| |
|
For the Year ended
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
| |
|
December 31,
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
| |
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet items, except for share
capital, additional paid in capital and
retained earnings (US$/RMB)
|
|
$ |
6.3090 |
|
|
$ |
6.1439 |
|
|
$ |
6.3190 |
|
|
$ |
6.1439 |
|
|
$ |
6.3190 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in the statements of
operations and cash flow statements
(US$/RMB)
|
|
$ |
6.3079 |
|
|
$ |
6.1439 |
|
|
$ |
6.3085 |
|
|
$ |
6.1439 |
|
|
$ |
6.3085 |
|
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. The restricted cash as shown in the consolidated balance sheets is strictly used by Jonway Auto which is based in China against the bank notes provided by the various Chinese banks that are providing the credit facilities or loans. The credit facilities and loans are used primarily to fund working capital and support the operating losses incurred by Jonway Auto.
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. 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 are 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 flow. Assets measured at fair value on a nonrecurring basis for the period ended September 30, 2013 are summarized below (in thousands):
| |
|
|
|
September 30, 2013 |
|
|
|
|
|
|
|
Assets
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Fair Value
Measurements
|
|
|
Long-lived assets- 3-door SUV mold
|
|
(1) |
|
|
|
|
|
$ |
2,560 |
|
|
$ |
2,560 |
|
(1) Included in “Property, plant and equipment, net” on the face of condensed consolidated balance sheets. The original carrying value was $5.12 million. The Company recognized impairment charges of $2.56 million (included in “impairment loss of long-lived assets” on the face of consolidated statements of operations and comprehensive loss) for the year December 31, 2012. These charges were related to the impairment in the 3-door SUV mold equipment used in the Jonway Auto segment (See Note 2-Accounting for long-lived assets).
The Company believes the reported carrying amounts of its current assets and current liabilities approximate fair value, based upon the short-term nature of these accounts. The fair value of the Company’s investment in joint ventures, receivable from related parties and its convertible long-term debt are impracticable to determine.
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 Company has not experienced significant credit-related losses to date. The allowance for doubtful accounts was $261,000 and $201,000 at September 30, 2013 and December 31, 2012, respectively
Inventories
Most of the inventory on the balance sheet consisting of $8.3 million (net value) is in Jonway Auto in China, ZAP’s Inventories of approximately half a million out of the total 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 September 30, 2013, ZAP has reserved $856,000 of its vehicle inventory that is held by former Co-CEO and current ZAP Director, Steve Schneider on the River Road property that was being leased by ZAP from Mr., Schneider. Mr. Schneider took this inventory without ZAP authorization before and after an illegal and failed attempt to take control of ZAP. He refuses to release the inventory. During the attempted takeover, $116,090 was diverted to a bank account set up by a former employee and board directors, Mark Abdou and Alex Wang. To date, we have recovered $22,770 of these diverted funds. The balance of $93,320 has not been recovered.
Property and equipment
Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements which are almost all in Jonway Auto in China. ZAP does not own any property or any significant amount of equipment in the U.S. 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:
|
Machinery and equipment
|
5-10 years (Jonway 10 years)
|
| |
|
|
Computer equipment and software
|
3-5 years
|
| |
|
|
Office furniture and equipment
|
5 years
|
| |
|
|
Vehicles
|
5 years
|
| |
|
|
Leasehold improvements
|
10 years or life of lease,
|
| |
whichever is shorter
|
| |
|
|
Building and improvements
|
20-30 years (Jonway 20 years)
|
Land use Rights
Under PRC law, all land in the PRC is permanently owned by the government and can not 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. There are no impairment losses of long-lived assets for the periods ended September 30, 2013 and $2.6 million of impairment loss for the year ended December 31, 2012, respectively.
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 2 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
The Company provides 30 to 90 day warranties on its personal electric products, including the ZAPPY3 and the Zapino scooters, six month warranties for the Xebra®, the ZAPTRUCK XL, the ZAPVAN Shuttle vehicles, and a six month warranty for Xebra® vehicles repaired by ZAP pursuant to its product recall. The Company records the estimated cost of the product warranties at the time of sale using the estimated costs of products 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.
Jonway provides a 2-year or 60,000 kilometer warranty for its SUV 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.
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
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carry forward, A Similar Tax Loss, or a Tax Credit Carry forward Exists (A Consensus the FASB Emerging Issues Task Force). ASU 2013-11 provides guidance on financial statement presentation of unrecognized tax benefit when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists. The FASB’s objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. This ASU applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. This amendment is effective for public entities for fiscal years beginning after December 15, 2013 and interim periods within those years. The company does not expect the adoption of this standard to have a material impact on the Company’s unaudited condensed consolidated financial position and results of operations.
.
