may require us to alter the design of our vehicles, which could negatively impact consumer interest in our vehicles. For example, ZAP Jonway’s electric vehicles make less noise than internal combustion vehicles. We are aware of advocacy groups, such as the United States National Federation of the Blind, which are lobbying for regulations to require electric vehicle manufacturers to adopt minimum sound standards.
The influence of any of the factors described above may cause current or potential customers not to purchase ZAP Jonway’s electric vehicles, which would materially adversely affect ZAP Jonway’s business, operating results, financial condition and prospects.
If ZAP Jonway is unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.
ZAP Jonway may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. Any failure to keep up with advances in electric vehicle technology would result in a decline in ZAP Jonway’s competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. ZAP Jonway’s research and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology. However, ZAP Jonway’s vehicles may not compete effectively with alternative vehicles if ZAP Jonway is not able to source and integrate the latest technology into our vehicles. For example, we do not manufacture engines, which make us dependent upon other suppliers of engine technology for our vehicles.
Manufacturing internationally may cause problems and present risks for ZAP Jonway.
ZAP Jonway has been focusing on manufacturing internationally, particularly in China. 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 ZAP Jonway’s 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.
ZAP Jonway is required to comply with all applicable domestic and foreign export control laws, including the International Traffic in Arms Regulations and the Export Administration Regulations, or EAR. Some items manufactured by us are controlled for export by the United States Department of Commerce’s Bureau of Industry and Security under the EAR. In addition, ZAP Jonway is subject to the Foreign Corrupt Practices Act and international counterparts that generally bar bribes or unreasonable gifts for foreign governments and officials. Violation of any of these laws or regulations could result in significant sanctions, including large monetary penalties and suspension or debarment from participation in future government contracts, which could reduce ZAP Jonway’s future revenue and net income.
Because ZAP Jonway manufactures and sell a substantial portion of our products abroad, its operating costs are subject to fluctuations in foreign currency exchange rates. If the U.S. dollar weakens against the foreign currencies in which we denominate certain of our trade accounts payable, fixed purchase obligations and other expenses, the U.S. dollar equivalent of such expenses would increase. We can provide no assurances that we will not experience losses arising from currency fluctuations in the future, which could be significant.
The range of ZAP’s electric vehicles on a single charge declines over time, which may negatively influence potential customers’ decisions whether to purchase our vehicles.
The range of ZAP electric vehicles on a single charge declines principally as a function of usage, time and charging patterns. For example, a customer’s use of their ZAP vehicle as well as the frequency with which they charge the battery of their vehicle can result in additional deterioration of the battery’s ability to hold a charge. Battery deterioration and the related decrease in range may negatively influence potential customer decisions whether to purchase ZAP Jonway’s vehicles, which may harm our ability to market and sell our vehicles.
Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for ZAP Jonway’s vehicles.
Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways ZAP Jonway does not currently anticipate. For example, fuel which is abundant and relatively inexpensive in North America, such as compressed natural gas may emerge as consumers’ preferred alternative to petroleum based propulsion. Any failure by ZAP Jonway to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced vehicles, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.
ZAP Jonway’s future success will depend upon our ability to design and achieve market acceptance of new vehicle models.
ZAP anticipates that a substantial amount of its revenue in the future will be generated from the sale of its electric vehicles. Jonway currently generates a substantial amount of its revenue from the sale of its gas fueled vehicles. Of ZAP Jonway’s planned vehicles, our electric vehicles, such as the Alias, electric A380 SUV and the improved gas fueled vehicle models are expected to be in production in 2014. All of our planned products require significant investment prior to commercial introduction, and may never be successfully developed or commercially successful. There can be no assurance that ZAP Jonway will be able to design future models of electric or gas vehicles that will meet the expectations of our customers or that our future model will become commercially viable. Additionally, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, ZAP Jonway may in the future be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As technologies change in the future for automobiles in general and performance electric vehicles specifically, we will be expected to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology. To date ZAP Jonway has limited experience simultaneously designing, testing, manufacturing and selling our vehicles.
Any changes to the Federal Trade Commission’s electric vehicle range testing procedure or the United States Environmental Protection Agency’s energy consumption regulations for electric vehicles could result in a reduction to the advertised range of ZAP Jonway’s electric vehicles which could negatively impact our sales and harm our business.
The Federal Trade Commission, or FTC, requires us to calculate and display the range of ZAP Jonway’s electric vehicles sold in the United States on a label we affix to the vehicle’s window. The FTC specifies that we follow testing requirements set forth by the Society of Automotive Engineers, or SAE, which further requires that we test vehicles sold in the United States using the United States Environmental Protection Agency’s, or the EPA’s, combined city and highway testing cycles. The EPA recently announced that it would develop and establish new energy efficiency testing methodologies for electric vehicles. However, there can be no assurance that the modified EPA testing cycles will not result in a greater reduction. Any reduction in the advertised range of ZAP Jonway vehicles could negatively impact our vehicle sales and harm our business.
If ZAP Jonway is unable to reduce and adequately control the costs associated with operating our business, including our costs of manufacturing, sales and materials, our business, financial condition, operating results and prospects will suffer.
If ZAP Jonway is unable to reduce and/or maintain a sufficiently low level of costs for designing, manufacturing, marketing, selling and distributing and servicing our vehicles relative to their selling prices, our operating results, gross margins, business and prospects could be materially and adversely impacted. We have made, and will be required to continue to make, significant investments for the design, manufacture and sales of our vehicles. There can be no assurances that our costs of producing and delivering our vehicles will be less than the revenue we generate from sales at the time of the launch of such vehicle or that we will ever achieve a positive gross margin on sales of any specific vehicle.
ZAP Jonway incurs significant costs related to contracting for the manufacture of our vehicles, procuring the materials required to manufacture our electric cars, assembling vehicles and compensating our personnel. Although we expect manufacturing expenses to proportionally decrease with the localization of manufacturing in Jonway’s facilities, if ZAP Jonway is unable to keep our operating costs aligned with the level of revenues we generate, our operating results, business and prospects will be harmed. Many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components, such as lithium-ion battery cells used in our vehicles could increase due to shortages as global demand for these products increases. Indeed, if the popularity of electric vehicles exceeds current expectations without significant expansion in battery cell production capacity and advancements in battery cell technology, shortages could occur which would result in increased materials costs to us.
The automotive market is highly competitive and ZAP Jonway may not be successful in competing in this industry. ZAP Jonway currently faces competition from established competitors and expect to face competition from others in the future.
The worldwide automotive market, particularly for alternative fuel vehicles, is highly competitive today and ZAP Jonway expects it will become even more so in the future. ZAP Jonway currently faces strong competition from established automobile manufacturers, including manufacturers of all-electric vehicles such as the Nissan LEAF, Tesla, Ford, Volkswagen, Chevy Volt, Renault and many others.
Most of ZAP Jonway’s current and potential competitors have significantly greater financial, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our incumbent competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, many of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.
Furthermore, certain large manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company. ZAP Jonway does not currently offer or plan to offer, any form of direct financing on our vehicles. ZAP Jonway has not in the past, and does not currently nor in the foreseeable future intend to, offer substantial customary discounts on our vehicles. The lack of direct financing options and the absence of substantial customary vehicle discounts could put ZAP Jonway at a competitive disadvantage.
ZAP Jonway expects competition in our industry to intensify in the future in light of increased demand for conventional and alternative fuel vehicles, continuing globalization and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect ZAP Jonway’s business, financial condition, operating results and prospects. ZAP Jonway’s ability to successfully compete in our industry will be fundamental to our future success in existing and new markets and our market share. There can be no assurances that ZAP Jonway will be able to compete successfully in our markets. If our competitors introduce new cars or services that compete with or surpass the quality, price or performance of our cars or services, ZAP Jonway may be unable to satisfy existing customers or attract new customers at the prices and levels that would allow us to generate attractive rates of return on our investment. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results.
Demand in the automobile industry is highly volatile.
Volatility of demand in the automobile industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we currently compete and plan to compete in the future have been subject to considerable volatility in demand in recent periods. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a newer automobile manufacturer and low volume producer, ZAP Jonway has less financial resources than more established automobile manufacturers to withstand changes in the market and disruptions in demand. As our business grows, economic conditions and trends in other countries and regions where we sell our vehicles will impact our business, prospects and operating results as well. Demand for ZAP Jonway’s vehicles may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations, including tariffs, import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in further downward price pressure and adversely affect ZAP Jonway’s business, prospects, financial condition and operating results. These effects may have a more pronounced impact on our business given our relatively smaller scale and financial resources as compared to many incumbent automobile manufacturers.
Difficult economic conditions may affect consumer purchases, such as ZAP Jonway’s vehicles.
Over the last three years, the deterioration in the global financial markets and continued challenging condition of the macroeconomic environment has negatively impacted consumer spending and we believe has adversely affected the sales of our vehicles. The Chinese economy is slowing down, and due to government regulation that restricts the purchase of vehicles for major cities such as Shanghai and Beijing due to massive congestion and pollution problems, the demand for automobiles may decline. Despite strong incentives from government to promote the adoption of EVs by subsidies and lifting restrictions to waive EV purchases, consumers’ reluctance may continue to persist due to the lack of charging infrastructures and consumers’ concern with the reliability and safety of EVs. Difficult economic conditions could therefore temporarily reduce the market for vehicles in ZAP Jonway’s price range. Discretionary consumer spending also is affected by other factors, including changes in tax rates and tax credits, interest rates and the availability and terms of consumer credit.
If the current difficult economic environment improvement is transient, we may experience a decline in the demand for new vehicles and thus ZAP Jonway’s vehicles as well, which could materially harm our business, prospects, financial condition and operating results. Accordingly, any events that have a negative effect on the United States or China’s economy or on other foreign economies or that negatively affect consumer confidence in the economy, including disruptions in credit and stock markets, and actual or perceived economic slowdowns, may harm ZAP Jonway’s business, prospects, financial condition and operating results.
Marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining ZAP Jonway’s business.
If ZAP Jonway is unable to establish and maintain confidence about ZAP Jonway’s liquidity and business prospects among consumers and within our industry, then our financial condition, operating results and business prospects may suffer materially. ZAP Jonway’s vehicles are highly technical products that require maintenance and support. If we were to cease or cut back operations, even years from now, buyers of ZAP Jonway’s vehicles from years earlier might have much more difficulty in maintaining their vehicles and obtaining satisfactory support. As a result, consumers may be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with ZAP Jonway if they are not convinced that our business will succeed. If ZAP Jonway is required to downsize in the future, such actions may result in negative perceptions regarding our liquidity and long-term business prospects.
Accordingly, in order to build and maintain our business, ZAP Jonway must maintain confidence among customers, suppliers and other parties in our liquidity and long-term business prospects. In contrast to some more established auto makers, we believe that, in ZAP Jonway’s case, the task of maintaining such confidence may be particularly complicated by factors such as the following:
·
ZAP Jonway’s limited operating history;
·
ZAP limited revenues and lack of profitability to date;
Jonway Auto’s outstanding loan and line of credit for working capital;
·
unfamiliarity with or uncertainty about our electric vehicles;
lack of infrastructure to support the refueling/recharging of EV and new energy vehicles;
·
uncertainty about the long-term marketplace acceptance of alternative fuel vehicles generally, or electric vehicles specifically;
·
the prospect that ZAP Jonway may need ongoing infusions of external capital to fund our planned operations;
·
the size of our expansion plans in comparison to our existing capital base and scope and history of operations; and
·
the prospect or actual emergence of direct, sustained competitive pressure from more established auto makers.
Many of these factors are largely outside of ZAP Jonway’s control, and any negative perceptions about our liquidity or long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds when needed.
ZAP Jonway may need to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need them, ZAP Jonway’s operations and prospects could be negatively affected.
The design, manufacture, sale and servicing of automobiles is a capital intensive business. For example, for the year ended December 31, 2013, ZAP Jonway incurred net losses of approximately $21.9 million and used approximately $2.3 million of cash in operations while recognizing approximately $51.5 million in revenue. As of December 31, 2013, ZAP Jonway had cash and cash equivalents of $2.63 million. We cannot be certain that additional funds will be available to ZAP Jonway on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our financial condition, results of operations, business and prospects could be materially adversely affected. Future issuance of ZAP equity or equity-related securities will dilute the ownership interest of existing ZAP shareholders and our issuance of debt securities could increase the risk or perceived risk of our company. Jonway Auto’s cash flow depends heavily on continuing orders from its domestic and international markets, and using the payments to finance the bulk of the required working capital to deliver the products in order to fulfill the sales orders. If the future orders were to slow down, or get substantially reduced, ZAP and Jonway Auto would need more funding to support its cash flow in order to make payment to its suppliers and meet its working capital cash needs.
If ZAP Jonway’s vehicles fail to perform as expected, we may have to recall our products and our ability to develop, market and sell our electric vehicles could be harmed.
ZAP Jonway’s vehicles may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. ZAP has received an order from Department of Transportation (DOT) in the U.S. to recall its 2008 Xebra vehicles with buy back because the proposed fix submitted in 2012 was not acceptable to DOT. ZAP has discontinued the sale of Xebras since 2011 and also issued recall notices last year with respect to the 2008 Xebra® model. This recall is due to the 2008 Xebras inability to meet the braking distance requirements when the vehicle is operating at its maximum speed. On November 14, 2012, NHTSA determined that ZAP has not reasonably met its recall remedy and notification requirements and ordered ZAP to take specified actions to meet its requirements. ZAP’s recall includes 627 units sold in U.S. market. ZAP and the United States reached a settlement that is incorporated into a Consent Decree that was entered and approved by the U.S. District Court on July 17, 2013. Pursuant to the Consent Decree, ZAP agreed to initiate a buy-back program whereby it would offer to provide a refund of $3,100 to each eligible MY 2008 ZAP Xebra owner. ZAP began repurchasing vehicles in March, 2014. As of March 25, 2014 ZAP had received 318 refund requests of which 311 were deemed eligible,
As for other models, while we have performed extensive internal testing, we currently have a limited frame of reference by which to evaluate the performance of our vehicles, particularly our electric vehicles, in the hands of our customers. While it has not initiated any product recalls to date, Jonway has had a relatively short operating history and there can be no assurances that Jonway will not be required to recall products in the future. There can be no assurance that ZAP Jonway will be able to detect and fix any defects in the vehicles prior to their sale to consumers. In the future, ZAP Jonway may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles or their components prove to be defective. Such recalls, voluntary or involuntary, involve significant expense and diversion of management attention and other resources, which would adversely affect our brand image in our target markets and could adversely affect our business, prospects, financial condition and results of operations. ZAP Jonway’s electric vehicles may not perform consistent with customers’ expectations or consistent with other vehicles currently available. For example, ZAP Jonway’s vehicles may not have the durability or longevity of current vehicles, and may not be as easy to repair as other vehicles currently on the market. Any product defects or any other failure of our vehicles to perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to ZAP Jonway’s brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.
ZAP Jonway has very limited experience servicing our vehicles and ZAP Jonway is using a different service model in the US through third party service contracts with US partners. If ZAP Jonway is unable to address the service requirements of our existing and future customers our business will be materially and adversely affected.
If ZAP Jonway is unable to successfully address the service requirements of our existing and future customers our business and prospects will be materially and adversely affected. In addition, we anticipate the level and quality of the service we provide our customers will have a direct impact on the success of our future vehicles. If ZAP Jonway is unable to satisfactorily service our current customers, our ability to generate customer loyalty, grow our business and sell additional vehicles could be impaired.
ZAP Jonway plans to service our vehicles by shipping parts to dealers, sending our authorized service personnel as necessary, providing service at our Santa Rosa location and arranging to have local US partners take up the service contracts with new vehicles delivered in the US supported by Jonway’s service personnel in China. ZAP Jonway’s customer service centers are distributed all over China and are trained to provide local support within their territories. We are adopting similar models internationally where ZAP will sign up local in-country partners who have presence in the major cities to provide customer service support, and provide these partners with service training and spare parts. Jonway’s service facilities in China are not yet equipped to handle ZAP Jonway electric vehicles and will have to be updated and the personnel trained for this purpose. There can be no assurance that these service arrangements or ZAP Jonway’s limited experience servicing our vehicles will adequately address the service requirements of our customers to their satisfaction, or that we will have sufficient resources to meet this service requirement in a timely manner as the volume of vehicles ZAP Jonway is able to deliver annually increases.
A number of potential customers may choose not to purchase ZAP Jonway’s vehicles because of the lack of a more widespread service network. If we do not adequately address our customers’ service needs, our brand and reputation will be adversely affected, which in turn, could have a material and adverse impact on our business, financial condition, operating results and prospects.
Traditional automobile manufacturers do not provide maintenance and repair services directly. Consumers must rather service their vehicles through franchised dealerships or through third party maintenance service providers. ZAP does not have any such arrangements with third party service providers and has not yet established US dealership network. It is unclear when such third party service providers will be able to acquire the expertise to service ZAP Jonway’s vehicles. As our vehicles are placed in more locations, ZAP’s may encounter negative reactions from our consumers who are frustrated that they cannot use local service stations to the same extent as they have with their conventional automobiles and this frustration may result in negative publicity and reduced sales, thereby harming our business and prospects.
In addition, the motor vehicle industry laws in many jurisdictions require that service facilities be available with respect to vehicles physically sold from locations in the jurisdiction. Whether these laws would also require that service facilities be available with respect to vehicles sold over the internet to consumers in a state in which ZAP Jonway has no physical presence is uncertain. While we believe our service practices would satisfy regulators in these circumstances, there are no assurances that regulators will not attempt to require that we provide physical service facilities in their states. If issues arise in connection with these regulations, certain aspects of our service program would need to be restructured to comply with state law, which may require additional investment and affect the efficiencies and operations of our business processes.
ZAP Jonway may not succeed in continuing to establish, maintain and strengthen the ZAP and Jonway brands, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.
Our business and prospects are heavily dependent on our ability to develop, maintain and strengthen the ZAP and Jonway brands. Any failure to develop, maintain and strengthen our brands may materially and adversely affect our ability to sell our existing and planned vehicles. If ZAP Jonway does not continue to establish, maintain and strengthen our brands, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brands will likely depend significantly on our ability to provide quality vehicles and maintenance and repair services, and we have limited experience in these areas, which are through third party arrangements. Jonway’s service facilities in China are not yet equipped to handle ZAP electric vehicles and will have to be updated and the personnel trained for this purpose. In addition, we expect that our ability to develop, maintain and strengthen the ZAP and Jonway brands will also depend heavily on the success of our marketing efforts. To date, Jonway has limited experience with marketing activities as we have relied primarily on the internet, word of mouth and attendance at industry trade shows to promote our brands and Jonway has relied primarily on its distribution network. To further promote our brands, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening the ZAP and Jonway brands. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain strong brands, our business, prospects, financial condition and operating results will be materially and adversely impacted.
ZAP Jonway is dependent on our suppliers, a significant number of which are single or limited source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles at prices and volumes acceptable to us could have a material adverse effect on our business, prospects and operating results.
While ZAP obtains components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. We refer to these component suppliers as our single source suppliers. To date we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our single source suppliers.
While ZAP believes that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term or at all at prices or costs that are favorable to us. In particular, while ZAP believes that we will be able to secure alternate sources of supply for almost all of our single sourced components on a relatively short time frame, qualifying alternate suppliers or developing our own replacements for certain highly customized components of our electric vehicles may be time consuming and costly.
Jonway obtains most of its components, such as its engines, from multiple third party suppliers, except for interior trim plastic components, which it obtains from Jonway Group.
Changes in business conditions, wars, governmental changes and other factors beyond ZAP Jonway’s control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significant increased demand, or need to replace our existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in vehicle deliveries to ZAP Jonway’s customers, which could hurt our relationships with our customers and also materially adversely affect our business, prospects and operating results.
