NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
ZAP was incorporated in California in September 1994 (together with its subsidiaries, “the Company,” or “ZAP”). ZAP markets advanced transportation, including alternative energy and fuel efficient automobiles, motorcycles, bicycles, scooters, personal watercraft, hovercraft, neighborhood electric vehicles and commercial vehicles. The Company’s business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which the Company believes have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. In pursuit of a manufacturing plant and a partner with an existing product line, a distribution and customer support network in China and experience in vehicle manufacturing, ZAP acquired a majority of the outstanding equity in Zhejiang Jonway Automobile Co., Ltd. (“Jonway”).
On January 21, 2011, the Company completed the acquisition of 51% of the equity shares of Jonway for a total purchase price of $31.75 million consisting of approximately $29 million in cash and 8 million shares of ZAP common stock valued at $2.7 million. The Company believes that the acquisition will allow it to expand its electric vehicle (“EV”) business and distribution network around the world, give it access to the rapidly growing Chinese market for electric vehicles and have competitive production capacity in an ISO 9000 certified manufacturing facility with the capacity and resources to support production of ZAP’s electric vehicles and new product line of mini vans and mini SUVs.
Jonway is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China (“the PRC”) on April 28, 2004 by Jonway Group Co., Ltd. (“Jonway Group”). Jonway Group is under the control of three individuals, Wang Huaiyi, Alex Wang (the son of Wang Huaiyi) and Wang Xiao Ying (the daughter of Wang Huaiyi and all three individuals collectively referred to as the “Wang Family”).
Jonway’s approved scope of business operations includes the production and sale of vehicle spare parts, and the sale of UFO licensed SUV vehicles. The principal activities of Jonway are the production and sale of automobile spare parts and the production and distribution of SUVs in China using the consigned UFO license from an affiliate of Jonway Group.
With the completion of the acquisition of a majority interest in Jonway, the combined companies’ new product lines include the A380 SUV EV and the minivan EV. Both products leverage the production moldings, the manufacturing engineering infrastructure and facilities currently in place for the gasoline models of these vehicles. Since the acquisition, the companies have been working on developing the joint product line, marketing and sales plans for the 2013 EV product lines.
Jonway received certification of the EV production line by the Chinese electric vehicle authorities, which occurred in February 2013. Meanwhile; the engineering teams from both companies are undertaking extensive testing of the A380 SUV EV at Jonway Auto and ZAP Hangzhou EV research and development center.
Our target is to deliver the EV A380 SUV and EV minivan in the first half of 2013, with the purpose of obtaining the Chinese central government electric vehicle incentives of up to RMB 60,000 or over $9,510 per vehicle. ZAP intends to use the existing manufacturing plant from Jonway that is being upgraded for the production of the electric vehicles and utilizing the existing Jonway models to gain economy of scale and reduce molding investment costs. ZAP also intends to leverage Jonway’s distribution and customer support centers in China to support the sales and marketing of its new EV product line. In May 2012, we launched the gasoline-powered minivan models into China market. We expect this gasoline minivan series can contribute our business expansion across the world. In the meantime, Jonway auto established its two wholly-owned subsidiaries, namely, Taizhou Fuxing Vehicle Sale Co., Ltd. focusing on minivan marketing and distribution in China and Taizhou Vehicle Leasing Co., Ltd focusing on the vehicle leasing business in Taizhou.
ZAP plans to focus on developing new international markets such as Brazil, South Africa, Russia and some of the Central America countries such as Costa Rica, Ecuador and Mexico. These countries are looking for affordable gasoline and electric SUVs and minivans with a competitive price and qualities.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the financial statements of ZAP, and its subsidiaries: Jonway Automobile, Voltage Vehicles, ZAP Stores and ZAP Hong Kong for the years ended December 31, 2012 and 2011 and are in accordance with United States (“U.S.”) generally accepted accounting principals (“GAAP”).
In these financial statements, “subsidiaries” are companies that are over 50% controlled, the financial statements of which are consolidated with those of the Company. Significant intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales, are also eliminated; non –controlling interests are included in equity. We account for our 37.5% interest in the ZAP Hangzhou Joint Venture using the equity method of accounting.
ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.OB.”
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Liquidity and Capital Resources
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
Our principal sources of liquidity consist of our existing cash on hand, bank facilities from China-based banks for Jonway Auto, our investment in securities with Samyang Optics, Ltd. and transactions with Luo Hua Liang, the brother-in-law of Alex Wang, the Co-CEO and director of ZAP. In 2011, we entered into private placement subscription agreements with Mr. Luo for the purchase of ZAP common stock for the aggregate purchase price of $7 million, of which we received $2 million as of the quarter ended March 31, 2011. The private placement subscription agreements were superseded and terminated by a stock purchase agreement with Mr. Luo in August 2011. Pursuant to the stock purchase agreement, Mr. Luo agreed to purchase ZAP common stock for an aggregate purchase price of $2 million in multiple closings. On September 8, 2011, we issued approximately 2.3 million shares of ZAP common stock in connection with the initial closing of $771,000. We received an additional $1.025 million in subsequent closings for which we have issued approximately 3.35 million shares of ZAP common stock. During 2011, we issued 7.7 million shares to Mr. Luo for cash of $3.8 million.