NOTE 3– INVENTORIES, NET
Inventories are summarized as follows (in thousands):
|
Inventory
|
|
|
|
|
|
|
| |
|
September 30, 2013
|
|
|
December 31, 2012
|
|
| |
|
|
|
|
|
|
|
Work in Process
|
|
$ |
2,390 |
|
|
$ |
2,155 |
|
|
Parts and supplies
|
|
|
3,497 |
|
|
|
4,178 |
|
|
Finished goods
|
|
|
5,168 |
|
|
|
7,144 |
|
| |
|
|
11,055 |
|
|
|
13,477 |
|
|
Less - inventory reserve
|
|
|
(2,473 |
) |
|
|
(2,325 |
) |
|
Inventories, net
|
|
$ |
8,582 |
|
|
$ |
11,152 |
|
Changes in the Company’s inventory reserve are as follows (in thousands):
|
Provision
|
|
|
|
|
|
|
| |
|
9 months ended
September 30, 2013
|
|
|
Year ended
12/31/2012
|
|
|
Balance opening period
|
|
$ |
2,325 |
|
|
$ |
1,577 |
|
|
Current provision for Jonway Auto
|
|
|
40 |
|
|
|
- |
|
|
Current provision for inventory ZAP-net
|
|
|
108 |
|
|
|
748 |
|
|
Balance end of period
|
|
$ |
2,473 |
|
|
$ |
2,325 |
|
NOTE 4 - Property, plant and equipment, net
Property, plant and equipment, are summarized as follows (in thousands):
| |
|
September 30, 2013
|
|
|
December 31, 2012
|
|
| |
|
|
|
|
|
|
|
Buildings and improvements
|
|
$ |
21,363 |
|
|
$ |
20,725 |
|
|
Machinery and equipment
|
|
|
49,952 |
|
|
|
48,081 |
|
|
Office furniture and equipment
|
|
|
514 |
|
|
|
499 |
|
|
Leasehold improvements
|
|
|
- |
|
|
|
37 |
|
|
Vehicles
|
|
|
858 |
|
|
|
872 |
|
| |
|
|
72,687 |
|
|
|
70,214 |
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(21,129 |
) |
|
|
(16,857 |
) |
| |
|
$ |
51,558 |
|
|
$ |
53,357 |
|
Four pieces of land were acquired from the acquisition of Jonway auto in 2011, and since all land in the People’s Republic of China is government owned, and it 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. Intangible assets consist of the following:
| |
|
September 30, 2013
|
|
|
December 31, 2012
|
|
| |
|
|
|
|
|
|
|
Land use right
|
|
$ |
10,680 |
|
|
$ |
10,558 |
|
|
Software
|
|
|
109 |
|
|
|
97 |
|
| |
|
|
10,789 |
|
|
|
10,655 |
|
|
Less: accumulated amortization
|
|
|
(849 |
) |
|
|
(657 |
) |
|
Less: accumulated Translation Adjustments
|
|
|
(74 |
) |
|
|
(231 |
) |
| |
|
$ |
9,866 |
|
|
$ |
9,767 |
|
As of September 30, 2013, estimated future amortization expense for intangibles assets, subject to amortization, is as follows (in thousands):
|
September 30
2013
|
|
Amortization
Expense |
|
|
2014
|
|
$ |
242 |
|
|
2015
|
|
|
242 |
|
|
2016
|
|
|
242 |
|
|
2017
|
|
|
242 |
|
|
2018
|
|
|
242 |
|
|
Thereafter
|
|
|
8,656 |
|
| |
|
$ |
9,866 |
|
Depreciation and amortization expense of property, plant and equipment, as well as land use rights and software was approximately $1.4 million and $1.8 million for the three months, and $4.5 million and $4.1 million for the nine months ended September 30, 2013 and 2012, respectively.
NOTE 5- INTANGIBLE ASSETS, NET & GOODWILL
The goodwill and intangible assets at September 30, 2013 and 2012 are summarized as follows (in thousands):
| |
|
|
|
|
Net Book
|
|
|
Amortization and
accumulated
translation
adjustments
(“ATA”)
|
|
|
Net Book
|
|
| |
|
Useful Life
|
|
|
Value
|
|
|
for the nine months
ended
|
|
|
Value
|
|
| |
|
(In Years)
|
|
|
December 31, 2012
|
|
|
September 30, 2013
|
|
|
September 30, 2013
|
|
|
Patents and Trademarks
|
|
|
7 |
|
|
$ |
52 |
|
|
$ |
(17 |
) |
|
$ |
35 |
|
|
Customer Relationships
|
|
|
8.5 |
|
|
|
600 |
|
|
|
(54 |
) |
|
|
546 |
|
|
Developed Technology
|
|
|
7 |
|
|
|
1,567 |
|
|
|
(187 |
) |
|
|
1,380 |
|
|
In Process Technology
|
|
(a)
|
|
|
|
183 |
|
|
|
5 |
|
|
|
188 |
|
|
Trade name
|
|
(a)
|
|
|
|
2,169 |
|
|
|
58 |
|
|
|
2,227 |
|
|
Intangibles
|
|
|
|
|
|
$ |
4,571 |
|
|
$ |
(195 |
) |
|
$ |
4,376 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$ |
324 |
|
|
$ |
- |
|
|
$ |
324 |
|
(a) The in process technology and trade name have been determined to have an indefinite life.
Amortization expense was approximately$326,000 and $330,000 for the nine months ended September 30, 2013 and 2012, respectively. Amortization expense was approximately$110,000 and $114,000 for the three months ended September 30, 2013 and 2012, respectively
As of September 30, 2013, estimated future amortization expense for intangibles assets, subject to amortization, is as follows (in thousands):
|
Year ended
December 31,
|
|
Amortization
Expense
|
|
|
2013
|
|
$
|
102
|
|
|
2014
|
|
|
424
|
|
|
2015
|
|
|
407
|
|
|
2016
|
|
|
402
|
|
|
2017
|
|
|
402
|
|
|
Thereafter
|
|
|
224
|
|
| |
|
$
|
1,961
|
|
NOTE 6 - DISTRIBUTION AGREEMENTS
Distribution agreements are presented below (in thousands):
| |
|
September 30,
2013
|
|
|
December 31,
2012
|
|
| |
|
|
|
|
|
|
|
Better World Products-related party
|
|
$
|
2,160
|
|
|
$
|
2,160
|
|
|
Jonway Products
|
|
|
14,400
|
|
|
|
14,400
|
|
| |
|
|
16,560
|
|
|
|
16,560
|
|
|
Less amortization
|
|
|
(6,361)
|
|
|
|
(5,281)
|
|
| |
|
$
|
10,199
|
|
|
$
|
11,279
|
|
Amortization expense related to these distribution agreements for the three months ended September 30, 2013 and 2012 were $360,000 and $540,000, respectively. Amortization expense related to these distribution agreements for the nine months ended September 30, 2013 and 2012 were $1.08 million and $1.62 million, respectively. Amortization is based over the term of the agreements. The estimated future amortization expense, as follows (in thousands):
|
Year ended December 31,
|
|
|
|
|
2013
|
|
$
|
360
|
|
|
2014
|
|
|
1,440
|
|
|
2015
|
|
|
1,440
|
|
|
2016
|
|
|
1,440
|
|
|
2017
|
|
|
1,440
|
|
|
Thereafter
|
|
|
4,079
|
|
|
Total
|
|
$
|
10,199
|
|
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. 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.