Increases in costs, disruption of supply or shortage of materials, in particular lithium-ion cells, could harm ZAP Jonway’s business.
ZAP Jonway may experience increases in the cost or a sustained interruption in the supply or shortage of materials. Any such cost increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. ZAP Jonway uses various materials in our business and the prices for these materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. For instance, ZAP Jonway is exposed to multiple risks relating to price fluctuations for batteries, particularly lithium-ion cells for our electric vehicles. These risks include:
·
the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases;
·
Disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and
·
An increase in the cost of raw materials, such as cobalt, used in lithium-ion cells.
ZAP Jonway’s business is dependent on the continued supply of battery cells for our vehicles. Battery cell manufacturers may have additional restrictions and constraints placed by local regulatory government agencies that may affect their ability to continue to supply lithium batteries for electric vehicle manufacturers in the event that they determine that the vehicles are not sufficiently safe. Furthermore, current fluctuations or shortages in petroleum and other economic conditions may cause us to experience significant increases in freight charges and material costs. Substantial increases in the prices for our materials would increase our bill of materials and operating costs, and could reduce our margins if we cannot recoup the increased costs through increased electric vehicle prices. There can be no assurance that we will be able to recoup increasing costs of materials by increasing vehicle prices and any attempts to increase the announced or expected prices in response to increased material costs could be viewed negatively by our customers and could materially adversely affect our brand, image, business, prospects and operating results.
The success of our electric vehicle business depends on attracting and retaining large fleet customers. If ZAP Jonway is unable to do so, we will not be able to achieve profitability.
ZAP Jonway’s electric vehicle business’ success depends on attracting large fleet or taxi customers to purchase our electric vehicles. If our existing and prospective customers do not perceive our vehicles and services to be of sufficiently high value and quality, cost competitive and high performing, ZAP Jonway may not be able to retain our current customers or attract new customers, and our business and prospects, operating results and financial condition would suffer as a result. To date, we have limited experience selling ZAP Jonway vehicles and we may not be successful in attracting and retaining large fleet or taxi customers. If for any of these reasons ZAP Jonway is not able to attract and maintain customers, our business, prospects, operating results and financial condition would be materially harmed.
ZAP Jonway’s plan to expand our network of distributors will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our electric vehicles.
ZAP Jonway’s plan to expand our network of distributors will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our vehicles. This planned global expansion of distributors may not have the desired effect of increasing sales and expanding our brand presence to the degree ZAP Jonway is anticipating. We will also need to ensure ZAP Jonway is in compliance with any regulatory requirements applicable to the sale of our vehicles in our potential markets, which could take considerable time and expense. If ZAP Jonway experiences any delays in expanding our network of distributors, this could lead to a decrease in sales of our vehicles and could negatively impact our business, prospects, financial condition and operating results. We may not be able to expand our network at our expected rate and our planned expansion of our network of distributors will require significant cash investment and management resources.
Furthermore, certain states and foreign jurisdictions may have permit requirements, franchise dealer laws or similar laws or regulations that may preclude or restrict our ability to sell vehicles out of such states and jurisdictions. Any such prohibition or restriction may lead to decreased sales in such jurisdictions, which could harm our business, prospects and operating results.
ZAP Jonway faces risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions, which could harm our business.
ZAP Jonway faces risks associated with our international operations, including possible unfavorable regulatory, political, tax and labor conditions, which could harm our business. Recently, in China, rising wages in China have increased operating costs and the rising RMB exchange rate is reducing the price competitiveness of our vehicles internationally. All of this is putting pressure on the operating costs of manufacturing plants. Meanwhile, due to numerous labor disputes in large manufacturing plants, local government regulatory authorities and labor union advocates have increased their scrutiny of wages, labor conditions in China. To the extent such developments result in more burdensome labor laws and regulations or require us to increase the wages of employees, ZAP Jonway’s ability to adequately staff our plants and to manufacture and ship products in China could be adversely affected, our margins and net income could be reduced and our reputation as a reliable supplier could be negatively impacted.
ZAP currently has international operations and subsidiaries in China, and is evaluating setting up assembly plants in strategic countries where local partners are willing to invest in the production assembly plants in order to improve tax rates. Jonway is developing international distribution activities in Brazil, Turkey, Russia, South Africa, Ghana and Thailand. In the near future, Jonway intends to add other new international distribution to Southeast Asia, the Middle East and South America depending on the opportunities and strengths of the local interested partners. Additionally, as part of ZAP Jonway’s growth strategy, we intend to expand our sales, maintenance and repair services internationally. However, we have limited experience to date in manufacturing, selling, and servicing our vehicles internationally and such expansion would require us to make significant expenditures, including the hiring of local employees and establishing facilities, in advance of generating any revenue. ZAP Jonway is subject to a number of risks associated with international business activities that may increase our costs, impact our ability to sell our electric vehicles and require significant management attention. These risks include:
·
compliance of ZAP Jonway’s vehicles to various international regulatory requirements where our vehicles are sold, or homologation;
·
labor unrest and difficulty in staffing and managing international operations;
·
excess costs associated with reducing employment or shutting down facilities;
·
constraints on our ability to maintain or increase prices as the RMB rises and still remain competitive;
·
coordinating communications among and managing international operations;
·
difficulties in marketing and attracting customers in new jurisdictions;
·
foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon ZAP in the United States, and foreign tax and other laws limiting our ability to repatriate funds to ZAP in the United States;
·
fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake; our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United States, Japan and European countries, which increases the risk of unauthorized, and uncompensated, use of our technology;
·
difficulties in obtaining or complying with export license requirements;
·
United States and foreign government trade restrictions, tariffs and price or exchange controls;
·
foreign labor laws, regulations and restrictions;
·
preferences of foreign nations for domestically owned companies;
·
changes in diplomatic and trade relationships;
·
political instability, natural disasters, war or events of terrorism; and
·
the strength of international economies.
ZAP Jonway also faces the risk that costs denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. If the value of the United States dollar depreciates significantly against such currencies, our costs as measured in United States dollars will correspondingly increase and our operating results will be adversely affected. In addition, our battery cell purchases from international suppliers are subject to currency risk. Although ZAP present contracts are United States dollar based, if the United States dollar depreciates significantly against the local currency it could cause our international suppliers to significantly raise their prices, which could harm ZAP Jonway’s financial results.
To respond to competitive pressures and customer requirements, ZAP Jonway may further expand internationally in lower cost locations. As we pursue continued expansion in these locations, we may incur additional capital expenditures. In addition, the cost structure in certain countries that are now considered to be favorable may increase as economies develop or as such countries join multinational economic communities or organizations, causing local wages to rise. As a result, we may need to continue to seek new locations with lower costs and the employee and infrastructure base to support our international operation. We cannot assure you that ZAP Jonway will realize the anticipated strategic benefits of our international operations or that our international operations will contribute positively to our operating results.
If ZAP Jonway fails to successfully address these risks, our business, prospects, operating results and financial condition could be materially harmed.
Some of the laws and regulations governing Jonway are vague and subject to risks of interpretation.
Some of the laws and regulations of the People’s Republic of China governing our business operations in China are vague and their official interpretation and enforcement may involve substantial uncertainty. These include, but are not limited to, laws and regulations governing Jonway’s business, required licenses and approvals, and the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We believe that we comply with regulatory requirements in the People’s Republic of China, but there can be no certainty that government will not have a different interpretation. Despite their uncertainty, Jonway will be required to comply. In particular, Jonway’s regulatory authority to manufacture vehicles is through Zhejiang UFO’s listing on the Public Notice. We believe this satisfies regulatory requirements, but if the government decides otherwise, they could enforce penalties and fees and require Jonway to obtain a separate listing on the Public Notice. New laws and regulations that affect existing and proposed businesses may be applied retroactively. Accordingly, the effectiveness of newly enacted laws, regulations or amendments may not be clear. ZAP Jonway cannot predict what effect the interpretation of existing or new laws or regulations may have on our business. If any promulgated regulations contain clauses that cause an adverse impact to ZAP Jonway’s operations in China, then our business, operating results and financial condition could be materially and adversely affected.
Jonway’s contracts are based in the Chinese Renminbi, which may fluctuate against the U.S. dollar and must be reconciled into the U.S. dollar for ZAP Jonway’s consolidated financials.
Jonway’s present contracts are based in the Chinese Renminbi (“RMB”), except for international trading contracts in the US dollar. The value of the RMB depends, to a large extent, on China’s domestic and international economic, financial and political developments and government policies, as well as the currency’s supply and demand in the local and international markets. Over the last two years, the value of the RMB largely appreciated against U.S. dollar and will continue to appreciate over time. There can be no assurance that such exchange rate will not fluctuate widely against the U.S. dollar in the future. Fluctuation of the value of the RMB will have adverse effects in reconciling Jonway’s financial statements into the U.S. dollar in consolidated financials and such reconciliation may require significant resources of ZAP Jonway and therefore cause an adverse effect on ZAP Jonway’s business. Additionally, the rising RMB could increasingly reduce the price competitiveness of our products internationally outside of China, and add to the overall manufacturing costs for each vehicle.
The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on ZAP Jonway’s business, financial condition, operating results and prospects.
Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the perceived success of the electric vehicle, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or ZAP Jonway’s electric vehicles in particular. This could materially and adversely affect the growth of the alternative fuel automobile markets and ZAP Jonway’s business, prospects, financial condition and operating results.
ZAP Jonway’s growth depends in part on the availability and amounts of government subsidies and economic incentives for alternative fuel vehicles generally and electric vehicles specifically. If we fail to meet conditions for tax incentives for electric vehicles, we would be unable to take full advantage of these tax incentives and our financial position could be harmed.
In addition, certain regulations that encourage sales of electric cars could be reduced, eliminated or applied in a way that creates an adverse effect for ZAP Jonway’s electric vehicles, either currently or at any time in the future. For example, while the federal and state governments in the United States have from time to time enacted tax credits and other incentives for the purchase of alternative fuel cars, our competitors have more experience and greater resources in working with legislators than we do, and so there is no guarantee that our vehicles would be eligible for tax credits or other incentives provided to alternative fuel vehicles in the future. This would put ZAP Jonway’s electric vehicles at a competitive disadvantage. Furthermore, low volume manufacturers are exempt from certain regulatory requirements in the United States. This provides ZAP Jonway with an advantage over high volume manufacturers that must comply with such regulations. Once we reach a certain threshold number of sales in the United States, we will no longer be able to take advantage of such exemptions in the respective jurisdictions, which could lead us to incur additional design and manufacturing expense.
Jonway depends in part on government subsidies and economic incentives to finance Jonway’s independent research and development, production and sale, such as a Chinese surtax exemption, technology innovation incentives and land use rights investment subsidies from local government. The related government subsidies and incentives amounted to $0.24 million and $0.31 million for Jonway in 2013 and 2012, respectively. If government policies change, or if Jonway otherwise fails to obtain these incentives, it will adversely affect ZAP Jonway’s financial position and operating results. Due to lack of a business license, Jonway cannot obtain certain government grants for the auto manufacturing industry, or other incentives, such as the enterprise income tax preferential treatment, and other incentives for auto manufacturers.
ZAP’s payment in its common stock in the US to compensate for services rendered by service providers and some employees may put downward pressure on stock prices.
ZAP in the US had paid some of its employees and contractors with stock and this continues to put pressure on the share price. ZAP is putting more restrain on the issuance of stock for services, and minimized the issuance of stock options to employees.
ZAP’s efforts to integrate acquired businesses, especially Jonway, into our existing operation may not be successful.
ZAP Jonway may, in the future, continue to acquire businesses in China and in other jurisdictions that we believe would benefit us in terms of product diversification, brand enhancement, technological advances, geographical presence or expansion of sales and distribution networks. Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable targets and to obtain any necessary financing for such acquisitions. In order to complete certain acquisitions, we may require regulatory approvals or other conditions to closing that delay the completing of strategic transactions beyond the time anticipated. Even if we successfully complete an acquisition, we may experience difficulties in integrating the acquired business, its personnel or its products into our existing business, particularly:
·
allocating management resources;
·
scaling up production and coordinating management of operations at new sites;
·
separating operations or support infrastructure for entities divested;
·
managing and integrating operations in geographically dispersed locations;
·
maintaining customer, supplier or other favorable business relationships of acquired operations and terminating unfavorable relationships;
·
integrating the acquired company’s systems into our management information systems;
·
satisfying unforeseen liabilities of acquired businesses, including environmental liabilities, which could require the expenditure of material amounts of cash;
·
operating in the geographic market or industry sector of the business acquired in which we may have little or no experience;
·
improving and expanding our management information systems to accommodate expanded operations; and losing key employees of acquired operations
These difficulties may result in delays or failures in realizing the benefits of the acquired business or its products, diversion of our management’s time and attention from other business concerns and, higher costs of integration than we anticipated. In addition, we may also face cultural and other issues integrating businesses in China and other jurisdictions, including oversight to ensure these businesses comply with applicable U.S. laws and regulations, particularly regarding compliance with the Office of Foreign Assets Control and the Foreign Corrupt Practices Act. ZAP Jonway may be ineffective in fully adopting more efficient systems for timely recording and reporting to provide transparency and accuracy of all operations and finances. Delayed adoption of tracking systems may affect the performance of the Company.
ZAP Jonway may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future.
Strategic business relationships will be an important factor in the growth and success of ZAP Jonway’s business. There are no assurances that we will be able to identify or secure suitable business relationship opportunities in the future or our competitors may capitalize on such opportunities before we do. We may not be able to offer competitive benefits to other companies that we would like to establish and maintain strategic relationships with which could impair our ability to establish such relationships. Moreover, identifying such opportunities could demand substantial management time and resources, and negotiating and financing relationships involves significant costs and uncertainties. If ZAP Jonway is unable to successfully source and execute on strategic relationship opportunities in the future, our overall growth could be impaired, and our business, prospects and operating results could be materially adversely affected.
ZAP Jonway may not be successful in implementing and integrating strategic transactions or in divesting non-strategic assets, which could cause our financial results to fail to meet our forecasts.
From time to time, ZAP Jonway may undertake strategic transactions that give us the opportunity to access new customers and new end-customer markets, to obtain new manufacturing and service capabilities and technologies, to enter new geographic manufacturing locations, to lower our manufacturing costs and improve the margins on our product mix, and to further develop existing customer relationships. Strategic transactions involve many difficulties and uncertainties, including the following:
·
integrating acquired operations and businesses;
·
regulatory approvals or other conditions to closing that delay the completing of strategic transactions beyond the time anticipated;
·
allocating management resources;
·
scaling up production and coordinating management of operations at new sites;
·
separating operations or support infrastructure for entities divested;
·
managing and integrating operations in geographically dispersed locations;
·
maintaining customer, supplier or other favorable business relationships of acquired operations and terminating unfavorable relationships;
·
integrating the acquired company’s systems into our management information systems;
·
satisfying unforeseen liabilities of acquired businesses, including environmental liabilities, which could require the expenditure of material amounts of cash;
·
operating in the geographic market or industry sector of the business acquired in which we may have little or no experience;
·
improving and expanding our management information systems to accommodate expanded operations; and
·
losing key employees of acquired operations.
Any of these factors could prevent ZAP Jonway from realizing the anticipated benefits of a strategic transaction, and our failure to realize these benefits could reduce our sales below and increase our costs above our forecasts. Acquisitions may also be dilutive to our earnings per share if our projections and assumptions about the acquired business’ future operating results prove to be inaccurate. As a result, although our goal is to improve our business and maximize shareholder value, any transactions that we complete may ultimately fail to increase our sales and net income and stock price.
China’s foreign exchange control policy may restrict ZAP Jonway from repatriating profit from Chinese subsidiaries to ZAP and may further restrict ZAP Jonway in the future.
The People’s Republic of China regulates the conversion between the RMB and foreign currencies. Over the years, the government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade and service-related foreign exchange transactions, payment of dividends and service of foreign debt. However, foreign exchange transactions by subsidiaries in China under capital accounts continue to be subject to significant foreign controls and require the approval of and or registration with, governmental authorities. There can be no assurance that these laws and regulations on foreign investment will not cast uncertainties on financing and operating plans in China. Under current foreign exchange regulations in China, subject to relevant registration at the State Administration of Foreign Exchange, (“SAFE”), Jonway will be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, there can be no assurance that the current foreign exchange policies regarding debt service and payment of dividends in foreign currencies will persist in their current formulation. Changes in foreign exchange policies in the People’s Republic of China might have a negative impact on ZAP Jonway’s ability to repatriate profit from Jonway to ZAP.
If ZAP Jonway fails to manage future growth effectively, we may not be able to market and sell our vehicles successfully.
The majority of ZAP Jonway sales are from Zhejiang Jonway Automobile Co. Ltd. For the year ended December 31, 2013 of the total sales of $51.5 million Jonway Automobile accounted for $50.6 million. Any failure to manage ZAP Jonway’s growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. ZAP Jonway’s future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this expansion include:
·
development of sales network and dealerships;
·
financially strong partnerships internationally that can help distribute and expand sales and marketing for the targeted regions;
Forecasting production and revenue;
·
controlling expenses and investments in anticipation of expanded operations; establishing or expanding design, manufacturing, sales and service facilities;
·
implementing and enhancing administrative infrastructure, systems and processes;
·
addressing new markets with adequate advertisement, branding and promotion; and
·
expanding international operations with experienced international sales team.
ZAP Jonway has suffered some losses in personnel in 2013, and intends to replace these losses with more experienced and skilled people to do sales and marketing, financial management, design and training new personnel;
·
Forecasting production and revenue;
·
controlling expenses and investments in anticipation of expanded operations; establishing or expanding design, manufacturing, sales and service facilities;
·
implementing and enhancing administrative infrastructure, systems and processes;
·
addressing new markets with adequate advertisement, branding and promotion; and
·
expanding international operations with experienced international sales team.
.
ZAP Jonway has suffered some losses in personnel in 2013, and intends to replace these losses with more experienced and skilled people to do sales and marketing, financial management, design and manufacturing personnel and service technicians for our vehicles. Competition for individuals with experience designing, manufacturing and servicing vehicles, particularly electric vehicles, is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm ZAP Jonway’s business and prospects.
.
If ZAP Jonway is unable to attract and retain key employees and hire qualified management, technical and vehicle engineering personnel, our ability to compete could be harmed.
The loss of the services of any of ZAP Jonway’s key employees could disrupt our operations, delay the development and introduction of our vehicles and services, and negatively impact our business, prospects and operating results. In particular, ZAP Jonway is highly dependent on the services of Priscilla Lu, Chairman of ZAP’s Board, Chuck Schillings, Alex Wang, ZAP’s Co-Chief Executive Officers and Fung Chi Kwong, ZAP’s Chief Financial Officer. Only two of ZAP Jonway’s key employees are bound by an employment agreement for any specific term. These employees are Chuck Schillings and Fung Chi Kwong. There can be no assurance that we will be able to successfully attract and retain senior leadership necessary to grow our business. Our future success depends upon our ability to attract and retain our executive officers and other key technology, sales, marketing and support personnel and any failure to do so could adversely impact our business, prospects, financial condition and operating results. We have in the past and may in the future experience difficulty in retaining members of our senior management team. There is increasing competition for talented individuals with the specialized knowledge of electric vehicles and this competition affects both our ability to retain key employees and hire new ones.
ZAP Jonway is subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in building our manufacturing facilities.
As an automobile manufacturer, ZAP Jonway and our operations, both in the United States, in China and abroad, are subject to national, state, provincial and/or local environmental laws and regulations, including laws relating to the use, handling, storage, disposal and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we expect that our business and operations will be affected by future amendments to such laws or other new environmental and health and safety laws which may require us to change our operations, potentially resulting in a material adverse effect on our business. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury and fines and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties, third party damages, suspension of production or a cessation of our operations.