In 2011, we were approved to have grants of up to an aggregate of $6.2 million of bank facilities from the Taizhou Branch of China Merchants Bank (“CMB”) through our majority-owned subsidiary, Jonway. Although we have been approved for these credit lines, there are no legal obligations or rights to the credit lines until we execute agreements with the respective lenders to borrow funds under the credit lines. When drawn down, the credit lines will be secured by lands owned by Jonway and guaranteed by Jonway Group.
Under the above mentioned credit line of $6.2 million granted by CMB, on August 19, 2011, Jonway entered into a Credit Agreement with CMB for a revolving short term bank loan in the aggregate amount of approximately $3.2 million which was drawn down in 2011. The annual interest rate is 7.22%. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CMB dated August 11, 2011 in which land use rights over three parcels of land owned by Jonway at Sanmen Factory have been pledged as security for this loan. As of December 31, 2012, the Company had repaid the $3.2 million.
In December 2011, Jonway established additional short term bank loans amounting to over $2.2 million from three small-size banks based in Taizhou City, which are subject to Jonway Group guarantee, and $790,000 of such loans is secured by bank notes received from Jonway dealers. The $2.2 million was repaid on March 31, 2012.
On March 31, 2012, to support the monthly business performance target of CMB, Jonway entered into another credit agreement with this bank for a sum of short term bank loan in the aggregate amount of approximately $520,000 which was drawn down on March 31, 2012, and repaid on April 1, 2012.
In March 2012, we were approved up to an aggregate of $0.8 million of credit line from a Sanmen local bank. The credit line expires in March 2013 and is guaranteed by related parties. As of December 31, 2012, this credit line was fully used in the form of notes payable. The credit line was renewed in March 2013 for another 1 year.
In May 2012, we were approved up to an aggregate of $ 23.8 million of credit line from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. 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 mentioned credit line of $23.8 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 loans in the aggregate amount of approximately $7.1 million from CITIC under the credit line. The annual interest rate is 6.60%, and the loans are due in November 2013. We have also drawn $5.6 million in the form of notes payable in 2012. We deposited 100% cash for these notes payable. These notes payable will be due varied from March to May 2013. As of December 31, 2012, the credit line of $11.1 million has not been used. The credit line expires in May 2013.
In June 2012, we entered into additional short term loan agreements with both banks based in Taizhou city for the aggregating amount of approximately $1 million. Such bank loans are secured by Jonway Group, certain individuals and Jonway’s property, plant and equipment. The annual interest rate is 9.00%. The $1 million was repaid in December 2012.
In December 2012, we were approved up to an aggregate of $4.0 million of credit line from Taizhou Bank. This credit line was guaranteed by related parties. In December 2012, we borrowed two short-term loans with Taizhou Bank under this credit line for aggregating total amount of $1.6 million. The annual interest rates are 8.06% and 8.46% respectively, and the loans are due in February and June 2013, respectively. The remaining credit line was used in the form of notes payable. As of December 31, 2012, the credit line was fully used. The credit line expires in December 2013.
In December 31, 2012, we were approved up to an aggregate of $8.9 million of credit line from Everbright Bank. As of December 31, 2012, this credit line was fully used in the form of notes payable. The credit line expires in December 2013.
As of December 31, 2012, Jonway had $8.7 million in short term bank loans outstanding, which are borrowed from the above stated China-based banks with interest rates ranging from 6.60% to 8.46% per annum and expires in November 2013.
Jonway intends to utilize the credit lines to expand its electric vehicle business as well as other future vehicle models. This includes on-going working capital needs, electric vehicle production equipment requirements, testing, homologation and new EV product molds. These credit lines will also be used to support the company’s expansion plans, with emphasis on its electric vehicle production line facilities in China. The credit will also help advance new electric vehicle initiatives, launch new strategic global sales and marketing operations, bolster infrastructure, and finance working capital. Also our principal shareholder, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through April 16, 2014 in the event that we require additional liquidity. In addition, CEVC would likely renew this convertible note and in the event that CEVC decides to call on the repayment, the repayment would likely be paid in full or in part in Jonway Auto shares or ZAP shares unless there is a breach by the Company on the covenant of the convertible note.
We will require additional capital to expand our current operations. In particular, we require additional capital to expand our presence across the world, to continue development of our electric vehicle business, to continue strengthening our dealer network and after-sale service centers and expanding our market initiatives. We also require financing the investment for the continued roll-out of new products and to add qualified sales and professional staff to execute on our business plan and pursue our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias, the electric and other fuel efficient vehicles.
We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.
NOTE-2 SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, 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.
Concentration of Credit Risk
The Company’s operations are all carried out 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, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Financial instruments which subject the Company to potential credit risk consist of its cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with one high credit quality financial institution. Deposits may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal. The Company has not experienced any losses to date on its deposits.
The Company performs ongoing credit evaluations of its customers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.