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 the joint ventures is as follows (in thousands):
| |
|
ZAP Hangzhou |
|
|
Shanghai Zapple |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$ |
554 |
|
|
$ |
736 |
|
|
$ |
1,290 |
|
|
Less: investment loss
|
|
|
(123 |
) |
|
|
(280 |
) |
|
|
(403 |
) |
|
CTA
|
|
|
6 |
|
|
|
5 |
|
|
|
11 |
|
|
Balance as of December 31, 2012
|
|
$ |
437 |
|
|
$ |
461 |
|
|
$ |
898 |
|
|
Less: Investment loss
|
|
|
(182 |
) |
|
|
(461 |
) |
|
|
(643 |
) |
|
Balance as of September 30, 2013
|
|
$ |
255 |
|
|
$ |
-- |
|
|
$ |
255 |
|
The Company recorded a loss of $182,000 and $92,000 in ZAP Hangzhou for the nine months ended September 30, 2013 and 2012, respectively. The Company recorded a loss of $79,000 and $7,000 in ZAP Hangzhou for the three months ended September 30, 2013 and 2012, respectively. Due to the suspension of Shanghai Zapple operations, the company recorded a loss of $461,000 in Shanghai Zapple for the nine months ended September 30, 2013. These losses relate to investments in non-consolidated joint ventures accounted for under the equity method of accounting because the company does not have control.
Summarized financial information of Hangzhou ZAP and Shanghai Zapple are as follows: (in thousands)
| |
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
Shanghai Zapple
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
-- |
|
|
$ |
1,472 |
|
|
Total liabilities
|
|
|
-- |
|
|
|
867 |
|
|
Revenue
|
|
|
-- |
|
|
|
- |
|
|
Hangzhou ZAP
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,453 |
|
|
|
1,682 |
|
|
Total liabilities
|
|
|
347 |
|
|
|
118 |
|
|
Revenue
|
|
$ |
82 |
|
|
$ |
922 |
|
NOTE 8 –LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES
Line of credit (Credit Exposure)
In March, 2012, Jonway was approved up to an aggregate of $0.8 million of credit line from a Sanmen local Bank. As of December 31, 2012, this credit line was fully used. The credit line was repaid and expired in March 2013.
In May 2012, we were approved up to an aggregate of $ 24.3 million of a credit line with the credit exposure of $7.3 million from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. When drawn down, the credit line will be 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 annual interest rate is 6.6%, and the loans are due in November 2013. We have also drawn $4.9 million in the form of notes payable as of September 30, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable. These notes are due in October and November 2013. The loans were repaid when due in October and November 2013. As of September 30, 2013, the total credit exposure of $7.3 million has been fully used. The credit exposure expires in November 2013. Till the Form 10-Q release date, we are in the process to finalize the documents on the extension of the credit line with the bank.
In December 2012, we were approved up to an aggregate of $4.0 million on a credit line with the credit exposure of $4.0 million from Taizhou Bank. This credit line was guaranteed by related parties. As of September 30, 2013, the total credit exposure of $4 million has been fully used. The annual interest rates are 8.46% to 8.89%. The loans are due in December 2013 and February 2014. A credit exposure of $ 2.0 million was used in the form of notes payable of $4.6 million with restricted cash of $2.6 million deposited with the bank.
In December 2012, we were approved up to an aggregate of $9.1 million of a credit line with the credit exposure of $4.5 million from Everbright Bank. As of September 30, 2013, $9.1 million was drawn down as notes payable with restricted cash of $4.5 million deposited with the bank. As of September 30, 2013, this credit exposure has been fully used. The credit exposure expires from December 2013 to March 2014.
We were also approved up to an aggregate of $4.8 million on 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. By September 30, 2013, the total outstanding loan under this credit line was $4.8 million which were drawdown in February, June and August 2013, with an annual interest rate of 6.9%. The loans are due in October 2013 through August 2014, and have been repaid when due.We have also drawn $176,000 in the form of notes payable as of September 30, 2013. We deposited 100% cash as restricted cash as collateral for these notes payable. These notes are due in March 2014. The credit line expires in December 2013.
Short term debt
Under the above mentioned credit line with credit exposure of $7.3 million granted by CITIC, Jonway entered into a Credit Agreement with CITIC for a revolving short term bank loan in the aggregate amount of approximately $1.6 million which was drawn down on May 25, 2012. The annual interest rate is 8.05% and was repaid in December 2012. In November 2012, Jonway borrowed another one year short-term loan in the aggregate amount of approximately $7.3 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. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CITIC dated May 25, 2012 in which land use right and a building with a total carrying amount of $5.8 million as of September 30, 2013 has been pledged as security for this loan.
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 are 8.06% and 8.46% respectively, and the loans were due in February and June 2013, respectively. The loans are guaranteed by Jonway Group, shareholder Huaiyi Wang and his two families as well as restricted cash of $0.1 million In July 2013, the company repaid $0.8 million of short term loans to Taizhou Bank In July and August, the company obtained a total of $1.3 million short term loans at an interest rate of 8.46% and 8.89% from Taizhou Bank. The loans are guaranteed by a related party and will be due in January and February 2014.
In January and February 2013, Jonway borrowed $1.4 million and $3.4 million, respectively, from Industrial and Commercial Bank of China (ICBC). $1.4 million is due in January 2014 and $3.4 million is due at various dates from May 2013 through December 31, 2013. In May 2013, $1.1 million was renewed and is due in June 2014. The annual interest rate is 6.90%. In August 2013, $1.1 million was renewed and is due in August 2014. The annual interest rate is 6.9%. In August and September, Jonway entered into a short-term loan of $1.5 million with ICBC. The loan was fully secured by a deposit of $1.5 million at ICBC. The loan is due in February and March 2014 respectively and the annual interest rate is 5.6%. The loans are guaranteed by shareholders Alex Wang and Huaiyi Wang, with collateral pledged by land use right and buildings at a carrying amount of approximately $3.3 million.
The weighted average annual interest rate was 8.01% and 7.77% for the three months ended September 30, 2013 and 2012 respectively. The weighted average annual interest rate was 8.15%and 7.77% for the nine months ended September 30, 2013 and 2012, respectively.
| |
|
September 30,
2013
|
|
|
December 31,
2012
|
|
|
Loan from CITIC bank
|
|
$ |
7,324 |
|
|
$ |
7,333 |
|
|
Loan from ICBC
|
|
|
6,348 |
|
|
|
-- |
|
|
Loan from Taizhou Bank
|
|
|
2,116 |
|
|
|
1,585 |
|
|
Loan from Pay-Ins Prem
|
|
|
169 |
|
|
|
36 |
|
| |
|
$ |
15,957 |
|
|
$ |
8,754 |
|
Bank Acceptance Notes
As of September 30, 2013, the Company has bank acceptance notes payable in the amount of $18.7 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 September 30, 2013, the restricted cash for the notes was $12.2 million.