Contamination at properties formerly owned or operated by ZAP Jonway, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations, including, but not limited to the Comprehensive Environmental Response, Compensation and Liability Act, which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on ZAP Jonway’s financial condition or operating results. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental laws in connection with our planned manufacturing facilities that could require significant time and financial resources and delay our ability to operate these facilities, which would adversely impact our business prospects and operating results.
ZAP Jonway’s business may be adversely affected by union activities.
Although none of ZAP Jonway’s employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. As we expand our business, there can be no assurances that our employees will not join or form a labor union or that we will not be required to become a union signatory. ZAP Jonway is also directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of ZAP Jonway’s vehicles and have a material adverse effect on our business, prospects, operating results or financial condition.
ZAP Jonway is subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.
ZAP Jonway’s electric vehicles, the sale of our motor vehicles in general and the electronic components used in our vehicles are subject to substantial regulation under international, federal, state, and local laws. We have incurred, and expect to incur in the future, significant costs in complying with these regulations. Regulations related to the electric vehicle industry and alternative energy are currently evolving and ZAP Jonway faces risks associated with changes to these regulations such as:
·
the imposition of a carbon tax or the introduction of a cap-and-trade system on electric utilities could increase the cost of electricity;
·
the increase of subsidies for corn and ethanol production could reduce the operating cost of vehicles that use ethanol or a combination of ethanol and gasoline;
·
changes to the regulations governing the assembly and transportation of lithium-ion batteries, such as the UN Recommendations of the Safe Transport of Dangerous Goods Model Regulations or regulations adopted by the U.S. Pipeline and Hazardous Materials Safety Administration could increase the cost of lithium-ion batteries;
·
increased sensitivity by regulators to the needs of established automobile manufacturers with large employment bases, high fixed costs and business models based on the internal combustion engine could lead them to pass regulations that could reduce the compliance costs of such established manufacturers or mitigate the effects of government efforts to promote alternative fuel vehicles; and changes to regulations governing exporting of our products could increase our costs incurred to deliver products outside the United States or force us to charge a higher price for our vehicles in such jurisdictions.
In addition, as the automotive industry moves towards greater use of electronics for vehicle systems, The U.S. National Highway Traffic Safety Administration and other regulatory bodies may in the future increase regulation for these electronic systems.
To the extent the laws change, some or all of ZAP Jonway’s vehicles may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, ZAP Jonway’s business, prospects, financial condition and operating results will be adversely affected.
ZAP Jonway’s electric vehicles make use of lithium-ion battery cells, which on rare occasions have been observed to catch fire or vent smoke and flame.
The battery packs in ZAP Jonway’s electric vehicles make use of lithium-ion cells, which have been used for years in laptops and cell phones. We also currently intend to make use of lithium-ion cells in the battery pack for certain future vehicles we may produce. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. The events have also raised questions about the suitability of these lithium-ion cells for automotive applications. To address these questions and concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. ZAP Jonway has delivered only a limited number of electric vehicles with lithium-ion battery cells to customers and has limited field experience with these vehicles. Accordingly, there can be no assurance that a field failure of our battery packs will not occur, which could damage the vehicle or lead to personal injury or death and may subject us to lawsuits. There can be no assurance that a safety issue or fire related to the cells would not disrupt ZAP Jonway’s operations. Such damage or injury would likely lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle, especially those that use a high volume of commodity cells similar to ZAP Jonway’s, may cause indirect adverse publicity for us. Such adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.
ZAP Jonway may become subject to product liability claims, which could harm our financial condition and liquidity if ZAP Jonway is not able to successfully defend or insure against such claims.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of vehicles. ZAP Jonway may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. ZAP Jonway’s risks in this area are particularly pronounced given the limited number of vehicles delivered to date and limited field experience of those vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have material adverse effect on our brand, business, prospects and operating results. ZAP maintains product liability insurance for all ZAP vehicles with annual limits of approximately $2 million on a claim made basis, but we cannot assure that our insurance will be sufficient to cover all potential product liability claims and the product liability insurance does not extend to Jonway products. Any lawsuit seeking significant monetary damages either in excess of ZAP Jonway’s coverage, or outside of our coverage, may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under our policy. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.
In connection with the development and sale of ZAP Jonway’s planned vehicles, we will need to comply with various safety regulations and requirements, such as certain frontal impact tests, which are required for sales exceeding certain annual volumes outside the United States. We may experience difficulties in meeting all the criteria for this test or similar tests for our planned electric vehicles, which may delay our ability to sell them in high volumes in certain jurisdictions.
ZAP Jonway’s facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
ZAP’s corporate headquarters are located in California, a region known for seismic activity. Jonway’s manufacturing facility is located in Sanmen, China. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, ZAP Jonway’s facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.
If ZAP Jonway’s suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.
ZAP Jonway does not control our independent suppliers or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental responsibility, fair wage practices, and compliance with child labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.
Violation of labor or other laws by ZAP Jonway’s suppliers or the divergence of an independent supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and ZAP Jonway’s brand. This could diminish the value of our brand image and reduce demand for our performance electric vehicles if, as a result of such violation, we were to attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, business, prospects, financial condition and operating results.
Risks related to Intellectual Property
ZAP Jonway may need to defend itself against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations or individuals, including ZAP Jonway’s competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop or sell our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks inquiring whether we infringe their proprietary rights. Companies holding patents or other intellectual property rights relating to battery packs, electric motors or electronic power management systems may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, if ZAP Jonway is determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:
·
cease selling, incorporating or using vehicles that incorporate the challenged intellectual property;
·
pay substantial damages;
·
obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or
·
redesign our vehicles.
In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.
ZAP Jonway also licenses intellectual property from third parties, and we may face claims that our use of this in-licensed technology infringes the rights of others. In that case, we may seek indemnification from our licensors under our license contracts with them. However, our rights to indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.
ZAP Jonway’s business will be adversely affected if ZAP Jonway is unable to protect our intellectual property rights from unauthorized use or infringement by third parties.
Any failure to protect our proprietary rights adequately could result in ZAP Jonway’s competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. As of December 31, 2013, we had 20 issued patents and approximately 28 pending patent applications with the United States Patent and Trademark Office and our majority-owned subsidiary Jonway had 22 issued patents and 1 pending patent applications with the China Patent and Trademark Bureau.
The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:
·
our pending patent applications may not result in the issuance of patents;
·
our patents, if issued, may not be broad enough to protect our proprietary rights;
·
the patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;
·
the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement impracticable;
·
current and future competitors may independently develop similar technology, duplicate our vehicles or design new vehicles in a way that circumvents our patents; and
·
our in-licensed patents may be invalidated or the holders of these patents may seek to breach our license arrangements.
Existing trademark and trade secret laws and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect ZAP Jonway’s proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.
ZAP Jonway’s patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that ZAP or Jonway are the first creator of inventions covered by their respective pending patent applications or that they are the first to file patent applications on these inventions, nor can we be certain that any of ZAP or Jonway’s pending patent applications will result in issued patents or that any of our issued patents will afford protection against any competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus ZAP Jonway cannot be certain that foreign patent applications related to issue U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States.
The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, ZAP Jonway cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to ZAP, Jonway or ZAP Jonway may be infringed upon or designed around by others and others may obtain patents that ZAP Jonway need to license or design around, either of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.
Risks Related to Ownership of ZAP Common Stock
Concentration of ownership among ZAP’s existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.
ZAP’s executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 65.93% of our outstanding shares of common stock, including securities convertible into shares of ZAP common stock. As a result, these shareholders will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendment of our amended and restated articles of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these shareholders.
ZAP may face risks associated with past sales of unregistered securities.
In the past, ZAP has sold numerous securities which were not registered under federal or state securities laws. ZAP has strived to comply with all applicable federal and state securities laws in connection with our issuances of unregistered securities. However, to the extent ZAP has not complied, ZAP may face liability for the purchase price of the securities sold, together with interest and the potential of regulatory sanctions.
ZAP’s stock price and trading volume may be volatile which could result in substantial losses for ZAP’s shareholders.
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 ZAP’s 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 ZAP’s common stock may fluctuate and cause significant price variations to occur. ZAP has experienced significant volatility in the price of our stock over the past few years. We cannot assure you that the market price of ZAP’s 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.
ZAP does not expect to declare any dividends in the foreseeable future.
ZAP has not paid cash dividends on ZAP’s common stock and do not anticipate paying any cash dividends on ZAP’s common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase ZAP’s common stock.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
The chart below contains a summary of ZAP’s principal facilities at December 31, 2013:
ZAP’s facilities are rented. ZAP’s principal executive offices are located at 501 Fourth Street, Santa Rosa, California. The property is rented on a month-by-month basis from Al Yousuf, LLC.
The 3rd Street property, in Santa Rosa is rented on a month-by-month basis with 3 W 3rd, LLC. We began renting this property in July 2012.
ZAP believes our insurance policies cover all insurance requirements of the landlords. ZAP owns the basic tools, machinery and equipment necessary for the conduct of our repairs, our research and development and vehicle prototyping activities. ZAP believes that the above facilities are generally adequate for ZAP’s present operations.
Jonway’s principal executive offices and manufacturing facility is located in Da Tang Industry Zone, Jiangtiao Village, Sanmen Country, Zheijiang Province, China. The building is 915,386 square feet and building includes offices, a canteen and dorms, plants for assembly, painting, pressing and welding, warehouses for paint and raw materials, and an area to store vehicles. Jonway occupies the entire space and has no properties pledged except for some land use rights for the grant of bank credit facilities. For such detailed pledges of land use rights, please refer to the below discussion of the liquidity and capital resources.
Jonway has obtained certificates of property for all of its buildings.
Item 3.
Item 3. Legal Proceedings
1. On January 11, 2013, Cathaya Capital, L.P., a ZAP shareholder (“Cathaya”), and Priscilla Lu, Chairman of the ZAP Board of Directors (“Lu”) (collectively “Plaintiffs”), filed a lawsuit in the Superior Court of California, County of Los Angeles, styled Cathaya Capital, L.P. et al. v. ZAP, et al., Case No. BC499106 (the “Cathaya Lawsuit”). By the Cathaya Lawsuit, Plaintiffs, derivatively on behalf of the nominally-named defendant ZAP, asserted claims for breach of fiduciary duty and conversion against the following three members of the ZAP Board of Directors: Mark Abdou, Steven Schneider and Wang Gang a/k/a Alex Wang (the “Minority Board Member Defendants”). In addition, Plaintiffs, derivatively on ZAP’s behalf, sought declaratory and injunctive relief against the Minority Board Member Defendants for their alleged tortious misconduct and breaches of fiduciary duty. Plaintiffs also asserted causes of action on their own behalf pursuant to California Corporations Code sections 304 and 709, for a judgment as to the rightful composition of the Board and to remove the Minority Board Member Defendants from the Board.
On February 19, 2013, the Minority Board Member Defendants filed a Cross-Complaint in the Cathaya Lawsuit (the “Cross-Complaint”). In the Cross-Complaint, the Minority Board Member Defendants joined in bringing a cross-claim for a determination as to the rightful composition of the Board pursuant to California Corporations Code section 709. (On March 14, 2013, Wang Gang a/k/a Alex Wang filed a Request for Dismissal withdrawing as a cross-complainant.) The Cross-Complaint also asserted the following purported claims: (1) Steven Schneider’s claim for “breach of promise” against Pricilla Lu based on an alleged August 2009 oral promise that ZAP would provide Steven Schneider with a more favorable employment contract; (2) Steven Schneider’s claim for “breach of agreement to negotiate in good faith” against ZAP, based on ZAP’s alleged failure in August 2009 to negotiate an employment contract with Steven Schneider; (3) Mark Abdou’s claim against ZAP alleging that ZAP breached a Director Agreement with Mark Abdou (“Abdou Director Agreement”) by failing to pay all compensation allegedly due there under; (4) Mark Abdou’s claim for “breach of the covenant of good faith and fair dealing” against ZAP based on the alleged breaches of the Abdou Director Agreement; and (5) a claim against Lu for tortious interference with contractual relations (although the Cross-Complaint is unclear as to who is bringing the tortious interference claim against Lu and the factual basis for the claim). The Cross-Complaint seeks an unspecified amount of damages and other consideration.
After two hearings, on March 3, 2014, the Court granted the motion of Priscilla Lu to dismiss all claims asserted by Mark Abdou and Steven Schneider in their Second Amended Cross-Complaint against Ms. Lu, without leave to amend. As a result of the Court’s ruling, five of the Abdou/Schneider causes of action have been dismissed, including all claims against Ms. Lu. In addition, the Court dismissed all tort claims against ZAP. However, the Court’s ruling does not dismiss all claims against ZAP.
The Abdou/Schneider claims against ZAP for unpaid compensation were not before the Court and therefore were not affected by the Court’s ruling and have not been dismissed. These contract-based claims are against ZAP only and do not allow for punitive damages.
ZAP intends to vigorously defend the Cross-Complaint.
The Court has already heard and determined the parties’ respective claims seeking a determination as to the proper composition of the ZAP Board of Directors. On February 2, 2013, the Court ruled on Plaintiffs’ application seeking such determination pursuant to California Corporations Code section 709, ruling that the purported actions taken by the Minority Board Member Defendants at a purported December 31, 2012 meeting of the ZAP Board of Directors, including the appointment of Luo Hua Lian and Juan Gao to fill alleged vacancies on the Board, were null and void. On March 1, 2013, the Court denied the Minority Board Member Defendants’ application pursuant to California Corporations Code section 709, which had sought an order declaring that Co Nguyen and Aileen Kao were not validly appointed to the ZAP Board of Directors in October 2012.
As a result of the Court’s rulings on the parties’ respective applications under California Corporations Code section 709, the Board is comprised of the directors that were members of the Board prior to the purported December 31, 2012 Board meeting, except for the previously announced resignation of Alex Wang at a meeting of the Board held on January 20, 2013, and the appointment of Wang Huai Yi as a member of the Board at the same meeting to fill the vacancy created by Alex Wang’s resignation.
The Court set January 15, 2015 as the trial date.
2. A derivative lawsuit filed by Cathaya Capital against Steve Schneider, Mark Abdou, and Alex Wang also is scheduled to go to trial on January 1, 2015 and is being taken over by the Company, which is currently pursuing Steve Schneider to return inventory and assets that were removed from the Company’s warehouse, as well as cash that was redirected to a new account. In addition, on March 13, 2014, the Company filed a Cross -Complaint against Mark Abdou and Steve Schneider, alleging causes of action for (1) breach of fiduciary duty; (2) conversion; (3) imposition of a constructive trust; and (4) an accounting. This Cross-Complaint likewise is scheduled to go to trial on January 15, 2015.
3. Integrity Automotive, LLC and Randall Waldman v. ZAP Motor Manufacturing,
Inc., et al., Complaint filed on March 2, 2010, Case No. 10 CI-01383 in the Jefferson Circuit Court, Division Ten, of the Commonwealth of Kentucky. The Complaint alleges causes of action for civil conspiracy, breach of fiduciary duties, conversion, and breach of contract and that the Defendants conspired against plaintiffs in connection with certain business transactions in Kentucky. Although no specific monetary demand is included, the Complaint seeks punitive damages, actual damages, and interest. All of the defendants answered and cross-complained on March 29, 2010, and discovery was served on plaintiffs requiring responses in early May 2010. The Company intends to defend itself vigorously in this matter and has recently learned that plaintiff Randall Waldman was arrested in Kentucky in late April, 2010, and charged with felonious criminal conduct. The Court indicated an intent to dismiss the case for failure to prosecute in early 2012 but the plaintiffs retained new counsel and successfully opposed the dismissal. There was no activity in the case that we are aware of in 2013.
4. Rainbow Cycle &Marine &Siloam Springs Cycle, v. Voltage Vehicles, Arkansas Motor Vehicle Commission, Case No. 10-008. On April 1, 2010, Rainbow Cycle &Marine &Siloam Spring Cycle (the "Dealer"), an automobile dealer in the State of Arkansas, submitted a complaint to the Arkansas Motor Vehicle Commission (the "Commission") regarding 6 Xebra vehicles purchased from the Company in 2008, each at the price of $8,750.00. The Dealer requested that the Commission order the Company to refund all monies paid by the Dealer to the Company for the vehicles, to pay all transportation costs, and in addition to assess penalties and interest charges against the Company in an unspecified amount. The Commission issued a Notice of Hearing on August 11, 2010, setting a hearing for September 15, 2010 on the Dealer's Complaint. The Company responded with a Motion to Dismiss, which the Commission set for hearing on December 15, 2010 and at the same time continued the hearing on the Dealer's Complaint to the same date. After the hearing, the Commission ruled that the Company was required to refund the Dealer's purchase price for the vehicles and to pay for transportation of the vehicles off of the Dealer's premises. In response, the Company's local counsel filed a Petition for Judicial Review on March 1, 201 1 in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. On November 11, 201 1, the Circuit Court upheld the decision of the Commission, and the Company filed a notice of Appeal on December 16, 201 1, and the Arkansas Supreme Court reversed and remanded to the Commission for further proceedings on October 11, 2012. There has been no subsequent activity in this matter since that time of which we are aware. In the event of a final, unfavorable outcome, the potential loss to the Company associated with the refund would be approximately $57,000.
5. Alvarez Lincoln - Mercury, Inc. vs. ZAP, Voltage Vehicles, Luizhou Wuling
Motors Co., Ltd., Pricilla Lu, and Steve Schneider, Complaint filed on May 30, 2012, in the Superior Court of the State of California, County of Riverside, Case No. RIC 1208152. The Complaint alleges causes of action for breach of written contract; money had and received fraud by intentional misrepresentation, fraud by concealment, and fraud by negligent misrepresentation. The allegations contained in the Complaint include a claim that plaintiff believed it was purchasing 2010 model year vehicles but that in fact the vehicles were model year 2009. The case was settled on March 27, 2014.
6. A letter was received in May 2012 from a shareholder regarding various prior transactions of the Company which the Company is working to address and clarify. A tolling agreement was reached between the Company and shareholder on October 22, 2012 whereas the company, through its legal council shall provide a written summary of the actions taken during the preceding month with respect to the matters regarding the prior transactions in question by the shareholder. These transactions include, but are not limited to, a) ZAP, Jonway Group, Jonway Auto and Cathaya Capital shall each in all respects comply with their executory obligations with respect to the continued funding of ZAP, b) resolve the litigation regarding the former contracted employee, c) use reasonable efforts to defend, compromise and/or settle any pending and future litigations and ZAP shall use all reasonable efforts to cause all officers, directors and such other individuals who are or were employees, agents or representatives of ZAP to fully cooperate in the defense of future arbitrations or litigations. This agreement is binding through December 31, 2015.
.
Other Regulatory Compliance Matters
ZAP has filed with the National Highway Transportation Safety Agency (NHTSA) that it is in non compliance with Department of Transportation (DOT) requirements potential hazard may exist because the Model -Year 2008 XEBRA sedan and pickup does not stop in the required distance at 30 miles per hour and the master cylinder does not have separate brake fluid reservoirs with proper labeling and other miscellaneous non compliance issues. A public hearing was held in Washington DC on October 9, 2012 that allowed the DOT to take comments from the public and from their inside officers for consideration in their determination of whether ZAP has made a reasonable effort to 1) notify dealers and purchasers of the brake recall and 2) provide a remedy to the public to correct the brake problem. There were recommendations at the public hearing from DOT staff testifying at the hearing that ZAP should be subject to penalties and be required to repurchase the MY 2008 Xebra vehicles. ZAP has contracted with an independent testing facility to test the remedy that ZAP believes will correct the stopping distance problem, the duel brake fluid reservoir with correct labeling and other miscellaneous non compliance issues.