The Company currently relies on various outside contract manufacturers in China to supply electric vehicles and products for its customers. Although management believes that other contract manufactures could provide similar services and intends to transition its manufacturing to Jonway’s facilities in Sanmen, China, but, if these Chinese companies are unable to supply electric vehicles and the Company is unable to transition manufacturing to Jonway’s facilities or find alternative sources for these product and services, the Company might not be able to fill existing backorders and/or sell more electric vehicles. Any significant manufacturing interruption could have a material adverse effect on the Company’s business, financial condition and results of operations.
Revenue Recognition
The Company records revenues for non-Jonway sales when all of the following criteria have been met:
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Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
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Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
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Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.
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Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
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The Company records revenues for Jonway sales only upon the occurrence of all of the following conditions:
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The Company has received a binding purchase order from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale);
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The purchase price has been fixed, based on the terms of the purchase order;
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The Company has delivered the product from its factory to a common carrier acceptable to the customer; and
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The Company deems the collection of the amount invoiced probable.
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The Company provides no price protection. Sales are recognized net of sale discounts, rebates and return allowances.
Stock-based compensation
The Company accounts for stock-based compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the “Black-Scholes model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.
The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
ASC 740-10, Accounting for Uncertainty in Income Taxes defines uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
United States federal, state and local income tax returns prior to 2009 are not subject to examination by tax authority.
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Foreign Currency Translation
The Company and its wholly owned subsidiary/investments, maintain their accounting records in United States Dollars (“US$”) whereas Jonway Auto maintains its accounting records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.
Jonway Auto’s principal country of operations is the PRC. The financial position and results of our operations are determined using RMB, the local currency, as the functional currency. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Due to the fact that cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholder’s equity as “Accumulated Other Comprehensive Income.”
The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect our financial condition in terms of US$ reporting. The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
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December 31, 2012 December 31, 2011
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Balance sheet items, except for share capital, additional
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$ 1=RMB 6.3090 $1=RMB 6.3009
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paid in capital and retained earnings, as of year end
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Amounts included in the statements of operations
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$ 1=RMB 6.3079 $1=RMB 6. 4618
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and cash flows for the year
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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.
Marketable equity securities
The Company had an investment in marketable securities which was classified as available-for-sale and recorded at fair value, the value of which fluctuates with the stock market value during 2011.The securities were shares of Samyang Optics Co., Ltd., traded on the Korean stock exchange. Net unrealized holding gains and losses, net of tax were reported as “net unrealized gain (loss) on marketable securities” in the consolidated statement of operations in 2011. The securities were sold in December 2012 and a realized loss was reported as “loss from sale of marketable securities” on the consolidated statement of operations in 2012.
Fair value of financial instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Accounting standards establish a three level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. For certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. 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 following table set forth a summary of changes in the fair value of Level 1 for the year ended December 31, 2011 (in thousands):
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December 31, 2011
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Assets
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Level 1
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Level 2
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Level 3
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Fair Value
Measurements
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Marketable Securities (1)
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$
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1,830
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$
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1,830
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Total assets
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$
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1,830
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$
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1,830
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(1)
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Marketable securities consist of common stock of a related party. The fair value of marketable securities is based upon market value quoted by Korean stock exchange. The Marketable securities were sold for $1,128 at December 31, 2012.
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In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States. Generally assets are recorded at fair value on a nonrecurring basis as a result of impairment changes. Fair value was estimated based on discounted cash flow. Assets measured at fair value on a nonrecurring basis for the years ended December 31, 2012 are summarized below (in thousands):
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December 31, 2012
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Assets
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Level 1
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Level 2
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Level 3
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Fair Value
Measurements
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Long-lived assets- 3-door SUV mold
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(2
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)
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$
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2,560
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$
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2,560
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(2)
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Included in “Property, plant and equipment, net” on the face of 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) and $0 for the years ended December 31, 2012 and 2011, respectively. 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).
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The Company’s other financial instruments at December 31, 2012 consist of accounts receivable, accounts payable and debt. For the year ended December 31, 2012 the Company did not have any derivative financial instruments. The Company believes the reported carrying amounts of its accounts receivable and accounts payable approximate fair value, based upon the short-term nature of these accounts. The carrying value of the Company’s loan agreements approximate fair value as each of the loans bears interest at a floating rate.
Accounts Receivable, Notes Receivable and Restricted 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 $201,000 and $11,000 at December 31, 2012 and 2011, respectively .Restricted Notes Receivable of $678,000 was pledged to Shanghai Pudong Bank for the same amount of bank acceptance notes payable.
Inventories
ZAP Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lesser of lower of cost (first-in, first-out basis for ZAP and moving average basis for Jonway) or market (net realizable value or replacement cost). The Company maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company’s products and corresponding demand were to decline, then additional reserves may be deemed necessary. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.
ZAP has reserved $545,908 of its vehicle inventory that is held by Steve Schneider on River Road property that was being leased by ZAP from Steven Schneider. Mr. Schneider refuses to release this inventory until his lawsuit against the ZAP is heard by the courts.
Property and equipment
Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements. Property and equipment is stated at cost, net of accumulated depreciation and amortization, and is depreciated or amortized using straight-line method over the asset's estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:
Machinery and equipment
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5-10 years (Jonway 10 years)
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Computer equipment and software
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3-5 years
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Office furniture and equipment
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5 years
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Vehicles
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5 years
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Leasehold improvements
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10 years or life of lease,
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whichever is shorter
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Building and improvements
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20-30 years (Jonway 20 years)
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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. The impairment losses of long-lived assets are $2.6 million and nil for the year ended December 31, 2012 and 2011, 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.