| |
|
September 30,
2013
|
|
|
December 31,
2012
|
|
|
a) Bank acceptance notes payable to China Everbright bank
|
|
$ |
9,110 |
|
|
$ |
6,334 |
|
|
b) Bank acceptance notes payable to Taizhou bank
|
|
|
4,557 |
|
|
|
4,627 |
|
|
c) Bank acceptance notes payable to CITIC bank
|
|
|
4,883 |
|
|
|
5,608 |
|
|
d) Bank acceptance notes payable to ICBC
|
|
|
176 |
|
|
|
-- |
|
|
e) Bank acceptance notes payable to Yinzuo bank
|
|
|
-- |
|
|
|
1,268 |
|
|
f) Bank acceptance notes payable to Shanghai Pudong development bank
|
|
|
-- |
|
|
|
676 |
|
| |
|
$ |
18,726 |
|
|
$ |
18,513 |
|
|
|
a.
|
Notes payable to China Everbright bank have various maturity dates from December 2013 to March 2014. The notes payable are guaranteed by land use right and a building at a total carrying value of $1.5 million. The Company is also required to maintain cash deposits at 50% of the notes payable with the bank, in order to ensure future credit availability.
|
|
|
b.
|
Notes payable to Taizhou bank have various maturity dates from October 2013 to March 2014. The Company is required to maintain cash deposits of 50% or 100% of the notes payable with the bank, in order to ensure future credit availability. Notes payable were repaid when due.
|
|
|
c.
|
Notes payable to CITIC bank have various maturity dates from October 2013 to November 2013. The Company is required to maintain cash deposits of 100% of the notes payable with the bank, in order to ensure future credit availability. Notes payable were repaid when due.
|
|
|
d.
|
Notes payable to ICBC will be due 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.
|
From October 2013 to November 2013, approximately $6.2 million of notes payable matured and approximately $4.1 million of notes payable were issued. The new notes payable will be due in April and May 2014. The Company is required to maintain cash deposits at 50% or 100% of the notes payable with the bank.
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, 2013 according to the representation letter dated March 21, 2012 from CEVC and accrues no interest with this new extension. 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. 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. 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, 2014. 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 a maturity date of August 12, 2013. The note accrues interest at a rate per annum of 8% effective to February 12, 2012.
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. This convertible note has been extended until August 12, 2014 with interest accrual as determined by the auditors, 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 extensionthe 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. The interest as from 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 .
.
CONVERTIBLE BOND
On June 12th, 2013, the Company signed a convertible bond agreement, in which a Convertible Bond will 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 an interest of 12% per annum payable in arrears in full. As at September 30, 2013 the Company received $1.7 million ($1.50 million net of interest) of the $2 million, leaving $300,00 yet to be received. A total of $0.13 million in amortization was recorded with the remaining balance of $0.73 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 the $300,000 either settled or the principal amount of the Bond is reduced to $1.7 million. At this time, only the $1.7 million that has been funded is accounted for in the 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 working on doing a UK AIM listing next year, and is working with professionals organizations 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 9-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.
|
-
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding December 31, 2012
|
|
|
28,691 |
|
|
$ |
0.44 |
|
|
|
5.0 |
|
|
|
-- |
|
|
Options granted under the plan
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
-- |
|
|
Options forfeited and expired
|
|
|
(14,796 |
) |
|
|
|
|
|
|
|
|
|
|
-- |
|
|
Options exercisable and Outstanding at September 30, 2013
|
|
|
13,895 |
|
|
$ |
0.44 |
|
|
|
4.25 |
|
|
|
-- |
|
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 September 30, 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 September 30, 2013.
As of September 30, 2013, total compensation cost of unvested employee stock options is $462,000. This cost is expected to be recognized through September 30, 2016. We recorded no income tax benefits for stock-based compensation expense arrangements for the three and nine months ended September 30, 2013, as we have cumulative operating losses.
NOTE 10 – SEGMENT REPORTING
Operating Segments
In accordance with ASC 280, the Company has identified four reportable segments consisting of Jonway Vehicles, Advanced Technology Vehicles, Consumer Product and Car Outlet. The Jonway Vehicles segment represents sales of the gas fueled Jonway A380 three and five-door sports utility vehicles 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. Our Car Outlet segment represents operation of a retail car outlet that sells pre-owned conventional vehicles and advanced technology vehicles. 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 to ZAP before
income taxes. Segment results are summarized as follows (in thousands):
| |
|
Jonway
|
|
|
Electric
|
|
|
|
|
|
Advanced
|
|
|
|
|
| |
|
Conventional
|
|
|
Consumer
|
|
|
|
|
|
Technology
|
|
|
|
|
| |
|
Vehicles
|
|
|
Products
|
|
|
Car outlet
|
|
|
Vehicles
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
9,660 |
|
|
$ |
252 |
|
|
$ |
|
|
|
$ |
17 |
|
|
$ |
9,929 |
|
|
Gross profit (loss)
|
|
$ |
512 |
|
|
$ |
107 |
|
|
$ |
|
|
|
$ |
(6 |
) |
|
$ |
613 |
|
|
Depreciation and amortization
|
|
$ |
1,389 |
|
|
$ |
657 |
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
2,046 |
|
|
Net profit (loss)
|
|
$ |
(1,719 |
) |
|
$ |
(1,622 |
) |
|
$ |
|
|
|
$ |
(5 |
) |
|
$ |
(3,346 |
) |
|
Total assets
|
|
$ |
88,226 |
|
|
$ |
22,692 |
|
|
$ |
|
|
|
$ |
0 |
|
|
$ |
110,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
10,296 |
|
|
$ |
177 |
|
|
$ |
27 |
|
|
$ |
27 |
|
|
$ |
10,527 |
|
|
Gross profit (loss)
|
|
$ |
96 |
|
|
$ |
75 |
|
|
$ |
(41 |
) |
|
$ |
(181 |
) |
|
$ |
(51 |
) |
|
Depreciation and amortization
|
|
$ |
1,789 |
|
|
$ |
955 |
|
|
$ |
6 |
|
|
$ |
1 |
|
|
$ |
2,751 |
|
|
Net loss
|
|
$ |
(4,207 |
) |
|
$ |
(2,329 |
) |
|
$ |
(169 |
) |
|
$ |
(158 |
) |
|
$ |
(6,863 |
) |
|
Total assets
|
|
$ |
104,354 |
|
|
$ |
24,259 |
|
|