On November 16, 2012 ZAP received notification from the Office of Chief Counsel of the National Highway Traffic Safety Administration (“NHTSA”) containing Findings, Conclusions, and Order on ZAP’s Failure to Reasonably Meet its Recall Remedy and Notification Requirements (“Order”), dated November 13, 2012, related to the recall of ZAP’s model year 2008 Xebra, an electric three-wheeled motor vehicle with an enclosed sedan or truck body style.
NHTSA determined that ZAP had not reasonably met its recall remedy and notification requirements and was ordered to remedy the model year 2008 Xebra by, among other things, refunding the purchase price, less reasonable allowance for depreciation, providing notice of this refund remedy to model year 2008 Xebra owners, purchasers, and dealers, and picking up and disposing of each recalled vehicle at ZAP’s sole expense. NHTSA determined that the average market price of a model year 2008 Xebra as of October 12, 2012 to be $3,100. The order stated a total of 691 model year 2008 Xebra vehicles are subject to this remedy. ZAP’s internal records indicate that 691 vehicles were imported into the U.S. by ZAP, of which 627 were shipped to customers located in the U.S.
ZAP and the United States reached a settlement that is incorporated into a Consent Decree that was entered and approved by the U.S. District Court on July 17, 2013. Pursuant to the Consent Decree, ZAP agreed to initiate a buy-back program whereby it will offer to provide a refund of $3,100 to each eligible MY 2008 ZAP Xebra owner. The Consent Decree also contains notification and reporting requirements and requires ZAP to take specified actions regarding the disposition of repurchased vehicles and MY 2008 Xebras that remain in ZAP’s possession. In accordance with the Consent Decree, the Company mailed the required notification letters to registered vehicle owners and ZAP Xebra dealers, along with a Refund Request Form. The repurchase offer extends to 691 vehicles that have been sold by ZAP. As of March 25, 2014 ZAP had received 318 refund requests of which 311 were deemed eligible
Per the terms of the Consent Decree, ZAP was to repurchase the vehicles of all eligible owners who requested a refund by no later than December 31, 2013 or 30 days after an eligible owner’s refund request, whichever is later. The Company did not repurchase any owner vehicles by December 31, 2013. ZAP began repurchasing vehicles in March, 2014.
On April 7, 2014 ZAP and the United States entered into an agreement to amend the Consent Decree wherein ZAP agreed to repurchase the vehicles of all eligible owners by no later than April 30, 2014. As of April 9, 2014 ZAP had repurchased at least 72 vehicles. The Company is planning on completing this buy-back program by April 30, 2014.
The Company has accrued for estimated expenses related to above claims.
Item 4.
Item 4. Mine safety disclosures
Not Applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP”.
Holders
ZAP had approximately 3,393 record holders of our common stock as of April 11, 2014, according to a shareholders’ list provided by our transfer agent as of that date. The number of registered shareholders does not include any estimate by us of the number of beneficial owners of common stock held in street name. The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company.
Dividends
ZAP has never declared or paid any cash or stock dividends on our common stock, and ZAP does not anticipate that ZAP will pay any cash dividends on our common stock in the foreseeable future. Any future determination to declare and pay cash or stock dividends will be at the discretion of ZAP’s Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our Board of Directors may deem relevant at that time.
Securities Authorized for Issuance under Equity Compensation Plans
ZAP maintains its 2008 Equity Compensation Plan, 2007 Consultant Stock Plan, 2006 Incentive Stock Plan, 2004 Consultant Stock Plan, and 2002 Incentive Stock Plan, all of which were approved by our shareholders. All of the plans in the following table contain information about equity awards under those plans as of December 31, 2013:
Sales of Unregistered Securities
The following lists sales of unregistered ZAP securities during the last fiscal year. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions:
ZAP issued 69,677 shares of common stock valued at $12,000 in exchange for engineering services. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 1,279,354 shares of common stock valued at $231,117 in exchange for consulting services. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 949,269 shares of common stock valued at $179,530 for employee compensation. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 2,109,689 shares of common stock valued at $203,957 to settle legal claims against the company. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 363,637 shares of common stock valued at $40,000 to a departing board member. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
Item 6.
Item 6. Selected Financial Data
A registrant that qualifies as a smaller reporting company is not required to provide information required by this Item 6.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Key Accomplishments during Fiscal Year 2013
Overview and 2013Highlights
Throughout 2013, ZAP and Jonway Auto aimed at shifting Jonway’s focus towards new energy vehicles. Jonway Auto’s factory re-tooled one of its buildings to support EV production, and began realigning the company’s resources to expanding EV as part of its main revenue stream. The sales and marketing team underwent reorganization to support new dealers that have more financial backing as Chinese banks raise the bar on qualified borrowers. As a result of the continued austerity of banking policies in China, the total number of dealers for traditional gasoline vehicles in Jonway Auto’s dealership network shrunk and currently stands at around 60 direct dealers. The key challenge in Jonway Auto’s manufacturing plant is working capital due to longer payment terms from its dealership partners.
One of the primary milestones in 2013 was to set up an efficient production line in the new EV facility. This required additional capital investment on tooling and assembly line facilities. As a result of the 2013 investments in both design and manufacturing of new smaller EV models, ZAP and Jonway Auto are able to launch two new smaller EV products, SPARKEE and URBEE, both targeting more economically priced models with excellent quality.
As Chinese government continues to offer excellent incentives for EVs, moving away from the amount of lithium batteries to incentivizing longer range of the EV models, the market is now more readily adopting EVs for utility markets where recharging is less of an issue due to the use of central depot for charge stations. The smaller EV products of both SPARKEE and URBEE are focused on addressing urban fleet markets. The plan going forward is to adapt these models to support EMS vehicles for deliveries and service industries.
Building on the expertise that ZAP and Jonway Auto has with the China type approved A380SUV, the Companies plan to deliver their latest EV model using the New Eagle SUV announced last year. The 5-Star Minivan EV is planned for type approval in 1H2014 will focus on the logistic market, where all of the main logistics companies are incented by the government to use EVs for its fleets. The target pricing for these logistic vehicles will be to price them below gasoline vehicles, after applying the incentives, or to ensure that the amortized cost of installment payment on the batteries over several years will bring the overall cost of ownership plus fuel usage to below that of the gasoline by at least 40% when calculated over the course of 4 years.
On other fronts, ZAP’s executive management in the US has resolved many of the legal issues associated with prior management. Specifically, ZAP entered into an agreement with the United States on the resolution of the 2008 Xebra recall Agreement on a buy-back program was reached on July 17, 2013. The Company is planning on completing this buy-back program by April 30, 2014.
Internationally, Jonway Auto has completed its certification and type approval requirements in many targeted countries, such as Brazil, Vietnam, South Africa, Iraq and Thailand; thus, opening up partnerships in these countries to expand its sales. Currently, it is working in collaboration with its Turkish partner to develop and get approval of its SUV model using a new diesel power train with EU6, focusing on the Eastern European markets. Successful type approval could lead additional opportunities for EV SUV in these markets as well.
In 2013 the renewable energy business of ZAP and Jonway Auto were reorganized into an entity JAZ (Jonway And ZAP), and the plan was to go IPO on AIM in the interest of addressing the European markets, especially Eastern European markets where there is a bigger demand for small sized EVs for congested city driving and commuting. This entity JAZ is being organized to be a wholly owned subsidiary of ZAP. The plan to move forward on AIM is still in progress as the Company assesses the cost and benefits of this offering and the opportunities in the European markets.
Un-resolved Issue
The Board of ZAP has demanded that CO-CEO Alex Wang resolve the conflict of interest in Jonway Group’s purchase of the Aptera assets and the formation of the new company Aptera (same name as the product) in the USA. Alex Wang has agreed to transfer the asset ownership of Aptera to Jonway Auto, but this currently remains unresolved.
Results of Operations
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net sales increased by $1.3million, from $50.3 million for the year ended December 31, 2012 to $51.5 million for the year ended December 31, 2013. This increase primarily related to the sales of minivans and spare parts. Jonway’s sales contributed $50.6 million and $49.3 million to net sales for the years ended December 31, 2013 and 2012, respectively.
During the fiscal year 2013, Jonway sold 3,794 units of SUVs and 503 units of minivans. During the fiscal year 2012, Jonway sold 4,217 units of SUVs and 367 units of minivans. The sales volume of SUVs decreased due to the following reasons: (i) more SUV models were launched into market by China-based auto makers, which intensified the completion, (ii) Although Jonway launched the upgraded A380, the resulting sales volume did not reach the expected volume, (iii) increasing oil prices in China affected customer demand and (iv) China’s overall economic condition worsened compared to fiscal year 2012. The sales volume of minivans increased in 2013 as compared to that of 2012 because we started to launch the sales of minivan in the middle of 2012 so we only had half year of sales in 2012 as opposed to full year of sales in 2013. Our sales of spare parts increased by approximately $4.6 million mainly due to the increased sales to one of our related party, whose exporting car sales increased significantly during 2013.
In our Advanced Technology segment, sales decreased by $106,000 from $151,000 for the year ended December 31, 2012 to $45,000 for the year ended December 31, 2013. The tight United States credit and general economic conditions negatively impacted our dealer sales in 2013. We also began the transition of moving our operations from the U.S. to China and switching suppliers for advanced technology vehicles from outside contract manufacturers to our auto manufacturing plant in China.
In our Consumer Product (ZAP) segment, sales increased by $148,000 from $723,000 for the year ended December 31, 2012 to $871,000 for the year ended December 31, 2013 due to a bulk sale to a major customer of our ZAPPY 3 electric scooters.
In our Car Outlet (Voltage Vehicles Car Lot) segment, we generated no sales in 2013 while we had net sales of $142, 000 for the year ended December 31, 2012. Our retail car lot has been effectively closed. We are discontinuing this business segment. We are currently settling our assets and inventory with Mr. Schneider, who is illegally holding these assets until his claims are settled.
Gross profit decreased by $0.6 million, from $1.6 million for the year ended December 31, 2012 to $1.0 million for the year ended December 31, 2013. The decrease in gross profit for the year ended December 31, 2013related primarily to the decrease in sales volume and lower gross margins from the SUVs sold in China for the Jonway cars and also for the dealer incentives initiated in 2013.Jonway’s gross profit decreased from $1.1 million to $0.8 million from fiscal year 2012 to 2013.
In our Advanced Technology segment, our gross loss increased by $531,000 from a gross profit of $499,000 for the year ended December 31, 2012 to a gross loss of $32,000 for the year ended December 31, 2013. The gross losses were primarily due to selling vehicles at lower prices to generate cash flow on slow-moving inventory.
In our Consumer Products (ZAP) segment, we experienced a decrease of $97,000 in gross profit from a gross profit of$285,000 for the year ended December 31, 2012 to a gross profit of $188,000 for the year ended December 31, 2013. This was due to selling old and discontinued models at lower prices to generate cash flows.
We did not have any income or loss for our retail car outlet (Voltage Vehicles Car Lot) segment in 2013. We are in the process of closing our retail car business in the U.S.
Sales and marketing expenses decreased by $4.3 million, from $10.7 million for the year ended December 31, 2012 to $6.4 million for the year ended December 31, 2013. The decrease in selling and marketing expense was mainly due to the decrease in advertisement expenditures resulted from the tighten budget during the year 2013.
General and administrative expenses decreased by $1.2 million, from $10.9 million for the year ended December 31, 2012 to $9.7 million for the year ended December 31, 2013. The decrease was primarily a result of reductions in ZAP US operations due to the following: (i) less salaries and wages due to transferring of various functions to Jonway China, and (ii) fewer professional fees in 2013. The general and administrative expenses in Jonway were also reduced due to the cost control in various administrative functions.
Research and development expenses decreased by $1.9 million, from $2.5 million for the year ended December 31, 2012 to $0.6million for the year ended December 31, 2013. Our normal research and development expenses relating to further developing new gasoline and electric vehicle models, including EV type approval testing, EV production facilities and new model engineering development. The decrease was primarily due to fewer projects scheduled in 2013.
Recall expense decreased by $2.1 million, from $2.1 million for the year ended December 31, 2012 to $nil for the year ended December 31, 2013. The accrual was made on the estimated recall expenses for the Model -Year 2008 XEBRA sedan that was sold several years ago but was found to have inadequate braking distance. The recall expense was based on the total cost and freight to repurchase the MY 2008 Xebra vehicles.
Impairment loss increased by $0.1 million, from $2.56 million for the year ended December 31, 2012 to $2.64 million for the year ended December 31, 2013.The impairment loss was recorded for the 3-door SUVs mold equipment. During 2012, the manufacturing of the 3-door SUVs was suspended in light of the defective in the mold equipment. The sum of the discounted future cash flows expected to generate from the 3-door mold equipment and their disposition was less than the carrying value. Therefore we decided to record an impairment loss of $2.56 million in 2012.During 2013, we determined that the fair value of those 3-door SUVs mold equipment was zero and we recorded an additional impairment loss of $2.64 million.
Interest expense, net increased by $0.7 million, from $3.0million for the year ended December 31, 2012 to $3.7 million for the year ended December 31, 2013. The increase was mainly due to the increased borrowings in China, and the amortization of prepaid interest and discount related to the newly issued convertible debt.
Loss from equity in Joint venture we account for our 37.5% interest in the ZAP Hangzhou Joint Venture and 50% interest in Shanghai Zapple Joint Venture by the equity method of accounting. Investment in these two Joint Ventures was fully written off during 2013 due to the suspension of Shanghai Zapple and the loss of ZAP Hangzhou.
Other income increased by $0.6 million, from $0.4 million for the year ended December 31, 2012 to $1.0 million for the year ended December 31, 2013. In 2013, interest income increased resulted from increased cash deposit with the Chinese banks.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, our operating and capital expenditure commitments and our financing abilities. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. At December 31, 2013, we believe that we will have sufficient liquidity required to conduct operations through December 31, 2014.
In January 2011, ZAP issued $19.0 million of convertible debt to China Electric Vehicle Corporation (“CEVC”) to make a partial payment in connection with the Jonway Acquisition. On March 31, 2012, ZAP entered into an amendment to the note which extended the maturity date of the note without interest from August 12, 2012 to August 12, 2013. This amendment changed the terms of the note requiring adjustment of the conversion price of note for dilutive issuances by ZAP. In addition, the warrant issued in connection with the CEVC note was amended to change the terms of conversion and to extend the maturity date until February 12, 2015. The interest accrued through the maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. The total amount of the convertible note is approximately $20.7 million with 8% interest rate per annum will have a new maturity date of August 12, 2014.It is likely that we will be able to extend the maturity of the debt upon the expiration date.
At present, we will require additional capital to expand our current operations. In particular, we require additional capital to expand our presence into Asia, to continue development of our methodology for converting gasoline vehicles to electric and to continue building our dealer network and expanding our market initiatives. We also require financing to purchase consumer inventory for the continued roll-out of new products to add qualified sales and professional staff to execute our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias and other fuel efficient vehicles.
We intend to fund our liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments. However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
We used cash in operations of $2.3 million and $6.5 million for the years ended December 31, 2013and 2012, respectively. Cash used in operations in 2012 was the result of the net loss of $31.2 million, offset by non-cash expenses of $16.4 million. In 2012, non-cash expenses mainly included $0.5 million related to stock-based compensation for consulting and other services, $1.7 million for stock-based compensation to employees, $2.6 million of impairment loss of long-lived assets, $7.9 million of depreciation and amortization, $1.2 million of amortization of debt discount, $0.8 million of inventory reserve and $0.9 million from loss on sale of marketable securities. Cash used in operations in 2013 was the result of the net loss incurred for the year of $21.9 million, offset by non-cash expenses of $13.7 million. In 2013, non-cash expenses mainly included $0.6 million for stock-based compensation to employees, $2.6 million of impairment loss of long-lived assets, $8.2 million of depreciation and amortization, $1.2 million of amortization of debt discount and $0.9 million of loss from joint venture.
In 2012, the net change in operating assets and liabilities resulted in a cash increase of $8.2 million. The change was primarily due to increase in accounts payable of $7.2 million, increase in accrued liabilities of $2.1 million, increase in accounts receivable of $2.9 million and offset by decrease in prepaid expenses and other assets of $1.2 million. .
In 2013, the net change in operating assets and liabilities resulted in a cash increase of $6.0 million. The change was primarily due to increase in accounts payable of $1.2 million, increase in advance from customers of $1.3 million, increase in related parties of $1.8 million, offset by decrease in inventories of $3.8 million and notes receivable of $1.5 million.
We used cash of $2.1 million and $1.3 million in the investing activities for the years ended December 31, 2013 and 2012, respectively. In 2013, $2.2 million was used for the acquisition of property and equipment, mostly of which was for the production of SUV. In 2012, $2.5 million was used for the acquisition of property and equipment, offset by $1.1 million proceeds from the sales of marketable securities.
We were provided cash of $5.4million and $3.7 million from the financing activities for the years ended December 31, 2013 and 2012, respectively. In 2013, we received $22.9 million and $39.1 million, respectively, from short term borrowings and notes payable. These were offset by a decrease in restricted cash of $1.4 million and repayments of notes payable and short term borrowings of $42.6 million and $16.9 million, respectively. In 2012, we received $12.6 million and $8.0 million, respectively, from short term borrowings and notes payable. These were offset by an increase in restricted cash of $5.6 million and repayments of related party loans and short term borrowings of $2.0 million and $9.3 million, respectively.
We had cash and cash equivalents of $2.6 million as of December 31, 2013 as compared to $1.7 million as of December 31, 2012. We had a working capital deficit of $69.0 million as of December 31, 2013 as compared to a deficit of $54.4 million as of December 31, 2012. We had a recurring loss of $21.9 million and $31.2 million during 2013 and 2012, respectively. Even though we had the above negative factors, we still believe that there is sufficient liquidity for our operations through December 31, 2014.
During 2013, Jonway received line of credit of $43.2 million (credit exposure of $20.5 million), of which $0.6 million of credit exposure has not been used by December 31, 2013. The unused lines of credit expire in December 2014. As long as we continue to pledge our buildings and land use rights with the bank, along with the guarantee support from Jonway Group and our shareholders, we believe that the line of credit can be renewed when due. Also our Principal shareholder, Jonway Group, has agreed to provide the necessary supports to meet our financial obligations through December 31, 2014 in the event that we require additional liquidity. In addition, CEVC (China Electric Vehicle Corporation) would renew the convertible note and in the event that CEVC decides to call on the repayment, the repayment would be paid in full or in part in Jonway Auto shares or ZAP shares unless there is a breach by the Company on the covenant of the convertible note.
Critical Accounting Policies and Use of Estimates
Estimates
The preparation of the consolidated financial statements in conformity with United States generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, warranty costs, stock based compensation, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates
Stock Based Compensation
The Company accounts for stock-based compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the “Black-Scholes model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.
The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.
Inventories
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 basis for ZAP and moving average basis for Jonway Auto) or market (net realizable value or replacement cost). 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. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.
Goodwill and Intangibles
Intangible assets consist of trade names, developed technology, in process research and development and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for developed technology and eight years for the customer relationships. Costs incurred by the Company in connection with trademark applications and approvals from governmental agencies, including legal fees and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over an estimated economic life of the asset commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred.
As a result of our acquisition of Jonway, we have recorded goodwill and various amortizable intangible assets. Businesses acquired are recorded at their fair value on the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Our goodwill at December 31, 2013 and 2012 was approximately $0.3million and $0.3 million, respectively.
Revenue Recognition
The Company records revenues for non-Jonway sales when all of the following criteria have been met:
·
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
·
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
·
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.
·
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
The Company records revenues for Jonway sales only upon the occurrence of all of the following conditions:
·
The Company has received a binding purchase order 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 factory to a common carrier acceptable to the customer; and
·
The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Sales are recognized net of sale discounts, rebates and return allowances.