Non-Controlling Interests
The Financial Accounting Standards Board (“FASB”) issued a statement which established accounting and reporting standards that require non-controlling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be re-measured at fair value, with any gain or loss recognized in earnings.
On January 21, 2011, the Company acquired 51% of Zhejiang Jonway Automobile Co. Ltd from Jonway Group, a related party, who holds a 49% of the remaining interest in Jonway Auto. Pursuant to the Jonway Acquisition Agreement, ZAP had the right to acquire the remaining 49% of Jonway at the same valuation, which expired on March 31, 2011. To account for the expired option, we recorded a reduction of common stock.
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.
ZAP
|
|
2012
|
|
|
2011
|
|
Balance as of January 1,
|
|
$
|
321
|
|
|
$
|
152
|
|
Warranties expired
|
|
|
-
|
|
|
|
(14
|
)
|
Provision for warranties
|
|
|
2,119
|
|
|
|
188
|
|
Charges against warranties
|
|
|
(54
|
)
|
|
|
(5
|
)
|
Balance December 31,
|
|
$
|
2,386
|
|
|
$
|
321
|
|
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.
Jonway
|
|
2012
|
|
|
2011
|
|
Balance as of January 1, 2012
|
|
$
|
1,097
|
|
|
$
|
590
|
|
Provision for warranties
|
|
|
1,115
|
|
|
|
1,327
|
|
Charges against warranties
|
|
|
(1,248
|
)
|
|
|
(820
|
)
|
Balance December 31, 2012
|
|
|
964
|
|
|
|
1,097
|
|
Less: long term portion
|
|
|
(229
|
)
|
|
|
(592
|
)
|
Current portion
|
|
$
|
735
|
|
|
$
|
505
|
|
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.
Reclassifications
Certain amounts from prior period have been reclassified to conform to the current period’s presentation. Deposits and other assets of $736,000 were reclassified to investment in non-consolidated joint venture on the Consolidated Balance Sheets. Loss on sale of marketable securities of $56,000 was reclassified to loss from equity investment in Joint Venture on the Consolidated Statements of Operations and Comprehensive Loss. Due from related parties and due to related parties was grouped as Due from related parties on the Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements
In March 2013, the FASB issued ASU 2013-05 Topic 830 – Foreign Currency Matters (“ASU 2013-05”). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, Topic 220 – Comprehensive Income: Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company’s consolidated financial statements.
NOTE 3– INVENTORIES, NET
Inventories, net at December 31, 2012 and 2011 are summarized as follows (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Work in Process
|
|
$
|
2,155
|
|
|
$
|
2,234
|
|
Parts and supplies
|
|
|
4,178
|
|
|
|
4,879
|
|
Finished goods
|
|
|
7,144
|
|
|
|
5,583
|
|
|
|
|
13,477
|
|
|
|
12,696
|
|
Less - inventory reserve
|
|
|
(2,325)
|
|
|
|
(1,578)
|
|
Inventories, net
|
|
$
|
11,152
|
|
|
$
|
11,118
|
|
Changes in the Company’s inventory reserve during the years ended December 31, 2012 and 2011 are as follows (in thousands):
|
|
2012
|
|
|
2011
|
|
Balance as of January 1,
|
|
$
|
1,578
|
|
|
$
|
619
|
|
Current provision for Jonway Auto
|
|
|
-
|
|
|
|
292
|
|
Current provision for inventory ZAP
|
|
|
748
|
|
|
|
667
|
|
Balance as of December 31,
|
|
$
|
2,325
|
|
|
$
|
1,578
|
|
NOTE 4 - Property, plant and equipment, net
Property, plant and equipment, net at December 31, 2012 and 2011 are summarized as follows (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Buildings and improvements
|
|
$
|
20,725
|
|
|
$
|
21,649
|
|
Machinery and equipment
|
|
|
48,081
|
|
|
|
39,566
|
|
Office furniture and equipment
|
|
|
499
|
|
|
|
415
|
|
Leasehold improvements
|
|
|
37
|
|
|
|
37
|
|
Vehicles
|
|
|
872
|
|
|
|
745
|
|
|
|
|
70,214
|
|
|
|
62, 412
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(16,857)
|
|
|
|
(15,459)
|
|
|
|
$
|
53,357
|
|
|
$
|
46,953
|
|
Four pieces of land were acquired from the acquisition of Jonway auto in 2011, all land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the Right) to use the land. The Company has the right to use the land for 50 years and amortized the Right on a straight-line basis over the period of 50 years. As of December 31, 2012 and 2011, intangible assets consist of the following:
|
|
2012
|
|
|
2011
|
|
Land use right
|
|
$
|
10,217
|
|
|
$
|
10,518
|
|
Software
|
|
|
97
|
|
|
|
92
|
|
|
|
|
10,314
|
|
|
|
10,610
|
|
Less: accumulated amortization
|
|
|
(547
|
)
|
|
|
(535
|
)
|
|
|
$
|
9,767
|
|
|
$
|
10,075
|
|
As of December 31, 2012, estimated future amortization expense for intangibles assets, subject to amortization, is as follows (in thousands):
Year
|
|
Amortization
Expense
|
|
2013
|
|
$
|
242
|
|
2014
|
|
|
242
|
|
2015
|
|
|
242
|
|
2016
|
|
|
242
|
|
2017
|
|
|
242
|
|
Thereafter
|
|
|
8,557
|
|
|
|
$
|
9,767
|
|
Depreciation and amortization expense of property, plant and equipment, as well as land use rights and software
was approximately $5,704,000 and $4,233,000 for the years ended December 31, 2012 and 2011.