$ |
256 |
|
|
$ |
350 |
|
|
$ |
129,219 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
35,878 |
|
|
$ |
639 |
|
|
$ |
- |
|
|
$ |
45 |
|
|
$ |
36,562 |
|
|
Gross profit (loss)
|
|
$ |
166 |
|
|
$ |
174 |
|
|
$ |
- |
|
|
$ |
(32 |
) |
|
$ |
308 |
|
|
Depreciation and amortization
|
|
$ |
4,079 |
|
|
$ |
1,970 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,049 |
|
|
Net profit (loss)
|
|
$ |
(8,360 |
) |
|
$ |
(5,078 |
) |
|
$ |
(174 |
) |
|
$ |
(33 |
) |
|
$ |
(13,645 |
) |
|
Total assets
|
|
$ |
88,226 |
|
|
$ |
22,692 |
|
|
$ |
- |
|
|
$ |
0 |
|
|
$ |
110,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine months ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
34,666 |
|
|
$ |
562 |
|
|
$ |
142 |
|
|
$ |
43 |
|
|
$ |
35,413 |
|
|
Gross profit (loss)
|
|
$ |
1,718 |
|
|
$ |
148 |
|
|
$ |
(1 |
) |
|
$ |
(184 |
) |
|
$ |
1,681 |
|
|
Depreciation and amortization
|
|
$ |
3,775 |
|
|
$ |
2,048 |
|
|
$ |
5 |
|
|
$ |
20 |
|
|
$ |
5,848 |
|
|
Net loss
|
|
$ |
(10,540 |
) |
|
$ |
(7,035 |
) |
|
$ |
(285 |
) |
|
$ |
(359 |
) |
|
$ |
(18,219 |
) |
|
Total assets
|
|
$ |
104,354 |
|
|
$ |
24,259 |
|
|
$ |
256 |
|
|
$ |
350 |
|
|
$ |
129,219 |
|
Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
Customer information
Approximately 98% of our revenues for the three and nine months ended September 30, 2013and 2012 respectively are from sales in China. Jonway Auto distributes its products to an established network of over 50 factory level dealers in China with some contributing more than 10% of our consolidated revenue
NOTE 11– RELATED PARTIES
Due from (to) related parties
Amounts due from related parties are principally for advances in the normal course of business for parts and supplies used in manufacturing.
|
Amount due from related parties are as follows (in thousands):
|
|
|
|
|
| |
September 30, 2013
|
|
December 31, 2012
|
|
|
Sanmen Branch of Zhejiang UFO Automobile
|
|
$ |
2,790 |
|
|
$ |
3,093 |
|
|
JAZ
|
|
|
805 |
|
|
|
- |
|
|
ZAP Hangzhou
|
|
|
127 |
|
|
|
- |
|
|
Total
|
|
$ |
3,722 |
|
|
$ |
3,093 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Amount due to related parties are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
September 30, 2013
|
|
December 31, 2012
|
|
|
Jonway Group
|
|
$ |
1,925 |
|
|
$ |
122 |
|
|
Jonway Motor Cycle
|
|
|
267 |
|
|
|
181 |
|
|
Taizhou Huadu
|
|
|
560 |
|
|
|
431 |
|
|
Shanghai Zapple
|
|
|
-- |
|
|
|
36 |
|
|
ZAP Hangzhou
|
|
|
-- |
|
|
|
147 |
|
|
Betterworld
|
|
|
149 |
|
|
|
152 |
|
|
Cathaya Capital
|
|
|
122 |
|
|
|
90 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,023 |
|
|
$ |
1,159 |
|
Promissory notes and Down Payment on 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 September 30, 2013, no advance has been made to ZAP from Jonway Group.
Transactions with Jonway Group
Jonway Group is considered a related party as the Wang Family, one of the shareholders of the Company, has controlling interests in Jonway Group. Jonway Group supplies some of the plastic spare parts to Jonway and gave guarantees on Jonway short term bank facilities from China-based banks. For the nine months ended September 30, 2013 and 2012, Jonway made purchases from Jonway Group of $916,000 and $942,000. For the three months ended September 30, 2013 and 2012, Jonway made purchases from Jonway Group of $236,000 and $176,000.
Jonway Agreement with Zhejiang UFO
Based on a contract by and among 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 historical rates:
|
The first 3,000 vehicles
|
$44 per vehicle
|
| |
|
|
Vehicles from 3,001 to 5,000
|
$30 per vehicle
|
| |
|
|
Vehicles over 5,000
|
$22 per vehicle
|
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. Jonway has obligation to pay such fees based on the number of SUVs assembled by Zhejiang UFO.
Other Related Party Transactions
For the nine months ended September 30, 2013 and 2012, Jonway purchased spare parts in the amount of $873,000 and $672,000 from Taizhou Huadu, respectively. For the three months ended September 30, 2013 and 2012, Jonway purchased spare parts in the amount of $143,000 and $473,000 from Taihou Huadu.
NOTE 12-INCOME TAXES
The Company is subject to United States of America (“US”) and People’s Republic of China (“PRC”) profit tax.
US
The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made as the Company has no taxable income for the year. The applicable income tax rate for the Company for the three months ended September 30, 2013 and 2012 was 35%, respectively. No tax benefit has been realized since a valuation allowance has offset the deferred tax asset resulting from the net operating losses.
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 provisions for income taxes have been made as the Company has no taxable income for the periods. $13,000 and $40,000 of tax benefits were recognized due to the change in the deferred tax assets in the three and nine months ended September 30, 2013, respectively.
Loss before income taxes consisted of:
| |
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
| |
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
$ |
(1,621 |
) |
|
$ |
(3,165 |
) |
|
$ |
(5,277 |
) |
|
$ |
(7,679 |
) |
|
PRC
|
|
|
(1,733 |
) |
|
|
(3,712 |
) |
|
|
(8,401 |
) |
|
|
(10,684 |
) |
| |
|
$ |
(3,354 |
) |
|
$ |
(6,877 |
) |
|
$ |
(13,678 |
) |
|
$ |
(18,363 |
) |
|
Benefit of income taxes consisted of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
| |
|
|
2013 |
|
|
|
2012 |
|
|
|
2013 |
|
|
|
2012 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
$ |
(5 |
) |
|
$ |
- |
|
|
$ |
(7 |
) |
|
$ |
- |
|
|
PRC
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total Current
|
|
$ |
(5 |
) |
|
$ |
- |
|
|
$ |
(7 |
) |
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
PRC
|
|
|
13 |
|
|
|
14 |
|
|
|
40 |
|
|
|
144 |
|
|
Total Deferred benefit
|
|
|
13 |
|
|
|
14 |
|
|
|
40 |
|
|
|
144 |
|
|
Total benefit for income taxes
|
|
$ |
8 |
|
|
$ |
14 |
|
|
$ |
33 |
|
|
$ |
144 |
|
NOTE 13– 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 tortuous 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.) Wang (but not the other Minority Board Member Defendants) eventually dismissed the Cross-Complaint. The Cross-Complaint also asserts 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 tortuous interference with contractual relations (although the Cross-Complaint is unclear as to who is bringing the tortuous interference claim against Lu and the factual basis for the claim). The Cross-Complaint seeks an unspecified amount of damages and other consideration.