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles which requires our management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.
Foreign Currency
The functional currencies of our foreign subsidiary/investments are their respective local currencies. The financial statements are maintained in local currencies and are translated to U.S. dollars using period-end rates of exchange for assets and liabilities and average rates during the period for revenues, cost of revenues and expenses. Translation gains and losses resulting from the translation of assets and liabilities of our foreign subsidiaries are recorded in the accumulated other comprehensive gain or loss as a separate component of stockholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions related to our interest rate swap. Gains and losses from foreign currency transactions are included in the consolidated statements of income.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
A registrant that qualifies as a smaller reporting company is not required to provide information required by this Item 7A.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 and the index thereto commences on the next page.
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ZAP and Subsidiaries
We have audited the accompanying consolidated balance sheets of ZAP and Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, equity and cash flows for each of the two years in the period ended December 31, 2013. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP
New York, New York
April 15, 2014
See accompanying notes to the consolidated financial statements
See accompanying notes to the consolidated financial statements
See accompanying notes to the consolidated financial statements
See accompanying notes to the consolidated financial statements
See accompanying notes to the consolidated financial statements
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
ZAP was incorporated in California in September 1994 (together with its subsidiaries, “the Company,” or “ZAP”). ZAP markets advanced transportation, including alternative energy and fuel efficient automobiles, motorcycles, bicycles, scooters, personal watercraft, hovercraft, neighborhood electric vehicles and commercial vehicles. The Company’s business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which the Company believes have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. In pursuit of a manufacturing plant and a partner with an existing product line, a distribution and customer support network in China and experience in vehicle manufacturing, ZAP acquired a majority of the outstanding equity in Zhejiang Jonway Automobile Co., Ltd. (“Jonway”).
On January 21, 2011, the Company completed the acquisition of 51% of the equity shares of Jonway for a total purchase price of $31.75 million consisting of approximately $29 million in cash and 8 million shares of ZAP common stock valued at $2.7 million. The Company believes that the acquisition will allow it to expand its electric vehicle (“EV”) business and distribution network around the world, give it access to the rapidly growing Chinese market for electric vehicles and have competitive production capacity in an ISO 9000 certified manufacturing facility with the capacity and resources to support production of ZAP’s electric vehicles and new product line of mini vans and mini SUVs.
Jonway is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China (“the PRC”) on April 28, 2004 by Jonway Group Co., Ltd. (“Jonway Group”). Jonway Group is under the control of three individuals, Wang Huaiyi, Alex Wang (the son of Wang Huaiyi) and Wang Xiao Ying (the daughter of Wang Huaiyi and all three individuals collectively referred to as the “Wang Family”).
Jonway’s approved scope of business operations includes the production and sale of vehicle spare parts, and the sale of UFO licensed vehicles. The principal activities of Jonway are the production and sale of automobile spare parts and the production and distribution of SUVs and minivans in China using the consigned UFO license from an affiliate of Jonway Group.
With the completion of the acquisition of a majority interest in Jonway, the combined companies’ new product lines include the A380 SUV EV and the minivan EV. Both products leverage the production moldings, the manufacturing engineering infrastructure and facilities currently in place for the gasoline models of these vehicles. Since the acquisition, the companies have been working on developing the joint product line, marketing and sales plans for the EV product lines.
Jonway received certification of the EV production line by the Chinese electric vehicle authorities, which occurred in February 2013. Meanwhile; the engineering teams from both companies are undertaking extensive testing of the A380 SUV EV at Jonway Auto and ZAP Hangzhou EV research and development center.
Our target is to deliver the EV A380 SUV and EV minivan in 2014, with the purpose of obtaining the Chinese central government electric vehicle incentives of up to RMB 60,000 or over $9,510 per vehicle. ZAP intends to use the existing manufacturing plant from Jonway that is being upgraded for the production of the electric vehicles and utilizing the existing Jonway models to gain economy of scale and reduce molding investment costs. ZAP also intends to leverage Jonway’s distribution and customer support centers in China to support the sales and marketing of its new EV product line. In May 2012, we launched the gasoline-powered minivan models into China market. We expect this gasoline minivan series can contribute our business expansion across the world. In the meantime, Jonway auto established its three wholly-owned subsidiaries, namely, Taizhou Setting Co. Ltd, focusing on vehicles marketing and distribution, Taizhou Fuxing Vehicle Sale Co., Ltd. focusing on minivan marketing and distribution in China and Taizhou Vehicle Leasing Co., Ltd focusing on the vehicle leasing business in Taizhou.
ZAP plans to focus on developing new international markets such as Brazil, South Africa, Russia and some of the Central America countries such as Costa Rica, Ecuador and Mexico. These countries are looking for affordable gasoline and electric SUVs and minivans with a competitive price and qualities.
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying consolidated financial statements include the financial statements of ZAP, and its subsidiaries: Jonway Automobile, Voltage Vehicles, Advanced Technology Vehicles, ZAP and ZAP Hong Kong for the years ended December 31, 2013 and 2012 and are in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).
Management considers subsidiaries to be companies that are over 50% controlled. Significant intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales, are also eliminated; non -controlling interests are included in equity. We account for our 37.5% interest in the ZAP Hangzhou and our 50% interest in Shanghai Zapple using the equity method of accounting because we have significant influence but not control.
ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.OB.”
.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
In May 2012, we were approved up to an aggregate of $ 24.3 million of a credit line from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. When drawn down, the credit line was secured by land and buildings on this land owned by Jonway and guaranteed by Jonway Group. Under the above credit line, in November 2012, Jonway borrowed one year short-term loans in the aggregate amount of approximately $7.3 million. The loans were repaid in November 2013. The credit line expired in November 2013.
In November 2013, we were approved up to an aggregate of $24.5 million of a credit line, with the credit exposure of $6.4 million from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. When drawn down, the credit line was secured by land and buildings owned by Jonway and guaranteed by the related party Jonway Group. Jonway borrowed one year short-term loans in the aggregate amount of $6.4 million in November 2013. The annual interest rate is 6.6%, and the loans are due in November 2014. We have also drawn $2.7 million in the form of notes payable as of December 31, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable. These notes are due onApril 24 and April 29, 2014. As of December 31, 2013, the credit exposure of $6.4 million has been used, and $- million was still available for use. The credit line expires in November 2015.
In December 2012, we were approved up to an aggregate of $4.1 million of a credit line, with the credit exposure of $4.1 million from Taizhou Bank. This credit line was guaranteed by related parties. As of December 31, 2013, the total outstanding loan under this credit line was $2.1 million. The annual interest rates are from 8.46% to 8.89%.The loans are due separately in January, February and May 2014, and have been repaid when due. A credit exposure of $2.0 million was used in the form of notes payable of $4.0 million with restricted cash of $2.0 million deposited with the bank. As of December 31, 2013, the total credit exposure of $4.1 million has been fully used. This credit line was reduced to $2.5 million in early 2014 when it was renewed.
In December 2013, we were approved up to an aggregate of $9.2 million of a credit line from Everbright Bank. This credit line can only been used in the form of notes payable with 50% restricted cash deposited. Thus, we were approved a credit exposure of $4.6 million. This credit line was guaranteed by the shareholder Wang Huaiyi, as well as a building and land use right at the carrying value of $2.2 million. As of December 31, 2013, $8.9 million was drawn down as notes payable with restricted cash of $4.45 million deposited with the bank. As of December 31, 2013, the credit line of $8.9 million has been used, and $0.3 million ($0.15 million credit exposure) was still available for use. The credit line expires in December 2014.
In December 2012, we were also approved up to an aggregate of $4.8 million of a credit line from Industrial and Commercial Bank of China (ICBC). This credit line was secured by land and buildings on this land owned by Jonway and guaranteed by related parties. This credit line expired in December 2013.
In December 2013, we were approved up to an aggregate of $5.4 million of a credit line from Industrial and Commercial Bank of China (ICBC). This credit line was secured by land and buildings on this land owned by Jonway and guaranteed by related parties. As of December 31, 2013, the total outstanding loan under this credit line was $6.4 million, with $1.5 million restricted cash deposited with the bank. The annual interest rates are from 5.6% to 7.2%. The loans are due in various dates from February 2014 to November 2014. Loans due as of the date of this report have been repaid when due. We have also drawn $177,000 in the form of notes payable as of December 31, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable, which were due in March 2014. As of December 31, 2013, a credit exposure of $4.9 million has been used, and $0.5 million was still available for use. The credit line expires in December 2014.
Jonway intends to utilize the above credit lines to expand its electric vehicle business as well as other future vehicle models. This includes on-going working capital needs, electric vehicle production equipment requirements, testing, homologation and new EV product molds. These credit lines will also be used to support the company’s expansion plans, with emphasis on its electric vehicle production line facilities in China. The credit will also help advance new electric vehicle initiatives, launch new strategic global sales and marketing operations, bolster infrastructure, and finance working capital. Also our principal shareholder, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through December 31, 2014 in the event that we require additional liquidity. In addition, CEVC (China Electric Vehicle Corporation) would likely renew this convertible note and in the event that CEVC decides to call on the repayment, the repayment would likely be paid in full or in part in Jonway Auto shares or ZAP shares unless there is a breach by the Company on the covenant of the convertible note.
We will require additional capital to expand our current operations. In particular, we require additional capital to expand our presence across the world, to continue development of our electric vehicle business, to continue strengthening our dealer network and after-sale service centers and expanding our market initiatives. We also require financing the investment for the continued roll-out of new products and to add qualified sales and professional staff to execute on our business plan and pursue our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias, the electric and other fuel efficient vehicles.
We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.
NOTE-2 SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, warranty costs, stock based compensation, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
Concentration of Credit Risk
The Company’s operations are substantially carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations maybe substantially influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which subject the Company to potential credit risk consist of its cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with one high credit quality financial institution. Deposits may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal. The Company has not experienced any losses to date on its deposits.
The Company performs ongoing credit evaluations of its customers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.
The Company currently relies on various outside contract manufacturers in China to supply electric vehicles and products for its customers. Although management believes that other contract manufactures could provide similar services and intends to transition its manufacturing to Jonway’s facilities in Sanmen, China, but, if these Chinese companies are unable to supply electric vehicles and the Company is unable to transition manufacturing to Jonway’s facilities or find alternative sources for these product and services, the Company might not be able to fill existing backorders and/or sell more electric vehicles. Any significant manufacturing interruption could have a material adverse effect on the Company’s business, financial condition and results of operations.
Revenue Recognition
The Company records revenues for non-Jonway sales when all of the following criteria have been met:
-
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
-
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
-
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.
-
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
The Company records revenues for Jonway sales only upon the occurrence of all of the following conditions:
-
The Company has received a binding purchase order 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 factory to a common carrier acceptable to the customer; and
-
The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Sales are recognized net of sale discounts, rebates and return allowances.
Stock-based compensation
The Company accounts for stock-based compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the “Black-Scholes model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.
The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, Accounting for Uncertainty in Income Taxes defines uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
United States federal, state and local income tax returns prior to 2010 are not subject to examination by tax authority.
.
Foreign Currency Translation
The Company and its wholly owned subsidiary/investments, maintain their accounting records in United States Dollars (“US$”) whereas Jonway Auto maintains its accounting records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.
Jonway Auto’s principal country of operations is the PRC. The financial position and results of our operations are determined using RMB, the local currency, as the functional currency. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Due to the fact that cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholder’s equity as “Accumulated Other Comprehensive Income.”
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect our financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
Loss per Share
Basic and diluted net loss per share is computed by dividing consolidated net loss by the weighted-average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding common stock options convertible debt and warrants, have not been included in the computation of diluted net loss per share for all periods presented as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share.
Cash and cash equivalents
The Company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the company and are comprised of investments having maturities of three months or less when purchased. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
The Company has cash restricted in connection with the issuance of bank acceptance notes to various suppliers of spare parts which were issued through Jonway’s banks. To issue these bank acceptance notes to Jonway’s suppliers, the banks require a deposit of 50% or 100% of the full amount of such notes which are payable within 6 months from issuance. Upon the maturity date, restricted funds will be used to settle the bank acceptance notes.
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Accounting standards establish a three level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. For certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. It was impracticable to determinate the fair value of the receivable from a related party and the distribution agreements. The three levels of inputs are defined as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs other than quoted prices in active markets that is directly or indirectly observable;
Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions and methodologies that result in management’s best estimate of fair value.
The Company records certain assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally assets are measured at fair value on a nonrecurring basis as a result of impairment changes. Fair value was estimated based on discounted cash flows (Level 3 inputs).Assets measured at fair value on a nonrecurring basis for the years ended December 31, 2013 are summarized below (in thousands):
December 31, 2013
December 31, 2012
(1)
The original carrying value was $5.20 million ($5.12 million at the exchange rate of 12/31/2012). The Company recognized impairment charges of $2.64 million (included in “impairment loss of long-lived assets” on the face of consolidated statements of operations and comprehensive loss) and $2.56 million for the years ended December 31, 2013 and 2012, respectively. These charges were related to the impairment in the 3-door SUV mold equipment used in the Jonway Auto segment.
(2)
The Company recorded a loss of $899 and $391, respectively for the years ended December 31, 2013 and 2012.
Accounts Receivable and Notes Receivable
Accounts and note receivable consist mainly of receivables from our established dealer network. A credit review is performed by the Company before the dealer is approved to purchase vehicles form the Company. The Company performs ongoing credit evaluations of its dealers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The allowance for doubtful accounts was $696, 000 and $201,000 at December 31, 2013 and 2012, respectively.
Inventories
ZAP Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lesser of lower of cost (first-in, first-out basis for ZAP and moving average basis for Jonway) or market (net realizable value or replacement cost). 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. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.
As of December 31, 2013, ZAP has reserved $824,519 of its vehicle inventory that is held by Steve Schneider on River Road property that was being leased by ZAP from Steven Schneider. Mr. Schneider refuses to release this inventory until his lawsuit against the ZAP is heard by the courts.
Property and equipment
Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements. Property and equipment is stated at cost, net of accumulated depreciation and amortization, and is depreciated or amortized using straight-line method over the asset's estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:
Land use rights
Under PRC law, all land in the PRC is permanently owned by the government and cannot be sold to an individual or company but companies can purchase the land use rights for the specified period of time, as in our industry the industrial purpose has a useful life of 50 years. The government grants individuals and companies the right to use parcels of land for specified periods of time. These land use rights are sometimes referred to informally as “ownership”. Land use rights are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight -line method. Estimated useful life is 50 years, and is determined in the connection with the term of the land use right.
Long-lived assets
Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.
Intangible Assets-Finite
Intangible assets consist of patents, trademarks, land use rights, government approvals and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for the EPA license and 8.5 years for the customer relationships. Costs incurred by the Company in connection with patent, trademark applications and approvals from governmental agencies such as the Environmental Protection Agency, including legal fees, patent and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over an estimated economic life of the asset, generally seven years, commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred.
Goodwill and Intangible Assets - Indefinite
Goodwill and intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance applicable accounting principles. The Company assesses annually whether there is an indication that goodwill is impaired, or more frequently if events and circumstances indicate that the asset might be impaired during the year. The Company performs its annual impairment test in the fourth quarter of each year. Calculating the fair value of the reporting units requires significant estimates and assumptions by management. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, there is an indication that the reporting unit goodwill may be impaired and a second step of the impairment test is performed to determine the amount of the impairment to be recognized, if any.
Product warranty costs
Jonway provides a 2-year or 60,000 kilometer warranty for its SUV and minivan products. Jonway records the estimated cost of the product warranties at the time of sale using the estimated cost of product warranties based on historical results. 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.
$207,000 was included in “accrued liabilities and others- long term” on the consolidated balance sheets. $631,000 was included in long-term “accrued liabilities” on the consolidated balance sheets.
Comprehensive loss
Comprehensive loss represents the net loss for the period plus the results of certain changes to shareholders’ equity that are not reflected in the consolidated statements of operations. The Company’s comprehensive loss consists of net losses, foreign currency translation adjustments and unrealized net losses on investments.
Risks and Uncertainties
A substantial portion of the Company’s operations are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The company’s results may be adversely affected by interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
Recent Accounting Pronouncements
There have been no new accounting pronouncements that would have a material impact on the financial position of the Company.
NOTE 3- INVENTORIES, NET
Inventories, net at December 31, 2013 and 2012 are summarized as follows (in thousands):
Changes in the Company’s inventory reserve during the years ended December 31, 2013 and 2012 are as follows (in thousands):
NOTE 4 - Property, plant and equipment, net, and Land Use Rights
Property, plant and equipment, net at December 31, 2013 and 2012 are summarized as follows (in thousands):
Four pieces of land were acquired from the acquisition of Jonway auto in 2011.All land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the Right) to use the land. The Company has the right to use the land for 50 years and amortized the Right on a straight-line basis over the period of 50 years. As of December 31, 2013 and 2012, land use rights consist of the following:
As of December 31, 2013, estimated future amortization expense for land use rights is as follows (in thousands):
Depreciation and amortization expense of property, plant and equipment, as well as land use rights and software was approximately $6.7 million and $5.7 million for the years ended December 31, 2013 and 2012.
NOTE 5- INTANGIBLE ASSETS, NET & GOODWILL
The goodwill and intangible assets at December 31, 2013 and 2012 are summarized as follows:
(a)
The in process technology and trade name have been determined to have an indefinite life.
As of December 31, 2013, estimated future amortization expense for intangibles assets, subject to amortization, is as follows (in thousands):
NOTE 6 - DISTRIBUTION AGREEMENTS
Distribution agreements as of December 31, 2013 and 2012 are presented below (in thousands):
Amortization expenses related to these distribution agreements for the years ended December 31, 2013and 2012was $1,440,000and $2,160,000, respectively. Amortization is based over the term of the agreements. The estimated future amortization expense is as follows (in thousands):
Distribution Agreement with Better World, Ltd
On January 15, 2010, ZAP entered into a Stock Purchase Agreement with a related party, Better World, Ltd., a British Virgin Islands company, whereby the Company issued 6 million shares of its common stock valued at $2.16 million in exchange for an agreement on terms relating to rights to the distribution of Better World products, such as charging stations for electric vehicles both in the U.S. and internationally. Priscilla Lu, Chairman of the Board of Directors of ZAP, is also General Partner of Better World, Ltd.
Distribution Agreement with Goldenstone Worldwide Limited for Jonway Products
On October 10, 2010, ZAP entered into an International Distribution with Goldenstone Worldwide Limited as the distributor of Jonway products such as gas SUV’s and gas and electric motor scooters, both in the U. S. and internationally. In connection with the distribution agreement the Company also issued 30 million shares of ZAP common stock valued at $14.4 million. The Jonway Group had previously granted exclusive worldwide distribution of Jonway products to Goldenstone Worldwide Limited. ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the worldwide distribution rights for Jonway Products. Therefore it was necessary for ZAP to acquire distribution rights for Jonway Products.
NOTE 7 - INVESTMENT IN JOINT VENTURES
On December 11, 2009, the Company entered into a Joint Venture Agreement to establish a new US-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Holley Group, the parent company of a global supplier of electric power meters and Better World. Priscilla Lu, Ph.D., who is the current Chairman of the Board of ZAP, is also a director and General Partner of Cathaya Capital, which is a shareholder of Better World. In January of 2011, Holley Group’s interest in ZAP Hangzhou was purchased by Jonway Group. ZAP and Better World each own 37.5% of the equity shares of ZAP Hangzhou, and Jonway Group owns 25% of the equity shares of ZAP Hangzhou. Th ejoint venture partners have also funded the initial capital requirements under the agreement for a total of $3 million, of which ZAP’s portion is $1.1 million.