NOTE 5- INTANGIBLE ASSETS, NET & GOODWILL
The goodwill and intangible assets at December 31, 2012 and 2011 are summarized as follows:
|
|
|
|
|
Net Book
|
|
|
Amortization and
cumulated translation
adjustments (“CTA”)
|
|
|
Net Book
|
|
|
|
Useful Life
|
|
|
Value
|
|
|
for the year ended
|
|
|
Value
|
|
|
|
(In Years)
|
|
|
12/31/2011
|
|
|
12/31/2012
|
|
|
12/31/2012
|
|
Patents and Trademarks
|
|
|
7
|
|
|
$
|
75
|
|
|
$
|
(23
|
)
|
|
$
|
52
|
|
Customer Relationships
|
|
|
8.5
|
|
|
|
692
|
|
|
|
(92
|
)
|
|
|
600
|
|
Developed Technology
|
|
|
7
|
|
|
|
1,879
|
|
|
|
(312
|
)
|
|
|
1,567
|
|
In Process Technology
|
|
(a)
|
|
|
|
183
|
|
|
|
-
|
|
|
|
183
|
|
Trade name
|
|
(a)
|
|
|
|
2,173
|
|
|
|
(4
|
)
|
|
|
2,169
|
|
Intangibles
|
|
|
|
|
|
$
|
5,002
|
|
|
$
|
(431
|
)
|
|
$
|
4,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
$
|
324
|
|
|
$
|
-
|
|
|
$
|
324
|
|
|
(a)
|
The in process technology and trade name have been determined to have an indefinite life.
|
As of December 31, 2012, estimated future amortization expense for intangibles assets, subject to amortization, is as follows (in thousands):
Year
|
|
Amortization
Expense
|
|
2013
|
|
$
|
424
|
|
2014
|
|
|
424
|
|
2015
|
|
|
407
|
|
2016
|
|
|
402
|
|
2017
|
|
|
402
|
|
Thereafter
|
|
|
160
|
|
|
|
$
|
2,219
|
|
NOTE 6 - DISTRIBUTION AGREEMENTS
Distribution agreements as of December 31, 2012 and 2011 are presented below (in thousands):
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Better World Products-related party
|
|
$
|
2,160
|
|
|
$
|
2,160
|
|
Jonway Products
|
|
|
14,400
|
|
|
|
14,400
|
|
|
|
|
16,560
|
|
|
|
16,560
|
|
|
|
|
|
|
|
|
|
|
Less amortization
|
|
|
(5,281)
|
|
|
|
(3,121)
|
|
|
|
$
|
11,279
|
|
|
$
|
13,439
|
|
Amortization expense related to these distribution agreements for the years ended December 2012 and 2011 was $2,160,000 and $2,160,000 respectively. Amortization is based over the term of the agreements. The estimated future amortization expense, as follows (in millions):
Year ended December 31,
|
|
|
|
2013
|
|
$
|
1,440
|
|
2014
|
|
|
1,440
|
|
2015
|
|
|
1,440
|
|
2016
|
|
|
1,440
|
|
2017
|
|
|
1,440
|
|
Thereafter
|
|
|
4,079
|
|
Total
|
|
$
|
11,279
|
|
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.
Distribution Agreement with Samyang Optics
On January 27, 2010, ZAP entered into an International Distribution Agreement (the “Distribution Agreement”) with a related party, Samyang Optics Co. Ltd. (“Samyang”) pursuant to which ZAP appointed Samyang as the exclusive distributor of certain ZAP electric vehicles including the Jonway A380 5-door electric sports utility vehicle equipped with ZAP’s electric power train, in the Republic of Korea. In addition, the Distribution Agreement provides that ZAP and Samyang will negotiate to enter into additional agreements related to the manufacture and assembly of ZAP vehicles by Samyang in Korea. The Distribution Agreement shall be in effect for one year and may be extended annually by Samyang provided that Samyang has satisfied sales quotas determined by ZAP and Samyang is otherwise in compliance with the Distribution Agreement. Samyang has not met the sales quotas as of this filing date.
In addition, on January 27, 2010, ZAP and Samyang entered into an initial purchase order pursuant to the Distribution Agreement for the purchase of one hundred ZAP Jonway UFO electric sports utility vehicles. Selling prices have yet to be determined and no purchases have been made as of December 31, 2012.