On March 22, 2013, Plaintiffs/Cross-Defendants’ Cathaya and Lu filed a Demurrer to the Cross-Complaint, which is set for hearing on June 27, 2013. ZAP also filed a Demurrer. In response to these two Demurrers, on June 25, 2013, Abdou and Schneider filed an Amended Cross-Complaint. The allegations in the Amended Cross-Complaint remain substantially the same as those set forth above.
On July 30, 2013, ZAP and Plaintiffs/Cross-Defendants’ Cathaya and Lu filed separate Demurrers to the Cross-Complaint, both of which were sustained with leave to amend. As of this date, a Second Amended Cross-Complaint has not yet been filed. The last date for filing such a pleading is November 12, 2013.
ZAP intends to vigorously defend the Amended Cross-Complaint and to file a Cross-Complaint against Schneider and Abdou, and possibly others (except for Wang).
2. 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 learned that plaintiff Randall Waldman was arrested in Kentucky in late April, 2010, and charged with felonious criminal conduct. The Court indicated intent to dismiss the case for failure to prosecute in early 2012 but the plaintiffs retained new counsel and successfully opposed the dismissal. There has been no activity in the case that we are aware of in the past several months.
3. 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 six 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, 2011 in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. On November 11, 2011, 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. In the event of a final, unfavorable outcome, the potential loss to the Company associated with the refund would be approximately $57,000. On November 4, 2013, the Company received from the Dealer a request for the Company to re-purchase the six Xebra vehicles for $3,100 each pursuant to a buy-back program for the vehicles.
4 Alvarez Lincoln - Mercury, Inc. vs. ZAP, Voltage Vehicles, Liuzhou Wuling Motors Co., Ltd., Pricilla Lu, and Steve Schneider. The 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. On or about October 14, 2013, the parties reached a tentative settlement agreement. The parties are currently working on formalizing that settlement agreement.
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 November 14, 2013 ZAP has received 284 refund requests of which 247 were deemed eligible
The Company has accrued for estimated expenses related to above claims.
NOTE 14 – 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 $6.8 million at September 30, 2013. The guarantee expires at variance dates from November 2013 to June 2014. Our performance risk under these guarantees is reviewed regularly, and has resulted in no changes to our initial valuations.
NOTE 15 – SUBSEQUENT EVENTS
In October 2013 and November 2013, the company repaid $1.1 million in short-term loans to ICBC and $7.3 million to CITIC.
In November 2013, the company borrowed $0.8 million short-term loan from Taizhou Bank. The interest note is 8.89% and is due in May 2014. In October 2013, the company borrowed $1.1 million short-term loan from ICBC. The interest rate is 7.20% and is due in October 2014.
In October 2013 and November 2013, approximately $6.2 million of notes payable matured and approximately $4.1 million of new notes were issued. The new notes will be due in April 2014 and May 2014.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This quarterly report including the following management’s discussion and analysis, and other reports filed by the registrant from time to time with the securities and exchange commission (collectively the “filings”) contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. you can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
|
|
·
|
our ability to establish, maintain and strengthen our brand;
|
|
|
·
|
our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
|
|
|
·
|
our ability to maintain effective disclosure controls and procedures;
|
|
|
·
|
our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
|
|
|
·
|
whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
|
|
|
·
|
our ability to attract and retain the personnel qualified to implement our growth strategies;
|
|
|
·
|
our ability to obtain approval from government authorities for our products;
|
|
|
·
|
our ability to protect the patents on our proprietary technology;
|
|
|
·
|
our ability to fund our short-term and long-term financing needs;
|
|
|
·
|
our ability to compete against large competitors in a rapidly changing market for electric and conventional fuel vehicles;
|
|
|
·
|
changes in our business plan and corporate strategies; and
|
|
|
·
|
Other risks and uncertainties discussed in greater detail in various sections of this report, or set forth in part I, Item 1A of our Annual Report on Form 10-K under the heading “Risk Factors”.
|
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
In this quarterly report on Form 10-Q the term “ZAP” refers to ZAP, the term “Jonway” refers to Zhejiang Jonway Automobile Co. Ltd., of which ZAP owns 51% of the equity shares, “ZAP Jonway” refers to both ZAP and Jonway on a consolidated basis, and “we,” “us” and “our” refer to ZAP or ZAP Jonway, as the context indicates.
Recent Developments
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
The following table sets forth, as a percentage of net sales, certain items included in ZAP’s Statements of Operations (see Financial Statements and Notes) for the periods indicated:
| |
Three Months
|
|
|
Nine Months
|
|
| |
Ended September 30,
|
|
|
Ended September 30,
|
|
| |
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of sales
|
|
|
93.8 |
% |
|
|
100.5 |
% |
|
|
99.2 |
% |
|
|
95.3 |
% |
|
Operating expenses
|
|
|
32.2 |
% |
|
|
62.5 |
% |
|
|
31.6 |
% |
|
|
52.4 |
% |
|
Loss from operations
|
|
|
-26.0 |
% |
|
|
-63.0 |
% |
|
|
-30.7 |
% |
|
|
-47.6 |
% |
|
Net loss attributable to ZAP
|
|
|
-25.2 |
% |
|
|
-48.0 |
% |
|
|
-26.1 |
% |
|
|
-36.9 |
% |
Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Net sales for the three months ended September 30, 2013 were $9.9 million as compared to $10.5 million for the three months ended September 30, 2012.