In November 2011, Jonway and ZAP Hangzhou jointly set up Shanghai Zapple Electric Vehicle Technologies Co., Ltd. (Shanghai Zapple) with registered capital of RMB 20 million. Jonway and ZAP Hangzhou each own 50% of the equity share of Shanghai Zapple. Jonway injected RMB 5 million into this joint venture and ZAP Hangzhou injected RMB 3 million. Shanghai Zapple’s approved scope of business includes: technical advice, technical development, technical services, technology transfer regarding electric vehicle technology, auto technology, energy technology, material science and technology, sale of commercial vehicle and vehicle for nine seats or more, auto parts, auto supplies, lubricant, mechanical equipment and accessories, business management consulting, industrial investment, exhibition services, business marketing planning, car rental (shall not be engaged in financial leasing), import and export of goods and technologies.
The carrying amount of Company’s investment in the joint ventures is as follows (in thousands):
The Company recorded a loss of $438,000 and $123,000 in ZAP Hangzhou, and a loss of $461,000 and $280,000 in Shanghai Zapple for the years ended December 31, 2013 and 2012 respectively.
Summarized financial information of Hangzhou ZAP and Shanghai Zapple are as follows (in thousands):
NOTE 8 -LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES
Line of credit (Credit Exposure)
In May 2012, we were approved up to an aggregate of $24.3 million of a credit line from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. When drawn down, the credit line was secured by land and buildings on this land owned by Jonway and guaranteed by Jonway Group. Under the above credit line, in November 2012, Jonway borrowed one year short-term loans in the aggregate amount of approximately $7.3 million. The loans were repaid in November 2013. The credit line expired in November 2013.
In November 2013, we were approved up to an aggregate of $24.5 million of a credit line, with the credit exposure of $6.4 million from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. When drawn down, the credit line was secured by land and buildings owned by Jonway and guaranteed by the related party Jonway Group. Jonway borrowed one year short-term loans in the aggregate amount of $6.4 million in November 2013. The annual interest rate is 6.6%, and the loans are due in November 2014. We have also drawn $2.7 million in the form of notes payable as of December 31, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable. These notes are due in April 2014. As of December 31, 2013, the credit exposure of $6.4 million has been used, and $- million was still available for use. The credit line expires in November 2015.
In December 2012, we were approved up to an aggregate of $4.1 million of a credit line, with the credit exposure of $4.1 million from Taizhou Bank. This credit line was guaranteed by related parties. As of December 31, 2013, the total outstanding loan under this credit line was $2.1 million. The annual interest rates are from 8.46% to 8.89%.The loans are due separately in January, February and May2014, and have been repaid when due. A credit exposure of $2.0million was used in the form of notes payable of $4.0 million with restricted cash of $2.0 million deposited with the bank. As of December 31, 2013, the total credit exposure of $4.1 million has been fully used. This credit line was reduced to $2.5 million in early 2014 when it was renewed.
In December 2013, we were approved up to an aggregate of $9.2 million of a credit line from Everbright Bank. This credit line can only been used in the form of notes payable with 50% restricted cash deposited. Thus, we were approved a credit exposure of $4.6 million. This credit line was guaranteed by the shareholder Wang Huaiyi, as well as a building and land use right at the carrying value of $2.2 million. As of December 31, 2013, $8.9 million was drawn down as notes payable with restricted cash of $4.45 million deposited with the bank. As of December 31, 2013, the credit line of $8.9 million has been used, and $0.3 million ($0.15 million credit exposure) was still available for use. The credit line expires in December 2014.
In December 2012, we were also approved up to an aggregate of $4.8 million of a credit line from Industrial and Commercial Bank of China (ICBC). This credit line was secured by land and buildings on this land owned by Jonway and guaranteed by related parties. This credit line expired in December 2013.
In December 2013, we were approved up to an aggregate of $5.4 million of a credit line from Industrial and Commercial Bank of China (ICBC). This credit line was secured by land and buildings on this land owned by Jonway and guaranteed by related parties. As of December 31, 2013, the total outstanding loan under this credit line was $6.4 million, with $1.5 million restricted cash deposited with the bank. The annual interest rates are from 5.6% to 7.2%. The loans are due in various dates from February 2014 to November 2014.Loans due as of the date of this report have been repaid when due. We have also drawn $177,000 in the form of notes payable as of December 31, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable, which were due in March 2014. As of December 31, 2013, a credit exposure of $4.9 million has been used, and $0.5 million was still available for use. The credit line expires in December 2014.
Short term debt (in thousands)
In November 2012, Jonway borrowed a one year short-term loan in the aggregate amount of approximately $7.1 million from CITIC under the credit line. The annual interest rate is 6.60%, and expires in November 2013. It has been repaid when due. In November 2013, Jonway borrowed one year short-term loans in the aggregate amount of $6.4 million. The annual interest rate is 6.6%, and the loans are due in November 2014.The loans are secured by a Maximum Amount Mortgage Contract between Jonway and CITIC dated November 11, 2013, in which land use right and a building with a total carrying amount of $5.8million as of December 31, 2013 has been pledged as security for this loan. The shareholder and CEO Alex Wang also personally guaranteed these loans.
In December 2012, Jonway entered into two short-term loans with Taizhou Bank for the aggregating amount of $1.6 million. The annual interest rates were 8.06% and 8.46% respectively, and the loans were due in February and June 2013, respectively. The loans are guaranteed by Jonway Group, the shareholder Huaiyi Wang and his two families. The loan was repaid in 2013.In July, August and November 2013, the company borrowed a total of $2.1 million short term loans at interest rates of 8.46% and 8.89% from Taizhou Bank. The loans are guaranteed by the related parties including Jonway Group, the shareholder Wang Huayi and other individuals. Loans of $1.3 million were due in January and February 2014, and were repaid when due. The remaining balance of $0.8 million will be due in May 2014.
The Company also borrowed loans from Industrial and Commercial Bank of China (ICBC) during 2013. In June 2013, Jonway borrowed a one year short-term loan of $1.1 million. The annual interest rate was 6.9%. In August 2013, Jonway borrowed a 6 months short-term loan of $0.8 million. The annual interest rate was 5.6%. In August 2013, Jonway borrowed a one year short-term loan of $ 1.2 million. The annual interest rate was 6.9%. In September 2013, Jonway borrowed a 6 months short-term loan of $0.7 million. The annual interest rate was 5.6%. In November 2013, Jonway borrowed a one year short term loan of $1.5 million. The annual interest rate was 7.2%. In December 2013, Jonway borrowed a one year short term loan of $1.1 million. The annual interest rate was 7.2%. These loans were guaranteed by the related parties including Jonway Group, the shareholder Wang Huaiyi and the shareholder and CEO Alex Wang. The Company also pledged buildings and land use right at a carrying value of $3.7 million with ICBC. Restricted cash of $1.5 million was also deposited with ICBC.
The weighted average interest rates were 7.04% and 6.51% for the years ended December 31, 2013 and 2012, respectively.
Bank acceptance notes
As of December 31, 2013, the Company has bank acceptance notes payable in the amount of $15.7 million. The notes are guaranteed to be paid by the banks and are usually for a short-term period of six (6) months. The Company is required to maintain cash deposits of 50% or 100% of the notes payable with these banks, in order to ensure future credit availability. As of December 31, 2013, the restricted cash for the notes was $9.3 million.
(in thousands)
a.
Notes payable to China Everbright bank include 114 bank acceptance notes expiring at various maturity dates from January 2014 to June 2014. The notes payable are guaranteed by land use right and a building at a total carrying value of $2.2 million. The Company is also required to maintain cash deposits of 50% of the notes payable with the bank, in order to ensure future credit availability.
b.
Notes payable to Taizhou bank include 68 bank acceptance notes expiring at various maturity dates from February 2014 to May 2014. The Company is required to maintain cash deposits of 50% of the notes payable with the bank, in order to ensure future credit availability.
c.
Notes payable to CITIC bank include 2 bank acceptance notes expiring on April 24 and April 29, 2014. The Company is required to maintain cash deposits of 100% of the notes payable with the bank, in order to ensure future credit availability.
d.
Notes payable to ICBC bank has 1 bank acceptance note due and paid in March 2014. The Company is required to maintain cash deposits of 100% of the notes payable with the bank, in order to ensure future credit availability.
e.
Notes payable to Yinzuo bank include 21 bank acceptance notes which expired in March 2013. The Company was required to maintain cash deposits at 50% of the notes payable with the bank, in order to ensure future credit availability.
f.
On March 13, 2012 the Company and Shanghai Pudong Development Bank signed a bank acceptance note agreement for $676,811. This bank note facility was issued to Jonway Auto’s suppliers and secured by a letter of credit, valued at $676,811, of which Jonway Auto was a beneficiary. The bank acceptance notes expired on March 13, 2013.
NOTE 9 -SENIOR CONVERTIBLE DEBT-China Electric Vehicle Corporation (“CEVC”) Note
On January 12, 2011, the Company entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Agreement”) with China Electric Vehicle Corporation (“CEVC”), a British Virgin Island company whose sole shareholder is Cathaya Capital, L.P., a Cayman Islands exempted limited partnership (“Cathaya”). Priscilla Lu is the chairman of the board of directors of ZAP, a managing partner of Cathaya and a director of CEVC.
Pursuant to the Agreement, (i) CEVC purchased from the Company a Senior Secured Convertible Note (the “Note”) in the principal amount of US$19 million, as amended, (ii) the Company issued to CEVC a warrant (the “Warrant”) exercisable for two years for the purchase up to 20 million shares of the Company’s Common Stock at $0.50 per share, as amended (iii) the Company, certain investors and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009 that was previously granted to Cathaya Capital L.P., (iv) the Company, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certain Registration Rights Agreement, dated as of August 6, 2009, that was previously granted to Cathaya Capital L.P which grants certain registration rights relating to the Note and the Warrant, and (v) the Company and CEVC entered into a Security Agreement that secures the Note with all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.
The Note which initially was scheduled to mature on February 12, 2012 but was extended to August 12, 2013according to the representation letter dated March 21, 2012 from CEVC and accrues no interest with this new extension. This amendment adjusted the rate at which the note would convert into shares of ZAP Common Stock or shares of capital stock of Zheijiang Jonway Automobile, Co. Ltd. held by ZAP. The interest accrued through the maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. The total amount of the convertible note is approximately $20.7 million.
The note is convertible upon the option of CEVC at any time, into (a) shares of Jonway capital stock owned by ZAP at a conversion rate of 0.003743% of shares of Jonway capital stock owned by ZAP for each $1,000 principal amount of the Note being converted or (b) shares of ZAP common stock at a conversion rate of 4,435 shares of common stock for each $1,000 principal amount of the Note being converted.
Since the value of the common stock into which the above-mentioned note is converted is greater than the proceeds for such issuance, a beneficial conversion feature totaling $19 million was recorded. During 2011, a total of $16.9 million in amortization was recorded and charged to interest expense and the remaining balance of $2.1 million of the discount was offset against the Company’s equity account due to the note extension to August 12, 2013.
In July 2013, this convertible note has been extended until August 12, 2014 with interest accrual at 8% per annum. According to ASC 470-10, the market interest should be imputed for the non-interest bearing loan between the related parties; therefore in the extended agreement the Convertible Note will bear a market interest rate at 8%. With the new extension, the principal of $20.7 million will have the same conversion features to cash, and will also be convertible in part or in whole to shares of ZAP or Jonway Auto at maturity date or at any time with a 90 day notice. Beginning August 12, 2013 within 10 calendar days following the end of each fiscal quarter, the Company shall pay Holder the Additional Interest accrued during such fiscal quarter by issuing the Holder or a party designated by the Holder, the number of shares of the Company’s Common Stock equal to (i) the Additional Interest accrued during such fiscal quarter divided by (ii) the average of the Closing Prices for each trading day during such fiscal quarter ending on (and including) the last Trading Day of such fiscal quarter. The Additional Interest Rate may be amended from time to time with the written consent of the Holder and the Company. In addition, the warrants issued in connection with the CEVC note was amended to change the terms of conversion and to extend the maturity date until February 12, 2015.
.
NOTE10- CONVERTIBLEBOND
On June 12, 2013, the Company signed a convertible bond agreement, pursuant to which a Convertible Bond would be put in place to fund the formation of JAZ (Jonway and ZAP) from the ZAP Hangzhou Joint Venture that was formed in 2010 in China, Hangzhou. The Convertible Bond was to be funded at US$2 million with the option to convert to JAZ shares upon listing on the AIM market at a discount of 30% of the IPO price, and if no AIM listing will be achieved within the duration of Bond period then the Convertible Bond can be converted into ZAP shares at 30% below market price based on the average trading prices of the previous 120 days after notification by bond holder for shares conversion in whole or in part of the bond sum. The Convertible Bond bears interest at 12% per annum payable in arrears in full. As of December 31, 2013 the Company received $1.7 million ($1.50 million net of interest) of $2 million, leaving $300,000 yet to be received. A total of $0.18 million in amortization was recorded with the remaining balance of $0.55 million of the discount was offset against the Company’s equity account. The Bond has not been fully funded and the remaining $300,000 may not be forthcoming and its settlement date is uncertain. Therefore, the final amount of the Bond will not be determined until either the $300,000 is received or the principal amount of the Bond is reduced to $1.7 million. As of December 31, 2013, only the $1.7 million that has been funded is accounted for in the accompanying consolidated financial statements. Ratification by the Company’s board of directors of the final amount of the Bond is pending the definitive payment or nonpayment of the remaining$300,000.
ZAP Hangzhou Joint Venture (ZHJV) was formed to develop electric power trains using local supply parts, and also develop new technology to comply with the China EV type approval requirements. ZHJV has since provided the electric power train and technology for the compliance of China type approval for the Jonway Auto SUV EV, and is developing the power train for the minivan for both the lead acid and the lithium battery version. Over the last few months, ZHJV has been working on getting the formation of an offshore entity of JAZ (Cayman Island Incorporated) in place to support the additional funding requirements to support further development of EV technology and EV product development. This new entity JAZ will seek funding for EV development, and will be singularly focused on EV platforms and technologies. Funding from this will be directed to supporting the licensing of distribution rights from ZAP and also future development, sales and marketing of EV products. The licensing of distribution rights from ZAP will help finance the on-going expenses of ZAP and help bridge over the financial needs and liabilities in paying the on-going operational cost of running ZAP USA, while ZAP continues to develop the USA market for both consumer EV products and low speed vehicle EVs.
JAZ is planning to list on the UK AIM next year, and is working with professionals in the UK to achieve this listing. JAZ will be the vehicle for ZAP to focus on EV sales and marketing and further technology development, and will provide access to capital and funds for the on-going development of EV product line and markets.
NOTE 11 - INCOME TAXES
The Company is subject to United States of America (“United States” or “US”) and People’s Republic of China (“China” or “PRC”) income tax on any profit generated, if any.
Income (loss) before provision for income taxes consisted of:
Provision for income taxes consisted of:
United States
The Company is incorporated in the United States of America and is subject to United States federal taxation. The Company has no taxable income for the year so did not incur income taxes. The applicable income tax rate for the Company for both years ended December 31, 2013 and 2012 was 34%.
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets as of December 31, 2013 and 2012 is presented below:
The net change in the valuation allowances for the years ended December 31, 2013 and 2012 were an increase of $1.1 million and $2.0 million, respectively. Because there is uncertainty regarding the Company’s ability to realize its deferred tax assets, a 100% valuation allowance has been established.
As of December 31, 2013, the Company had net operating loss carry forwards of approximately $146 million, which expires in the years 2014 through 2029.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized for the years ended December 31, 2013 and 2012. The federal tax returns of 2010, 2011 and 2012 remain subject to examination. And the state tax returns from 2008 to 2012 remain subject to examination.
PRC
Effective January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law, and Implementing Rules impose unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, the Company’s subsidiary in PRC is subject to an enterprise income tax rate of 25%. No provision for income taxes has been made as the Company has no taxable income for the periods.
The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets at December 31, 2013 and 2012 is presented below (in thousand):
The non-current portion of deferred tax assets were included in the “Deposits and other assets” on the accompanying consolidated balance sheets.
The net change in the valuation allowances for the years ended December 31, 2013 and 2012 was an increase of $1.8 million and $3.1 million, respectively.
As of December 31, 2013, the Company had net operating loss carry forwards of approximately of $31.4 million, which expires in the years 2014 through 2018.
The following table reconciled the U.S. statutory rates to the Company's effective rate for the years ended December 31, 2013 and 2012.
NOTE 12- STOCK-BASED COMPENSATION
Services performed and other transactions settled in the Company’s common stock are recorded at the estimated fair value of the stock issued if that value is more readily determinable, than the fair value of the consideration received.
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.
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 December 31, 2013 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 December 31, 2013.
As of December 31, 2013, total compensation cost of unvested employee stock options is $611,000. This cost is expected to be recognized through December 31, 2016. We recorded no income tax benefits for stock-based compensation expense arrangements for the years ended December 31, 2013 and 2012, as we have cumulative operating losses.
NOTE 13 - LOSS PER SHARE
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the period, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:
For the years ended December 31, 2013 and 2012, 12.0 million and 28.7 million options, and 38.0 million and 38.2 million warrants, respectively were not included in the diluted loss per share because the average stock price was lower than the strike price of these options and warrants.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of non-cash investing and financing information is as follows (in thousands):
NOTE 15 - SEGMENT REPORTING
Operating Segments
In accordance with ASC 280, the Company has identified four reportable segments consisting of Jonway Vehicles, Advanced Technology Vehicles, ZAP (Consumer Product) and ZAP Hong Kong. The Jonway Vehicles segment represents sales of the gas fueled Jonway A380 three and five-door sports utility vehicles, minivans and spare parts principally through distributors in China. The Advanced Technology Vehicles segment represents sales and marketing outside of China of the ZAPTRUCK XL, the ZAPVAN Shuttle and the Xebra® Sedan and will transition to selling mostly Jonway’s EV A380SUV and EV minivan in 2013. The Consumer Product segment represents rechargeable portable energy products, our Zapino scooter, and our ZAPPY3 personal transporters. These segments are strategic business units that offer different services. They are managed separately because each business requires different resources and strategies. The Company’s chief operating decision making group, which is comprised of the Chief Executive Officer and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to allocate resources and in assessing performance.
The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands):
Customer information
Approximately 98.2% or $50.6 million of our 2013 revenues are from sales in China. Jonway Auto distributes its products to an established network of over 70factory level dealers in China with one customer contributing to 11% of our consolidated revenue. Approximately 98.0% or $49.3 million of our 2012 revenues are from sales in China. Jonway Auto distributes its products to an established network of over 100 factory level dealers in China with one customer contributing to 12% of our consolidated revenue.
Supplier information
For the years ended 2013 and 2012, approximately 98.5% or $49.8 million and 99.0% or $48.2 million of the consolidated cost of goods sold were purchased in China. For the year ended December 31, 2013 and 2012, Haerbin Dongan Auto, Engine Manufacturing Co., Ltd., as the sole supplier of engine to Jonway, accounted for22% and 21% of the total purchase, respectively.
NOTE 16-SHAREHOLDERS’ EQUITY
Common stock
2012 ISSUANCES
ZAP issued 1, 279,354 shares of common stock valued at $231,178 in exchange for consulting services. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 949,269 shares of common stock valued at $179,530 for employee compensation. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 2,109,689 shares of common stock valued at $203,957 to settle legal claims against the company. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 363,637 shares of common stock valued at $40,000 to a departing board member. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
Shares acquired through exercises of warrants for all Series other than Series B, C, D and K are restricted as to sale. However, the warrants may be assigned, sold, or transferred by the holder without restriction.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series.
Total warrants outstanding at December 31, 2012 are summarized as follows (in thousands):
2013 ISSUANCES
ZAP issued 69,677 shares of common stock valued at $12,000 in exchange for engineering services. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
Total warrants outstanding at December 31, 2013 are summarized as follows (in thousands):
55,000 of Series D-2 warrants and 100,000 of $0.70 unrestricted warrants expired in fiscal year 2013.