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:
|
|
ZAP Hangzhou
|
|
|
Shanghai Zapple
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
808
|
|
|
$
|
-
|
|
|
$
|
808
|
|
Initial investment
|
|
|
-
|
|
|
|
790
|
|
|
|
790
|
|
Less: investment loss
|
|
|
(272
|
)
|
|
|
(56
|
)
|
|
|
(328
|
)
|
CTA
|
|
|
18
|
|
|
|
2
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The Company recorded a loss of $123,000 and $272,000 in ZAP Hangzhou, and a loss of $280,000 and $56,000 in Shanghai Zapple for the years ended December 31, 2012 and 2011 respectively. These losses relate to the investment in a 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)
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Shanghai Zapple
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,472
|
|
|
$
|
1,325
|
|
Total liabilities
|
|
|
867
|
|
|
|
172
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Hangzhou ZAP
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,682
|
|
|
|
1,819
|
|
Total liabilities
|
|
|
118
|
|
|
|
259
|
|
Revenue
|
|
$
|
922
|
|
|
$
|
-
|
|
NOTE 8 –LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES
Line of credit
In 2011, Jonway was approved for a line of credit up to an aggregate of $6.2 million from the Taizhou Branch of China Merchants Bank through our majority-owned subsidiary, Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by lands owned by Jonway and guaranteed by Jonway Group.
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 in the form of notes payable. The credit line expires in March 2013 and was renewed for 1 more year.
In May 2012, Jonway was approved up to an aggregate of $ 23.8 million of credit line from CITIC bank through Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by land and buildings on this land owned by Jonway and guaranteed by Jonway Group. During 2012, $7.1 million was drawn as short term bank loans and $5.6 million was drawn as notes payable. At December 31, 2012, $11.1 million of the credit has not been used. Such bank loans and notes payable under the Credit Agreements are used to support working capital and the credit line is secured by land use rights and a building at the carrying value of $5.9 million, bank deposits, guarantee from Jonway Group and guarantee from other individuals.
In December 2012, Jonway was approved up to an aggregate of $4.0 million of credit line from Taizhou Bank. This credit line was guaranteed by related parties. As of December 31, 2012, the credit line was fully used in the form of short term loans and notes payable. The credit line expires in December 2013.
In December2012, Jonway was approved up to an aggregate of $8.9 million of credit line from Everbright Bank. As of December 31, 2012, this credit line was fully used in the form of notes payable. The credit line expires in December 2013.
Short term debt
Under the above mentioned credit line of $6.2 million granted by CMB on August 19, 2011, Jonway entered into a Credit Agreement with CMB for a revolving short term bank loan in the aggregate amount of approximately $3.2 million which was drawn down in 2011. The annual interest rate is 7.22% and was due on August 18, 2012. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CMB dated August 11, 2011 in which land use rights over two parcels of land owned by Jonway at Sanmen Factory have been pledged as security for this loan. As of September 30, 2012, the Company had repaid $3.2 million.
Under the above mentioned credit line of $23.8 million granted by CITIC, Jonway entered into a Credit Agreement with CITIC for a revolving short term bank loan in the aggregate amount of approximately US$ 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 loans in the aggregate amount of approximately $7.1 million from CITIC under the credit line. The annual interest rate is 6.60%, and expires in November 2013.
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 at a total carrying amount of $5.9 million have been pledged as security for this loan.
In December 2011, Jonway established additional short term bank loans amounting to over $2.2 million from three small-size banks based in Taizhou City, which are subject to Jonway Group guarantee, of which $790 of such loans were secured by bank notes received from Jonway dealers. These loans were repaid on March 31, 2012.
In March 2012, to support the monthly business performance target of Taizhou Branch of China Merchants Bank, Jonway entered into another credit agreement with this bank for a sum of short term bank loan in the aggregate amount of approximately $520 which was drawn down on March 31, 2012, and was repaid on April 1, 2012.
In June 2012, Jonway entered into additional short term loan agreements with both banks based in Taizhou city for the aggregating amount of approximately $1 million. Such bank loans are secured by Jonway Group, certain individuals and Jonway’s property, plant and equipment. The annual interest rate was 9.00%. The $1 million was repaid in December 2012.
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 are due in February and June 2013, respectively. The loans are guaranteed by Jonway Group, shareholder Huaiyi Wang and his two families. In February 2013, $0.8 million was renewed and expires in July 2013.
As of December 31, 2012, Jonway had $8.7 million in short term bank loans outstanding, which are borrowed CITIC bank with interest rates ranging from 6.60% to 8.46% per annum and are due within November 2013. The loan is guaranteed by land use right and buildings at a carrying value of $5.9 million as well as by CEO Alex Wang.
In 2012, Jonway in total borrowed$12.6 million and repaid $9.3 million. The weighted average annual interest rate was 6.51%.