Jonway Auto’s revenue for the three months ended September 30, 2013 decreased by $0.5million from $10.2 million for the quarter ended September 30, 2012 compared to $9.7 million for the quarter ended September 30, 2013. The sales volume decreased due to the following reasons (i) more SUV models were launched into market by China-based auto makers, which intensified the competition, (ii) Although Jonway ‘s upgraded A380, which was launched into the market to compete with these competitors, the resulting sales volume ramped up in this 3rd quarter did not reach the expected volume (iii) increasing oil prices in China affected customer demand and (iv) China’s overall economic condition worsened during the quarter (the GDP increase rate for this quarter compared to same quarter in 2012 was 7.8%, which is unexpected low),
Net sales of our Advanced Technology segment decreased by $10,000 to $17,000 from $27,000 for the three months ended September 30, 2013 and 2012, respectively. This is still far below our projections due to the tight United States credit market and general economic conditions negatively impacting our dealer sales in 2012. 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.
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.
In our Consumer Product segment, sales increased by $75,000, from $177,000 to $252,000 for the three months ended September 30, 2012 and 2013 respectively. The steady sales volume is primarily due to a bulk sale to a major customer of our ZAPPY 3 electric scooters.
Gross profit increased by $664,000 from a gross loss of $51,000 for the three months ended September 30, 2012 to a gross profit of $613,000 for the three months ended September 30, 2013. Our margins increased from negative 0.5% to 6.2%.
Jonway Auto’s gross profit increased by $416,000 from a gross profit of $96,000 in the third quarter of 2012 to a gross profit of $512,000 for the third quarter ended September 30, 2013. The increase was primarily due to cost reduction on the material cost.
Advanced Technology vehicles gross loss decreased $175,000 from a gross loss of $181,000 for the three months ended September 30, 2012 to a gross loss of $6,000 for the three months ended September 30, 2013. The gross losses were primarily due to selling vehicles at lower prices to generate cash flow on obsolete inventory.
Our retail car lot gross loss decreased by $41,000 from $41,000 for the three months ended September 30, 2012 to $0 for the three months ended September 30, 2013. We have closed the retail car lot.
The Consumer Products segment experienced an increase in gross profit of $32,000 from $75,000 in the three months ended September 30, 2012 to $107,000 in the three months ended September 30, 2013. The increase was due to the low cost of obsolete inventory.
Sales and marketing expenses decreased $1.1 million from $2.3 million for the three months ended September 30, 2012, to $1.2 million for the three months ended September 30, 2013. As a percentage of sales the expense decreased from 22% for the three months ended September 30, 2012 to 12% for the three months ended September 30, 2013 due to an overall decrease in sales and marketing expenses.
General and administrative expenses decreased by $1.6 million from $3.4 million for the three months ended September 30, 2012 to $1.8 million for the three months ended September 30, 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) less 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 $736,000 from $856,000 for the three months ended September 30, 2012 to $ 120,000 for the three months ended September 30, 2013. The decrease was primarily due to fewer projects scheduled for the third quarter of 2013. In the prior year’s quarter ended September 30, 2012, we incurred research and development fees relating to refinement of the automatic transmission for Jonway’s three and five door sport utility vehicles.
Interest expense increased by $264,000 from $691,000 in third quarter of 2012 to $955,000 in the third quarter of 2013. The amortization of discount on the convertible debt issued in this quarter amounted to $77,000, the bond interest expense amounted to $54,000 and the rest of the increase was incurred for short term loan and note payable .
Other income decreased by $204,000 from $467,000 for the three months ended September 30, 2012 to $263,000 for the three months ended September 30, 2013. This amount mainly represents a decrease in the sales of metal scrap and a decrease in interest income.
Nine months Ended September 30, 2013 Compared to Nine months Ended September 30, 2012
Net sales increased by $1.1 million from $35.4 million for the nine months ended September 30, 2012 to $36.5 million in September 30, 2013.
Jonway auto’s revenue for the nine months ended September 30, 2013 increased by $1.2 million from $34.7 million for the nine months ended September 30, 2012 to $35.9 million for the nine months ended September 30, 2013. The sales volume increased was due to more minivans sold in 2013.
Sales in the Advanced Technology segment increased by $2,000 from $43,000 in 2012 to $45,000 for the nine months ended September 30, 2013. We sold discontinued models and obsolete stock to generate cash flow.
Sales of consumer products increased by $77,000 from $562,000 for the nine months ended September 30, 2012 to $639,000 for first nine months of 2013. The primary reason is due to a bulk sale to a major customer of our ZAPPY 3 electric scooters
Our retail car lot experienced a decrease in sales of $142,000 from $142,000 in 2012 to $0 in 2013. The decrease was due to us closing the retail car lot.
Gross profit decreased by $1.4 million from $1.7 million for the nine months ended September 30, 2012 to a gross profit of $0.3 million for the nine months ended September 30, 2013. The decrease in gross profit was principally related to the lower profits on the manufacturing of Jonway Auto’s vehicles.
Jonway auto’s gross profit decreased by $1.5 million from $1.7 million for the first nine months of 2012 to a gross profit of $0.2 million for the nine months ended September 30, 2013. The decrease was primarily due to a new price reduction program to its existing models while the upgraded models with higher gross profit were not launched into market in the nine months ended September 30, 2013. In order to deal with the increasing competition in the SUV market in China, Jonway auto initiated its price reduction program to end users throughout the first nine months of 2013. This resulted in a decrease of the ex-factory price to dealers by RMB 6,000 or over $950.
In our Advanced Technology segment our gross loss decreased by $152,000 from a gross loss of $184,000 for the nine months ended September 30, 2012 to a gross loss of $32,000 for the nine months ended September 30, 2013. This was due to selling obsolete and discontinued models at lower prices to generate cash flows.
In our Consumer Products segment we experienced an increase of $26,000 in gross profit from a gross profit of $148,000 in 2012 to a gross profit of $174,000 in 2013. The increase was due to the increase in sales volume of the Zappy Pro Flex.
Gross profits in our retail car lot increased by $1,000 from a gross loss of $1,000 for the nine months ended September 30, 2012 to $0 for the nine months ended September 30, 2013. We have closed this segment of our business.
Sales and marketing expenses in the first nine months of 2013 decreased by $3.2 million from $7.9 million in 2012 to $4.7 million in 2013. As a percentage of sales the expense decreased from 22% for the nine months ended September 30, 2012 to 13% for the nine months ended September 30, 2013. The lower sales and marketing expenses for the nine months ended September 30, 2013 were contributed by the savings in advertisement expenses due to the termination of one major contract.