NOTE 17 - RELATED PARTY TRANSACTIONS
Due from (to) related parties
Amount due from related parties are principally for advances in the normal course of business for parts and suppliers used in manufacturing.
Amount due from related parties are as follows (in thousands):
Amount due to related parties are follows (in thousands):
Promissory notes and Down Payment Convertible Note from Jonway Group
On December 11, 2011, ZAP entered into a Down Payment Convertible Note agreement with Jonway Group pursuant to which ZAP may borrow $3 million for the production of seventy-five Alias electric vehicles to be delivered and sold in 2012. The unpaid principal amount of the note bears interest at a rate per annum equal to 8%, calculated on the basis of a 365 day year and the actual number of days lapsed. Upon the completion of selling seventy-five Alias vehicles, ZAP will repay the unpaid principal, together with any then unpaid and accrued interest, on or before December 31, 2012. Repayment shall be made at the option of Jonway Group in the form of either cash or ZAP’s Common Stock priced as of the date the principal was deposited into Jonway’s bank account on behalf of ZAP. As of December 31, 2013, no advance has been made to ZAP from Jonway Group.
Transactions with Jonway Group
Jonway Group is considered as a related party as the Wang Family, one of the shareholders of the Company, has controlling interests in JonwayGroup. Jonway Group supplies some of plastics spare parts to Jonway and gave guarantees on Jonway short term bank facilities from China-based banks. Jonway made such purchase from Jonway Group for a total of $1.4 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively.
Jonway Agreement with Zhejiang UFO
Based on a contract by and among the Zhejiang UFO, Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006.
According to the contract, Jonway shall pay Zhejiang UFO a variable contractual fee which is calculated based on the number of SUVs that Jonway assembles in the Sanmen Branch every year, at the following rates (historical exchange rate):
Zhejiang UFO is considered a related party because the Wang Family, who are shareholders of Jonway, has certain non-controlling equity interests in Zhejiang UFO. For the years ended December 31, 2013 and 2012, $706,000and $807,000 were recorded as assembling fees, respectively. Also during 2013, Jonway sold SUVs in the amount of $95,000 and spare parts in the amount of $8,255,000 to Zhejiang UFO. During 2012, Jonway sold SUVs in the amount of $415,000 and spare parts in the amount of $3,516,000 to Zhejiang UFO.
Other Related Party Transactions
During 2013, Jonway purchased spare parts in the amount of $55,000 and $1,214,000 from Jonway Motor Cycle and Taizhou Huadu, respectively. During 2012, Jonway purchased spare parts in the amount of $154,000 and $1,173,000 from Jonway Motor Cycle and Taizhou Huadu, respectively.
NOTE 18- LITIGATION
1. On January 11, 2013, Cathaya Capital, L.P., a ZAP shareholder (“Cathaya”), and Priscilla Lu, Chairman of the ZAP Board of Directors (“Lu”) (collectively “Plaintiffs”), filed a lawsuit in the Superior Court of California, County of Los Angeles, styled Cathaya Capital, L.P. et al. v. ZAP, et al., Case No. BC499106 (the “Cathaya Lawsuit”). By the Cathaya Lawsuit, Plaintiffs, derivatively on behalf of the nominally-named defendant ZAP, asserted claims for breach of fiduciary duty and conversion against the following three members of the ZAP Board of Directors: Mark Abdou, Steven Schneider and Wang Gang a/k/a Alex Wang (the “Minority Board Member Defendants”). In addition, Plaintiffs, derivatively on ZAP’s behalf, sought declaratory and injunctive relief against the Minority Board Member Defendants for their alleged tortious misconduct and breaches of fiduciary duty. Plaintiffs also asserted causes of action on their own behalf pursuant to California Corporations Code sections 304 and 709, for a judgment as to the rightful composition of the Board and to remove the Minority Board Member Defendants from the Board.
On February 19, 2013, the Minority Board Member Defendants filed a Cross-Complaint in the Cathaya Lawsuit (the “Cross-Complaint”). In the Cross-Complaint, the Minority Board Member Defendants joined in bringing a cross-claim for a determination as to the rightful composition of the Board pursuant to California Corporations Code section 709. (On March 14, 2013, Wang Gang a/k/a Alex Wang filed a Request for Dismissal withdrawing as a cross-complainant.) The Cross-Complaint also asserted the following purported claims: (1) Steven Schneider’s claim for “breach of promise” against Pricilla Lu based on an alleged August 2009 oral promise that ZAP would provide Steven Schneider with a more favorable employment contract; (2) Steven Schneider’s claim for “breach of agreement to negotiate in good faith” against ZAP, based on ZAP’s alleged failure in August 2009 to negotiate an employment contract with Steven Schneider; (3) Mark Abdou’s claim against ZAP alleging that ZAP breached a Director Agreement with Mark Abdou (“Abdou Director Agreement”) by failing to pay all compensation allegedly due thereunder; (4) Mark Abdou’s claim for “breach of the covenant of good faith and fair dealing” against ZAP based on the alleged breaches of the Abdou Director Agreement; and (5) a claim against Lu for tortious interference with contractual relations (although the Cross-Complaint is unclear as to who is bringing the tortious interference claim against Lu and the factual basis for the claim). The Cross-Complaint seeks an unspecified amount of damages and other consideration.
After two hearings, on March 3, 2014, the Court granted the motion of Priscilla Lu to dismiss all claims asserted by Mark Abdou and Steven Schneider in their Second Amended Cross-Complaint against Ms. Lu, without leave to amend. As a result of the Court’s ruling, five of the Abdou/Schneider causes of action have been dismissed, including all claims against Ms. Lu. In addition, the Court dismissed all tort claims against ZAP. However, the Court’s ruling does not dismiss all claims against ZAP.
The Abdou/Schneider claims against ZAP for unpaid compensation were not before the Court and therefore were not affected by the Court’s ruling and have not been dismissed. These contract-based claims are against ZAP only and do not allow for punitive damages.
ZAP intends to vigorously defend the Cross-Complaint.
The Court has already heard and determined the parties’ respective claims seeking a determination as to the proper composition of the ZAP Board of Directors. On February 2, 2013, the Court ruled on Plaintiffs’ application seeking such determination pursuant to California Corporations Code section 709, ruling that the purported actions taken by the Minority Board Member Defendants at a purported December 31, 2012 meeting of the ZAP Board of Directors, including the appointment of Luo Hua Lian and Juan Gao to fill alleged vacancies on the Board, were null and void. On March 1, 2013, the Court denied the Minority Board Member Defendants’ application pursuant to California Corporations Code section 709, which had sought an order declaring that Co Nguyen and Aileen Kao were not validly appointed to the ZAP Board of Directors in October 2012.
As a result of the Court’s rulings on the parties’ respective applications under California Corporations Code section 709, the Board is comprised of the directors that were members of the Board prior to the purported December 31, 2012 Board meeting, except for the previously announced resignation of Alex Wang at a meeting of the Board held on January 20, 2013, and the appointment of Wang Huai Yi as a member of the Board at the same meeting to fill the vacancy created by Alex Wang’s resignation.
The Court set January 15, 2015 as the trial date..
2. A derivative lawsuit filed by Cathaya Capital against Steve Schneider, Mark Abdou, and Alex Wang also is scheduled to go to trial on January 1, 2015 and is being taken over by the Company, which is currently pursuing Steve Schneider to return inventory and assets that were removed from the Company’s warehouse, as well as cash that was redirected to a new account. In addition, on March 13, 2014, the Company filed a Cross -Complaint against Mark Abdou and Steve Schneider, alleging causes of action for (1) breach of fiduciary duty; (2) conversion; (3) imposition of a constrictive trust; and (4) an accounting. This Cross-Complaint likewise is scheduled to go to trial on January 15, 2015.
3. Integrity Automotive, LLC and Randall Waldman v. ZAP Motor Manufacturing,
Inc., et al., Complaint filed on March 2, 2010, Case No. 10 CI-01383 in the Jefferson Circuit Court, Division Ten, of the Commonwealth of Kentucky. The Complaint alleges causes of action for civil conspiracy, breach of fiduciary duties, conversion, and breach of contract and that the Defendants conspired against plaintiffs in connection with certain business transactions in Kentucky. Although no specific monetary demand is included, the Complaint seeks punitive damages, actual damages, and interest. All of the defendants answered and cross-complained on March 29, 2010, and discovery was served on plaintiffs requiring responses in early May 2010. The Company intends to defend itself vigorously in this matter and has recently learned that plaintiff Randall Waldman was arrested in Kentucky in late April, 2010, and charged with felonious criminal conduct. The Court indicated an intent to dismiss the case for failure to prosecute in early 2012 but the plaintiffs retained new counsel and successfully opposed the dismissal. There was no activity in the case that we are aware of in 2013.
4. Rainbow Cycle &Marine &Siloam Springs Cycle, v. Voltage Vehicles, Arkansas Motor Vehicle Commission, Case No. 10-008. On April 1, 2010, Rainbow Cycle &Marine &Siloam Spring Cycle (the "Dealer"), an automobile dealer in the State of Arkansas, submitted a complaint to the Arkansas Motor Vehicle Commission (the "Commission") regarding 6 Xebra vehicles purchased from the Company in 2008, each at the price of $8,750.00. The Dealer requested that the Commission order the Company to refund all monies paid by the Dealer to the Company for the vehicles, to pay all transportation costs, and in addition to assess penalties and interest charges against the Company in an unspecified amount. The Commission issued a Notice of Hearing on August 11, 2010, setting a hearing for September 15, 2010 on the Dealer's Complaint. The Company responded with a Motion to Dismiss, which the Commission set for hearing on December 15, 2010 and at the same time continued the hearing on the Dealer's Complaint to the same date. After the hearing, the Commission ruled that the Company was required to refund the Dealer's purchase price for the vehicles and to pay for transportation of the vehicles off of the Dealer's premises. In response, the Company's local counsel filed a Petition for Judicial Review on March 1, 201 1 in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. On November 11, 201 1, the Circuit Court upheld the decision of the Commission, and the Company filed a notice of Appeal on December 16, 201 1, and the Arkansas Supreme Court reversed and remanded to the Commission for further proceedings on October 11, 2012. There has been no subsequent activity in this matter since that time of which we are aware. In the event of a final, unfavorable outcome, the potential loss to the Company associated with the refund would be approximately $57,000.
5. Alvarez Lincoln - Mercury, Inc. vs. ZAP, Voltage Vehicles, Luizhou Wuling
Motors Co., Ltd., Pricilla Lu, and Steve Schneider, Complaint filed on May 30, 2012, in the Superior Court of the State of California, County of Riverside, Case No. RIC 1208152. The Complaint alleges causes of action for breach of written contract, money had and received, fraud by intentional misrepresentation, fraud by concealment, and fraud by negligent misrepresentation. The allegations contained in the Complaint include a claim that plaintiff believed it was purchasing 2010 model year vehicles but that in fact the vehicles were model year 2009. The case was settled on March 27, 2014.
6. A letter was received in May 2012 from a shareholder regarding various prior transactions of the Company which the Company is working to address and clarify. A tolling agreement was reached between the Company and shareholder on October 22, 2012 whereas the company, through its legal council shall provide a written summary of the actions taken during the preceding month with respect to the matters regarding the prior transactions in question by the shareholder. These transactions include, but are not limited to, a) ZAP, Jonway Group, Jonway Auto and Cathaya Capital shall each in all respects comply with their executory obligations with respect to the continued funding of ZAP, b) resolve the litigation regarding the former contracted employee, c) use reasonable efforts to defend, compromise and/or settle any pending and future litigations and ZAP shall use all reasonable efforts to cause all officers, directors and such other individuals who are or were employees, agents or representatives of ZAP to fully cooperate in the defense of future arbitrations or litigations. This agreement is binding through December 31, 2015.
Other Regulatory Compliance Matters
ZAP has filed with the National Highway Transportation Safety Agency (NHTSA) that it is in non compliance with Department of Transportation (DOT) requirements potential hazard may exist because the Model -Year 2008 XEBRA sedan and pickup does not stop in the required distance at 30 miles per hour and the master cylinder does not have separate brake fluid reservoirs with proper labeling and other miscellaneous non compliance issues. A public hearing was held in Washington DC on October 9, 2012 that allowed the DOT to take comments from the public and from their inside officers for consideration in their determination of whether ZAP has made a reasonable effort to 1) notify dealers and purchasers of the brake recall and 2) provide a remedy to the public to correct the brake problem. There were recommendations at the public hearing from DOT staff testifying at the hearing that ZAP should be subject to penalties and be required to repurchase the MY 2008 Xebra vehicles. ZAP has contracted with an independent testing facility to test the remedy that ZAP believes will correct the stopping distance problem, the duel brake fluid reservoir with correct labeling and other miscellaneous non compliance issues.
On November 16, 2012 ZAP received notification from the Office of Chief Counsel of the National Highway Traffic Safety Administration (“NHTSA”) containing Findings, Conclusions, and Order on ZAP’s Failure to Reasonably Meet its Recall Remedy and Notification Requirements (“Order”), dated November 13, 2012, related to the recall of ZAP’s model year 2008 Xebra, an electric three-wheeled motor vehicle with an enclosed sedan or truck body style.
NHTSA determined that ZAP had not reasonably met its recall remedy and notification requirements and was ordered to remedy the model year 2008 Xebra by, among other things, refunding the purchase price, less reasonable allowance for depreciation, providing notice of this refund remedy to model year 2008 Xebra owners, purchasers, and dealers, and picking up and disposing of each recalled vehicle at ZAP’s sole expense. NHTSA determined that the average market price of a model year 2008 Xebra as of October 12, 2012 to be $3,100. The order stated a total of 691 model year 2008 Xebra vehicles are subject to this remedy. ZAP’s internal records indicate that 691 vehicles were imported into the U.S. by ZAP, of which 627 were shipped to customers located in the U.S.
ZAP and the United States reached a settlement that is incorporated into a Consent Decree that was entered and approved by the U.S. District Court on July 17, 2013. Pursuant to the Consent Decree, ZAP agreed to initiate a buy-back program whereby it will offer to provide a refund of $3,100 to each eligible MY 2008 ZAP Xebra owner. The Consent Decree also contains notification and reporting requirements and requires ZAP to take specified actions regarding the disposition of repurchased vehicles and MY 2008 Xebras that remain in ZAP’s possession. In accordance with the Consent Decree, the Company mailed the required notification letters to registered vehicle owners and ZAP Xebra dealers, along with a Refund Request Form. The repurchase offer extends to 691 vehicles that have been sold by ZAP. As of March 25, 2014 ZAP had received 318 refund requests of which 311 were deemed eligible
Per the terms of the Consent Decree, ZAP was to repurchase the vehicles of all eligible owners who requested a refund by no later than December 31, 2013 or 30 days after an eligible owner’s refund request, whichever is later. The Company did not repurchase any owner vehicles by December 31, 2013. ZAP began repurchasing vehicles in March, 2013.
On April 7, 2014, ZAP and the United States entered into an agreement to amend the Consent Decree wherein ZAP agreed to repurchase the vehicles of all eligible owners by no later than April 30, 2014. As of April 9, 2014, ZAP had repurchased at least 72 vehicles. The Company is planning on completing this buy-back program by April 30, 2014.
The Company has accrued for estimated expenses related to above claims.
NOTE 19- COMMITMENTS AND CONTINGENCIES
Guarantees
Jonway Auto guaranteed certain financial obligations of outside third parties including suppliers to support our business and economic growth. Guarantees will terminate on payment and/or cancellation of the obligation once it is repaid. A payment by us would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Maximum potential payments under guarantees total $7.7 million at December 31, 2013. The guarantee expires at variance dates from April 2014 to December 2014. Our performance risk under these guarantees is reviewed regularly, and has resulted in no changes to our initial valuations.
NOTE 20 - SUBSEQUENT EVENTS
In January and February 2014, Jonway repaid $0.65 million and $0.65 million of short term loans respectively to Taizhou Bank when they became due. In February and March 2014, Jonway repaid $0.82 million and $0.65 million of short term loans respectively to Industrial and Commercial Bank of China (ICBC) when due.
In February 2014, Jonway borrowed $0.33 million of short term loan from Taizhou Bank. The loan expires in August 2014 and the annual interest rate is 8.89%.
In March 2014, Jonway borrowed $0.79 million of short term loan from Industrial and Commercial Bank of China (ICBC). The loan expires in September 2014 and the annual interest rate is 5.6%. Restricted cash of the same amount was deposited with the bank.
In March 2014, Jonway borrowed $0.98 million from CITIC Bank. The loan expires in March 2015 and the annual interest rate is 7.08%. The Company pledged a building and land use right at an aggregate carrying value of $0.5 million to the bank.
From January to March 2014, approximately $9.71 million of notes payable matured.
From January to March 2014, approximately $6.61 million of notes payable were issued. The Company is required to main cash deposits of 50% of the notes payable with the bank. These notes payable expire at variance maturity dates from July 2014 to September 2014.
Item 9.
Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our co-Chief Executive Officers and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and our Principal Financial Officer (collectively, the “Certifying Officers”) are responsible for maintaining our disclosure controls and procedures. Prior to the filing of this report, our Certifying Officers evaluated the effectiveness of our disclosure controls and procedures for the period covered by this report. Based on the evaluation, our Certifying Officers concluded that our disclosure controls and procedures were ineffective to provide reasonable assurance that (a) information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and (b) that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
We have conducted a review of the effectiveness of our internal control over financial reporting as disclosed herein. Our management is also responsible for establishing and maintaining a system of adequate internal control over financial reporting. Internal control over financial reporting is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, and receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (3) provide reasonable assurance regarding prevention or timely detection of use or disposition of our assets that could have a material effect on our financial statements.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control over financial reporting as of December 31, 2013, we determined that there was one material weakness.
Management, in assessing its review and approval procedures, identified a lack of sufficient control in the area of technical competency in review and approval of financial reporting processes. This control weakness may result in reconciliations, reports and other documents to be insufficiently reviewed prior to being approved by management and a number of audit adjustments to be identified by our auditors during their review and audit work. This material weakness resulted in errors in the recording of non-routine and complex accounting transactions in the preparation of our annual consolidated financial statements and disclosures.
Managements Remediation Initiatives
In response to the above identified material weakness and to continue strengthening the Company’s internal control over financial reporting, we are considering utilizing outside accounting experts to assist us in accounting for future complex transactions and establishment of additional monitoring controls.
Under the supervision and with the participation of our Certifying Officers, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Based on the results of our evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2013 and the date of the filing of the annual report. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this Annual Report on Form 10-K.
This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of Zap, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Changes in internal control over financial reporting
No significant changes were made in our internal control over financial reporting during the Company’s fourth quarter of 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B.Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The Company’s directors and executive officers and their ages as of April 15, 2014 are as follows:
Business Experience of Directors
Dr. Lu has served as a director of ZAP since August 2009. Dr. Lu has served as founder and general partner of Cathaya Capital, L.P., a private equity venture fund focused on technology-based mature businesses, leveraging cross border alliances in China, with an emphasis in the clean technology and health care industries. From 2003 to 2009, Dr. Lu was a China advisor to Mayfield Fund, a venture capital firm with over $2.8 billion under management. While at Mayfield Fund, Dr. Lu helped found the GSR Fund, a venture capital fund in China overseeing more than $700 million in investments. In 2006, Dr. Lu founded ViDeOnline Inc., a company which delivered digital media over secured broadband and mobile networks to service providers to China broadband operators, and Dr. Lu served as its Chief Executive Officer from 2005 to 2007. In 1994, Dr. Lu founded InterWAVE Communications, Inc., a provider of mobile GSM and CDMA networks. Dr. Lu served as its Chief Executive Officer and its Chairman until 2003. Dr. Lu oversaw the initial public offering of InterWAVE’s Common Stock on the NASDAQ stock exchange. Before this, Dr. Lu was at AT&T Bell Laboratories for 16 years, where she led efforts in digital switching and networking and developed the early technologies in CMOS VLSI in microprocessors. Dr. Lu has a B.S. and M.S. in Computer Science and Mathematics from University of Wisconsin, Madison and holds a Ph.D. in Electrical Engineering and Computer Science from Northwestern University, funded as a Bell Labs Scholar. Dr. Lu possesses particular knowledge and experience in technology and international business that strengthen the Board of Directors’ collective qualifications, skills, and experience.