In January and February 2013, Jonway borrowed $1.4 million and $3.3 million, respectively, from Industrial and
Commercial
Bank of China. $1.4 million expires in January 2014. $3.3 million expires at various dates during 2013. The annual interest rate is 6.90%. The loans are guaranteed by shareholders Alex Wang and Huaiyi Wang, as well as pledged by land use right and buildings at a carrying amount of approximately $3.7 million.
|
|
2012
|
|
|
2011
|
|
Loan from CITIC bank
|
|
$
|
7,133
|
|
|
$
|
0
|
|
Loan from Taizhou Bank
|
|
|
1,585
|
|
|
|
1,428
|
|
Loan from Zhejiang Tailong Commercial Bank
|
|
|
-
|
|
|
|
794
|
|
Loan from China Merchants Bank
|
|
|
-
|
|
|
|
3,174
|
|
Loan from Pay-Ins Prem
|
|
|
36
|
|
|
|
89
|
|
Balance as of December 31,
|
|
$
|
8,754
|
|
|
$
|
5,485
|
|
On December 6, 2011, Jonway entered into a bank acceptance note Agreement with Taizhou Branch of China Everbright Bank for a revolving bank note facility in the aggregate amount of approximately $4.7 million. Such bank note facility were issued to Jonway Auto’s suppliers under the Credit Agreement and are secured by a Maximum Amount Mortgage Contract by and between Jonway and this bank dated December 6, 2011 in which land use right over one parcel of land owned by Jonway at Sanmen Factory has been pledged as security for this facility. Except for the bank acceptance notes payable to China Everbright Bank, other bank acceptance notes payable to other banks were granted through the below mentioned cash deposit practice.
As of December 31, 2012, the Company has bank acceptance notes payable in the amount of $18.5 million. The notes are guaranteed to be paid by the banks and usually for a short-term period of six (6) months. The Company is required to maintain cash deposits at 50% or 100% of the notes payable with these banks, in order to ensure future credit availability. As of December 31, 2012, the restricted cash for the notes was $11.8 million.
Bank acceptance notes
- 3 to 6 month term for each note issued
|
|
2012
|
|
|
2011
|
|
a) Bank acceptance notes payable to China Everbright bank
|
|
$
|
6,334
|
|
|
$
|
4,761
|
|
b) Bank acceptance notes payable to CITIC bank
|
|
|
5,608
|
|
|
|
0
|
|
c) Bank acceptance notes payable to Taizhou bank
|
|
|
4,627
|
|
|
|
2,451
|
|
d) Bank acceptance notes payable to Yinzuo bank
|
|
|
1,268
|
|
|
|
0
|
|
e) Bank acceptance notes payable to Shanghai Pudong development bank
|
|
|
676
|
|
|
|
0
|
|
f) Bank acceptance notes payable to China Merchants bank
|
|
|
0
|
|
|
|
3,316
|
|
|
|
$
|
18,513
|
|
|
$
|
10,528
|
|
|
a.
|
Notes payable to China Everbright bank include 65 bank acceptance notes expiring at various dates from January 2013 to June 2013. 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. During 2013, a total amount of 7.2 million was renewed.
|
|
b.
|
Notes payable to CITIC bank include 7 bank acceptance notes expiring at various dates from March 2013 to May 2013. The Company is required to maintain cash deposits at 100% of the notes payable with the bank, in order to ensure future credit availability.
|
|
c.
|
Notes payable to Taizhou bank include 47 bank acceptance notes expiring at various dates from February 2013 to June 2013. The Company is required to maintain cash deposits at 50% of the notes payable with the bank, in order to ensure future credit availability. In January and February 2013, a total of $2.5 million was renewed.
|
|
d.
|
Notes payable to Yinzuo bank include 21 bank acceptance notes expiring in March 2013. The Company is required to maintain cash deposits at 50% of the notes payable with the bank, in order to ensure future credit availability.
|
|
e.
|
On March 13, 2012 the Company and Shanghai Pudong Development Bank signed the bank acceptance note agreement for the amount of $ 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 is a beneficiary. The bank acceptance notes expire on March 13, 2013.
|
In January 2013, the Company received $12.1 million of notes payable from Industrial and Commercial Bank of China. The Company is required to maintain cash deposits at 100% of the notes payable with the bank, in order to ensure future credit availability.
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. 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 new 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.
In addition, the Company recorded $1.2 million in interest expense through the year ended December 31, 2012 related to this note.
NOTE 9 - INCOME TAXES
The Company is subject to United States (“USA”) and People’s Republic of China (“China”) profit tax. ZAP’s operations are in US and Jonway’s operations are in PRC. The Company has incurred net accumulated operating losses for income tax purposes for both ZAP and Jonway.