General and administrative expenses for the nine months ended September 30, 2013 decreased by approximately $2.3 million, from $8.7 million in 2012 to $6.4 million in 2013. The decrease was due to the following: 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 $1.5 million from $1.9 million in 2012 to $0.4 million in 2013. The decrease was the result of fewer projects scheduled for the first nine months of 2013.
Interest expense, net increased by $0.5 million from an interest expense of $2.1 million for the first nine months of 2012 to interest expense of $2.6 million in the nine months ended September 30, 2013.The increase was due to increased borrowings in China and the discount on the convertible debt.
Other income (expense) decreased $142,000 from $933,000 for the first nine months of 2012 to other income of $791,000 for the first nine month of 2013. The decrease was due to less sales of scrap metal by Jonway Auto.
Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in related party 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. At September 30, 2013, we believe that we will have sufficient liquidity required to conduct operations through November 14, 2014.
In January 2011, ZAP issued $19 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 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, 2014. 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. The interest as from 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.
.
At present, the Company 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 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. However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
In the first nine months of 2013, the net cash used for operating activities was $6.0 million. Cash used in the first nine months of 2013 was comprised of the net loss incurred for the first nine months of $13.6 million plus net non-cash expenses of $8.4 million and the net decrease of $0.7 million in operating assets and liabilities. In the first nine months of 2012, net cash used for operating activities was $11.2 million. Cash used in the first nine months of 2012 was comprised of the net loss incurred for the first nine months of $18.2 million plus net non-cash expenses of $9.0 million and the net decrease of $2.0 million in operating assets and liabilities
Investing activities used cash of $1.58 million and $1.76 million in the first nine months ended September 30, 2013 and 2012, respectively. $1.58 million and $1.84 million were used for the purchases of equipment.
Financing activities for the first nine months ended September 30, 2013 provided cash of $6.6 million compared with financing activities that provided cash of $7.7 million in 2012. During the first nine months of 2013, we provided cash of $44.9 million in notes payable and short term financing and used cash of $38.2 million for repayment short term debt and notes payable and the change in restricted cash of $1.6 million. The issuance of convertible bonds provided cash of $1.5 million.
The Company had cash of $0.57 million at September 30, 2013 as compared to $1.66 million at December 31, 2012. The Company had working capital deficits of $58.7 million and $51.3 million for the periods ended September 30, 2013 and December 31, 2012 respectively.
In the event that we require additional liquidity, one of our principal shareholders, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through August 2014.
On May 15, 2013, the U.S. Department of Justice filed a complaint for declaratory and injunctive relief and for civil penalties against the Company. The complaint was filed in the U.S. District Court for the District of Columbia as United States v. ZAP; Civil Action No. 13-646. The action was brought under the National Traffic and Motor Vehicle Safety Act of 1966. The complaint alleges that the Company failed to develop and implement a remedy to bring its 2008 ZAP Xebra into compliance with minimum safety requirements; failed to timely and properly notify the National Highway Traffic Safety Administration (“NHTSA”) about the vehicle recalls; and was uncooperative and evasive with NHTSA.
ZAP and the United States have reached a settlement of all matters arising out of the facts alleged in the complaint. The settlement 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 has agreed to initiate a buy-back program whereby it will offer to provide a refund of $3,100.00 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 has 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 November 14, 2013 ZAP has received 284 refund requests of which 247 were deemed eligible
Critical Accounting Policies and Use of Estimates
Estimates
The preparation of the unaudited condensed 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, derivative liabilities, 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) 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.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide disclosure pursuant to this Item 3.
Item 4. Controls and Procedures
As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2012, we identified a lack of sufficient control in the area of technical competency in review and approval of financial reporting processes. This control weakness allowed for reconciliations, reports and other documents to be insufficiently reviewed prior to being approved by management and audit adjustments to be identified by our auditors as part of their year-end 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. The Company is considering utilizing outside accounting experts to assist us in accounting for future complex transactions.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Co- Chief Executive Officers 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 ineffective as of the end of the period covered by this report.
Changes in internal control over financial reporting
No significant changes were made in our internal control over financial reporting during the Company’s first half year of 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
On May 15, 2013, the U.S. Department of Justice filed a complaint for declaratory and injunctive relief and for civil penalties against the Company. The complaint was filed in the U.S. District Court for the District of Columbia as United States v. ZAP; Civil Action No. 13-646. The action was brought under the National Traffic and Motor Vehicle Safety Act of 1966. The complaint alleges that the Company failed to develop and implement a remedy to bring its 2008 ZAP Xebra into compliance with minimum safety requirements; failed to timely and properly notify the National Highway Traffic Safety Administration (“NHTSA”) about the vehicle recalls; and was uncooperative and evasive with NHTSA.
ZAP and the United States have reached a settlement of all matters arising out of the facts alleged in the complaint. The settlement 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 has agreed to initiate a buy-back program whereby it will offer to provide a refund of $3,100.00 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 has 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.
Item 1A. Risk Factors
There have been no material changes to the Company’s risk factors which are included and described in the annual report on Form 10-K for the fiscal year ended December 31, 2012. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 1B. Unresolved Staff Comments
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Mine safety disclosure
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
(b) Exhibits.
|
Exhibit
Exhibit Number
|
|
Description
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
|
31.3
|
|
Certification of Principal Financial Officer pursuant to 13a-14/15d-14 of the Exchange Act as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| |
|
|
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS*
|
XBRL Instance Document
|
| |
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
|
| |
|
|
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
| |
|
|
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document
|
| |
|
|
101.LAB*
|
XBRL Taxonomy Extension Label Linkbase Document
|
| |
|
|
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
Furnished herewith, XBLR (Extensive 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
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Dated: November 14, 2013
|
By: /s/ Alex Wang
|
| |
Name: Alex Wang
|
| |
|
| |
Title: Co-Chief Executive Officer
|
| |
|
| |
(Co-Principal Executive Officer).
|
| |
|
| |
|
|
Dated: November 14, 2013
|
By: /s/ Charles Schillings
|
| |
Name: Charles Schillings
|
| |
|
| |
Title: Co-Chief Executive Officer
|
| |
|
| |
(Co-Principal Executive Officer).
|
| |
|
| |
|
|
Dated: November 14, 2013
|
By: /s/ Chi Kwong FUNG
|
| |
Name: Chi Kwong FUNG
|
| |
|
| |
Title: Finance Director
|
| |
|
| |
(Principal Financial Officer)
|
46