Wang, Huai Yi is the founder and Chairman of Jonway Group, a multi-business enterprise owned 100% by him and his immediate family. The company is headquartered in Taizhou, Zhejiang Province. He founded Jonway Auto in 2004, which was a wholly owned 100% by Jonway Group until ZAP acquired 51% of the equity in January 2011. Jonway Group also owns Jonway Motorcycle, which produces more than a million motorcycles a year, primarily focused at the international markets. Jonway Group also owns a number of real estate enterprises that have real estates in Zhejiang Province. He has had a long history in automobiles and owns a number of auto supply parts companies that supplies to Jonway Auto and other automobile companies.
Wang "Alex" Gang, CEO of Zhejiang Jonway Automobile Co. Ltd., graduated from the University of Sunderland in the United Kingdom with an undergraduate degree in business administration. A member of the Zhejiang Council and member of the After 70's Elite Club in Taizhou, Mr. Wang has many years of manufacturing management experience as well as a broad overview of international market development and management. Through his manufacturing innovations and international training, Mr. Wang has been able to enhance Jonway Auto's level of modernization and internationalization.
Goman Chong serves as a general partner of Cathaya Capital, L.P. He has also been the President of Daifu Waste Management Holdings Limited since September 2007, a medical waste management company invested in by Goldman Sachs. Mr. Chong served as the Chief Executive Officer of Daifu Group, a medical information portal, from June 2007 to January 2009. From April 2004 to January 2006, he served as a Business Development Manager in Beijing for News Corporation, a global media company. Mr. Chong received his MBA degree from the Tsinghua-M.I.T. Sloan joint program at Tsinghua School of Economics and Management in 2004, and his Bachelor of Arts degree in Economics, Statistics and Actuarial Science from the University of Toronto in 1997.
Co Nguyen serves as Chief Financial Officer of Cathaya Capital. He has in-depth experience in corporate finance and corporate management. Mr. Nguyen was previously Corporate Finance Director of Jaccar Holdings Vietnam. Before joining Jaccar Holdings in 2008, he was Deputy Director of Corporate Strategy and Finance Department of Prudential Life Insurance (Vietnam). Mr. Nguyen also has spent 7 years with FedEx in France as Senior Financial Advisor and 3-year professional experience with Ernst & Young as an auditor. Mr. Nguyen received his Master in Auditing and Consulting from “Ecole Supérieure de commerce de Paris”, France and MBA in International Business in 2000.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires ZAP’s officers and directors and persons who own more than 10% of ZAP’s Common Stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. These persons are required to provide ZAP with copies of all Section 16(a) forms that they file.
The officers and directors listed below, after re-constituting the Board in the Company's shareholder's meeting held in August, 2013, did not file a Form 3 for the fiscal year ended 2013. None of these people, with the exception of Wang Huai Yi, currently own any shares and they are in the process of preparing to file Form 3’s. However, filing the Form 3 may take some time due to the logistical issue that most of these people do not reside in the U.S. and do not have access to a U.S. authorized notary.
Chuck Schillings
Wang Huai Yi
Goman Chong
Co Nguyen
Fung Chi Kwong
Corporate Governance
ZAP is committed to excellence in corporate governance and maintains clear policies and practices that promote good corporate governance. To this end, we have adopted a clear Corporate Governance Policy, as well as charters for our Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee that clearly establish the committees’ respective roles and responsibilities. ZAP has also adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees.
A copy of our Code of Business Conduct and Ethics is posted on our Internet website at www.zapworld.com/corporate-governance. Information on or accessible through, this website is not a part of, and is not incorporated into, this annual report. If we make any amendment or modification to any provision of the Code of Business Conduct and Ethics that applies to our officers or directors, we intend to disclose such amendment or waiver and the reasons therefore on our Internet website at www.zapworld.com within two days of the action by the Board of Directors approving such amendment or modification or pursuant to applicable SEC rules.
ZAP’s primary corporate governance documents, including our Corporate Governance Policy, Code of Ethics and Committee Charters, are available to the public on our website at http://www.zapworld.com/corporate-governance.
ZAP’s Audit Committee is currently composed of Mr. Chong, Mr, Co Nguyen and Ms. Lu. At present, none of the audit committee members are deemed independent.
There have been no changes to the procedures by which stockholders may recommend nominees to our board of directors.
Item 11.
Item 11. Executive Compensation
Director Compensation
This section provides information regarding the compensation policies for directors and amounts paid and securities awarded to directors in fiscal 2013.
Directors who are employees of ZAP do not receive compensation from us for the services they provide as directors. Directors are reimbursed for out-of-pocket travel and other expenses incurred in attending Board of Directors and/or committee meetings.
The Compensation Committee is responsible for establishing components of compensation for directors and recommending changes to the Board of Directors.
There was no compensation paid for services of the directors during fiscal year 2013.
Summary of Compensation
The following table sets forth the compensation earned by the named executive officers for services rendered in all capacities to ZAP and its subsidiaries for each of the last two or fewer fiscal years during which such individuals served as executive officers. ZAP’s named executive officers for fiscal 2013 include ZAP’s Co-Chief Executive Officers and Chief Financial Officer.
Summary Compensation Table
(1) The amounts in the Stock Awards column represent the aggregate grant date fair values, computed in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, of restricted stock unit awards issued pursuant to the 2008 Equity Compensation Plan. The grant date fair value of these awards is calculated using the closing price of ZAP’s Common Stock on the grant date as if these awards were vested and issued on the grant date. There can be no assurance that these grant date fair values will ever be realized by the Named Executive Officers.
(2) The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions (no options or warrants granted in 2013):
(3) Mr. Schillings was appointed Chief Operating Officer on June 17, 2012
(4) Mr. Schillings was appointed Co-Chief Executive Officer on August 8, 2012
ZAP has two employment agreements at December 31, 2013 with Mr. Schillings as of June 17, 2012, and Mr. Fung Chi Kwong as of August 1, 2013.
Mr. Zhu’s agreement provided for a base salary of $140,000, an option grant of 500,000 vesting ¼ upon the first anniversary and in equal portions monthly for the remaining 3 years and certain housing, travel and expense allowances or reimbursements. In 2012, Mr. Zhu was awarded an option grant of an additional 500,000 vesting ¼ upon the first anniversary and in equal portions monthly for the remaining 3 years. If Mr. Zhu is terminated after three months of employment with ZAP, unless terminated for cause, by death or disability, Mr. Zhu will be paid an amount equal to his salary for the remainder of the 21-month period following his initial 3 months of employment. Mr. Zhu terminated his employment on August 6, 2013.
Mr. Schillings’ agreement provides for a base salary of $144,000 and an option grant of 400,000 vesting ¼ upon the first anniversary and in equal portions monthly for the remaining 3 years and certain housing, travel and expense allowances or reimbursements.
Mr. Fung’s agreement provides for a base salary of $90,000 and certain travel reimbursements.
Outstanding Equity Awards at 2013 Fiscal Year-End
Potential Payments upon Termination or Change in Control
Acceleration of Equity Awards
Each outstanding award to all employees under the 2008 Equity Compensation Plan, the 2006 Incentive Stock Plan, and the 2002 Incentive Stock Plan that is subject to vesting provisions may vest in full and become immediately exercisable upon a change in control or in the event of the named executive officer’s death, terminal illness or long-continued and indefinite illness. The 2007 Consultant Stock Plan and 2004 Consultant Stock Plan do not contain such a provision.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information known to ZAP with respect to beneficial ownership of ZAP Common Stock as of April 14, 2014 for (i) each director, (ii) each holder of 5.0% or greater of ZAP Common Stock, (iii) ZAP’s Co-Chief Executive Officers and the two most highly compensated executive officers other than the Co-Chief Executive Officers and the Chief Financial Officer named in the table entitled “Summary Compensation Table” below (the “named executive officers”), and (iv) all executive officers and directors as a group. Unless otherwise listed below, the address for each investor is ZAP’s address: 501 Fourth Street, Santa Rosa, CA 95401.
Beneficial ownership is determined under the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, to ZAP’s knowledge the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock beneficially owned. In addition, unless otherwise indicated, all persons named below can be reached at ZAP, 501 Fourth Street, Santa Rosa, CA 95401. The number of shares beneficially owned by each person or group as of April 14, 2014 includes shares of Common Stock that such person or group had the right to acquire on or within 60 days after April 14, 2014, including, but not limited to, upon the exercise of options or the vesting of restricted stock units. References to options in the footnotes of the table below include only options to purchase shares outstanding as of April 14, 2014 that were exercisable on or within 60 days after April 14, 2014, and references to restricted stock units in the footnotes of the table below include only restricted stock units outstanding as of April 14, 2014 that would vest and could settle on or within 60 days after April 14, 2014. For each individual and group included in the table below, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of the 302,518,002 shares of Common Stock outstanding on April 14, 2014 plus the number of shares of Common Stock that such person or group had the right to acquire on or within 60 days after April 14, 2014.
(1) Includes warrants to purchase 8,000,000 shares of Common Stock issued to Jeffrey Banks, and Banks Development, an affiliate of the Banks Group.
(2) Includes (a) 90,981,276 shares of Common Stock issuable upon conversion of a promissory note and 20,000,000 shares of Common Stock issuable upon exercise of a warrant held by China Electric Vehicle Corporation, (b) 10,000,000 shares of Common Stock issuable upon the exercise of a warrant (see 3).
(3) Dr. Lu is the Chairman of the Board of Directors of ZAP and is also founder and general partner of Cathaya Capital Co., Ltd.., the general partner of Cathaya Capital GP, L.P., which is the general partner of Cathaya Capital L.P.; a Cayman Islands exempted limited partnership (“Cathaya”). Cathaya is the sole shareholder of China Electric Vehicle Corporation, a British Virgin Islands Company (“CEVC”). Dr. Lu is also a director of Better World International Limited, a British Virgin Islands company (“Better World”) and Cathaya is the majority shareholder of Better World. Accordingly, Ms. Lu represents Cathaya Capital who is the beneficial ownership and this may be deemed to include (a) a promissory note convertible into 90,981,276 shares of Common Stock and a warrant to purchase 20,000,000 shares of Common Stock held by China Electric Vehicle Corporation, (b) 10,000,000 shares of Common Stock issuable upon the exercise of a warrant and 69,000,000 shares of Common Stock held by Cathaya Capital, L.P., (c) 6,000,000 shares of Common Stock held by Better World International Limited, (d) options to purchase 6,600,364 shares of Common Stock that are currently exercisable or will be exercisable within 60 days of April 15, 2014 held by Dr. Priscilla Marilyn Lu on behalf of Cathaya Capital. Dr. Lu as per Cathaya Capital’s Limited Partner Agreement, and General Partner Agreement, manages the investment of the portfolio companies, Better World, CEVC and ZAP.
(4) Includes shares, options and warrants described in the notes above, as applicable
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Other than as described below, since the beginning of Zap’s last fiscal year, there are no transactions or currently proposed transactions in which any related person had or will have a direct or indirect material in which Zap was or is to be a participant and the amount involved exceeds the lesser of $120,000 or one percent of Zap’s total assets at year end for the last two completed fiscal years.
Financing Provided to ZAP by Cathaya Capital, L.P., Better World International Limited and China Electric Vehicle Corporation, Who Are Affiliated with Dr. Lu, Chairman of the Board of ZAP
Dr. Priscilla Lu was appointed to the Board of Directors of ZAP on August 6, 2009. Ms. Lu is also a founder and general partner of Cathaya Capital Co., Ltd., the general partner of Cathaya Capital GP, L.P., which is the general partner of Cathaya Capital L.P. a Cayman Islands exempted limited partnership (“Cathaya”). Cathaya is the sole shareholder of China Electric Vehicle Corporation, a British Virgin Islands Company (“CEVC”). Dr. Lu is also a director of Better World International Limited, a British Virgin Islands company (“Better World”) and Cathaya is the majority shareholder of Better World.
On January 12, 2011, ZAP entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “CEVC Agreement”) with CEVC. Pursuant to the CEVC Agreement, (i) CEVC purchased from ZAP a Senior Secured Convertible Note (the “CEVC Note”) in the principal amount of US$19 million, (ii) ZAP issued to CEVC a warrant (the “CEVC Warrant”) exercisable for two years for the purchase of up to 20 million shares of ZAP’s Common Stock at $0.50 per share, subject to adjustments as set forth therein, (iii) ZAP, certain investors and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009, (iv) ZAP, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certain Registration Rights Agreement, dated as of August 6, 2009, which grants certain registration rights relating to the Note and the Warrant, and (v) ZAP and CEVC entered into a Security Agreement that secures the Note with all of ZAP’s assets other than those assets specifically excluded from the lien created by the Security Agreement.
The Note which initially was scheduled to mature on February 12, 2012 but was extended to August 12, 2013 according to the representation letter dated March 21, 2012 from CEVC. On March 22, 2012, ZAP entered into an amendment to the note which extended the maturity date of the note from August 12, 2012 to August 12, 2013 and the interest accrued through the maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. In July 2013 this convertible note has been extended until August 12, 2014 with interest accrual as determined by the auditors, at 8% per annum. In addition, the warrant issued in connection with the CEVC note was amended to change the terms of conversion and to extend the maturity date until February 12, 2015.
The note is convertible upon the option of CEVC at any time, into (a) shares of Jonway capital stock owned by ZAP at a conversion rate of 0.003743% of shares of Jonway capital stock owned by ZAP for each $1,000 principal amount of the Note being converted or (b) shares of ZAP common stock at a conversion rate of 4,435 shares of common stock for each $1,000 principal amount of the Note being converted.
ZAP used the proceeds of the CEVC Note to complete the acquisition of 51% of the capital stock of Zhejiang Jonway Automobile Co. Ltd.
Joint Venture ZAP Hangzhou
On December 11, 2009, ZAP entered into a Joint Venture Agreement to establish a new U.S.-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Better World International Limited, a company focused on infrastructure technology and services for electric vehicles. Priscilla Lu, PhD, the Chairman of the Board of Directors of ZAP, is also a director and shareholder of Better World International Limited. ZAP and Better World International Limited each have a 37.5% interest in ZAP Hangzhou, and Jonway Group owns a 25% interest. The joint venture partners have also funded the initial capital requirements under the agreement for a total of $3 million, of which ZAP’s portion is $1.1 million.
Independent Directors
ZAP is not required by the OTC Bulletin Board on which it is traded to determine or comply with independent director requirements. The following information concerning director independence is based on the director independence standards of The NASDAQ Stock Market Corporate Governance Rules. According to Listing Rule 5615(c) and IM-5615-5, because more than 50% of our voting power is beneficially held by Cathaya Capital, L.P. and its affiliates, we would be considered a “Controlled Company” under such rules a Controlled Company is exempt from the majority independent board requirement, as set forth in Listing Rule 5615(b), except for the requirements of subsection (b)(2), which pertain to executive sessions of independent directors, and from the requirement for independent director oversight of executive officer compensation and director nominations, as set forth in Listing Rules 5605(d) and 5605(e).
In determining independence, the Board of Directors reviews and seeks to determine whether directors have any material relationship with ZAP, direct or indirect, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Board of Directors reviews business, professional, charitable and familial relationships of the directors in determining independence. A member of the Board of Directors is not considered independent under the objective standards if, for example, he or she is, or at any time during the past three years was, employed by ZAP, or he or she is an executive officer of an entity that has an executive officer of ZAP serving on the compensation committee of its board of directors. Mr. Wang is not deemed independent because he is an executive officer of ZAP and ZAP’s 51% owned subsidiary, Jonway. Ms. Lu, and Mr. Chong are not deemed independent because they are general partners of Cathaya Capital, L.P., which along with its affiliates, beneficially owns more than 50% of ZAP. Mr. Co Nguyen is not deemed independent because he is the CFO of Cathaya Capital. Mr. Wang Huai Yi is not deemed independent because he is the minority owner of Jonway Auto.
ZAP’s Audit Committee is currently composed of Mr. Chong, Mr. Co Nguyen and Ms. Lu. None of whom are deemed independent. The Audit Committee should be a three director committee and as such, ZAP does not comply with the NASDAQ criteria
Item. 14 Principal Accountant Fees and Services
Principal Accountant Fees and Services
The following is a summary of the fees billed to ZAP by Friedman LLP for professional services rendered for the fiscal years ended December 31, 2013 and December 31, 2012:
Audit Fees. Consists of fees accrued for professional services rendered for the audit of ZAP’s consolidated financial statements for review of the interim consolidated financial statements included in quarterly reports and for services that are normally provided by Friedman LLP in connection with statutory and regulatory filings or engagements.
Audit-Related Fees. Consists of fees accrued for assurance and related services that are reasonably related to the performance of the audit or review of ZAP’s consolidated financial statements and are not reported under “Audit Fees.” These services include employee benefit plan audits, accounting consultations in connection with transactions, merger and acquisition due diligence, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards.
Tax Fees. Consists of fees accrued for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, assistance with tax reporting requirements and audit compliance, assistance with customs and duties compliance, value-added tax compliance, mergers and acquisitions tax compliance, and tax advice on international, federal and state tax matters. None of these services were provided under contingent fee arrangements.
All Other Fees. For Consists of fees accrued for products and services other than the services reported above. These services included translation of filings and other miscellaneous services. No management consulting services were provided.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services to be provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to report periodically to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements
See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
2. Financial Statement Schedules
All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits
See the Exhibit Index which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference.
(b) Exhibits
See Item 15(a) (3) above.
(c) Financial Statement Schedules
See Item 15(a) (2) above.
EXHIBIT INDEX
______________
*Indicates a management contract or compensatory plan or arrangement.
In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.
Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZAP
Date: April 15, 2014
By: /s/ Chuck Schillings
_________________________
Chuck Schillings
Co-Chief Executive Officer
(Co-Principal Executive Officer)
Date: April 15, 2014
By: /s/ Alex Wang
_________________________
Alex Wang
Co-Chief Executive Officer
(Co-Principal Executive Officer)
Date: April 15, 2014
By: /s/ Fung Chi Kwong
_________________________
Fung Chi Kwong
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Charles Schillings, Alex Wang and Fung Chi Kwong as his or her attorney-in-fact for him or her, in any and all capacities, to sign this annual report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Position
Date
By: /S/ Chuck Schillings
_________________________
Chuck Schillings
Director and Co-Chief Executive Officer
(co-principal executive officer)
April 15, 2014
By: /S/ ALEX WANG
_________________________
Alex Wang
Director and Co-Chief Executive Officer
(co-principal executive officer)
April 15, 2014
By: /S/ FUNG CHI KWONG
_________________________
Fung Chi Kwong
Chief Financial Officer
(principal financial and accounting officer)
April 15, 2014
By: /S/ PRISCILLA LU
_________________________
Priscilla Lu
Director and Chairperson
April 15, 2014
By: /S/ GOMAN CHONG
_________________________
Goman Chong
Director
April 15, 2014
By: /S/ Huaiyi Wang
_________________________
Huaiyi Wang
Director
April 15, 2014
By:/S/ Co Nguyen
Director
April 15, 2014
Co Nguyen