Income (loss) before provision for income taxes consisted of:
|
|
2012
|
|
|
2011
|
|
USA
|
|
$
|
(12,106
|
)
|
|
$
|
(36,328
|
)
|
China
|
|
|
(18,775
|
)
|
|
|
(9,239
|
)
|
|
|
$
|
(30,881
|
)
|
|
$
|
(45,567
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes consisted of
:
|
|
2012
|
|
|
2011
|
|
Current provision:
|
|
|
|
|
|
|
USA
|
|
$
|
-
|
|
|
$
|
4
|
|
China
|
|
|
-
|
|
|
|
-
|
|
Total current provision
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
USA
|
|
|
-
|
|
|
|
-
|
|
China
|
|
|
282
|
|
|
|
(149
|
)
|
Total Deferred provision (benefit)
|
|
|
282
|
|
|
|
(149
|
)
|
Total provision for income taxes
|
|
$
|
282
|
|
|
$
|
(145
|
)
|
The tax effect of temporary differences from USA and China that give rise to significant portions of the deferred tax assets at December 31, 2012 and 2011 is presented below:
|
|
2012
|
|
|
2011
|
|
Net operating loss carryovers
|
|
|
|
|
|
|
- USA
|
|
$
|
59,588
|
|
|
$
|
56,768
|
|
- China
|
|
|
6,837
|
|
|
|
2,982
|
|
Total net operating loss carryovers
|
|
|
66,425
|
|
|
|
59,750
|
|
Timing differences
|
|
|
|
|
|
|
|
|
- USA
|
|
|
(16,396
|
)
|
|
|
(15,029
|
)
|
- China
|
|
|
1,492
|
|
|
|
523
|
|
Total gross deferred tax assets
|
|
|
51,521
|
|
|
|
45,244
|
|
Valuation allowance
|
|
|
(51,280
|
)
|
|
|
(44,721
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
241
|
|
|
|
523
|
|
Less: current portion
|
|
|
-
|
|
|
|
331
|
|
Non-current portion
|
|
$
|
241
|
|
|
$
|
192
|
|
For USA
The provision for income taxes for all periods presented in the consolidated statements of operations represents minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following:
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Computed expected tax expense
|
|
$
|
(4,187
|
)
|
|
$
|
(12,353
|
)
|
|
|
|
|
|
|
|
|
|
Losses and credits for which no benefits have been recognized
|
|
|
2,820
|
|
|
|
9,969
|
|
Stock grants and warrants not deductible for income tax purposes
|
|
|
760
|
|
|
|
1,340
|
|
Other amortization and impairments
|
|
|
607
|
|
|
|
1,044
|
|
State tax expense, net of federal income tax benefit
|
|
|
-
|
|
|
|
4
|
|
|
|
$
|
-
|
|
|
$
|
4
|
|
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2012 and 2011 is presented below:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net operating loss carryovers
|
|
$
|
59,588
|
|
|
$
|
56,768
|
|
Permanent differences, including stock
|
|
|
|
|
|
|
|
|
based compensation, amortization and bad debts
|
|
|
(6,248
|
)
|
|
|
(5,489
|
)
|
Fixed assets, due to differences in depreciation
|
|
|
(288
|
)
|
|
|
(288
|
)
|
Non qualified options and warrants
|
|
|
(6,728
|
)
|
|
|
(6,728
|
)
|
Reserves on investments
|
|
|
(1,877
|
)
|
|
|
(1,673
|
)
|
Intangible assets , due to impairment
|
|
|
(99
|
)
|
|
|
(99
|
)
|
R&D credit
|
|
|
138
|
|
|
|
138
|
|
Other differences
|
|
|
(1,294
|
)
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
$
|
43,192
|
|
|
$
|
41,739
|
|
Valuation allowance
|
|
|
(43,192
|
)
|
|
|
(41,739
|
)
|
Net deferred tax assets
|
|
$
|
--
|
|
|
$
|
--
|
|
The net change in the valuation allowance for the year ended December 31, 2012 was an increase of $1.5 million. Because there is uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established.
As of December 31, 2012, the Company had federal tax net operating loss carry forwards of approximately $175 million, which will begin to expire in the years 2013 through 2028. The Company also has federal research and development carry forwards as of December 31, 2012 of approximately $138,000, which will begin to expire in the years 2013 through 2028.
The State net operating loss carry forwards were approximately $103 million as of December 31, 2012. The State net operating loss carry forwards will begin to expire in the years 2013 through 2019.
The Company's ability to utilize its net operating loss and research and development tax credit carry forwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code. Federal and State tax laws impose substantial restrictions on the utilization of net operating loss and credit carry forwards in the event of an "ownership change" for tax purposes as defined in the Internal Revenue Code section 382.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized for the years ended December 31, 2012 and 2011.
For CHINA
Under the relevant regulations of the Corporate Income Tax Law in China, the corporate income tax rate applicable to Jonway is 25%.
|
|
2012
|
|
|
2011
|
|
Computed expected tax expense
|
|
$
|
(4,694
|
)
|
|
$
|
(2,465
|
)
|
Loss for which no benefits have been recognized
|
|
|
3,856
|
|
|
|
2,159
|
|
Change in valuation allowance for temporary differences
|
|
|
1,250
|
|
|
|
|
|
Others (a)
|
|
|
(130
|
)
|
|
|
157
|
|
Income tax expense (benefit)
|
|
$
|
282
|
|
|
$
|
(149
|
)
|
(a) Other represents expenses incurred by the Company that are not deductible for PRC income taxes.
The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets at December 31, 2012 and 2011 is presented below (in thousand):
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Property and equipment,
|
|
|
|
|
|
|
due to differences in depreciation
|
|
$
|
881
|
|
|
$
|
192
|
|
Inventories, due to impairment
|
|
|
369
|
|
|
|
57
|
|
Accrued liabilities
|
|
|
241
|
|
|
|
274
|
|
Net operating loss Carry forward
|
|
|
6,838
|
|
|
|
2,982
|
|
Total deferred tax assets, gross
|
|
|
8,329
|
|
|
|
3,505
|
|
Valuation allowance
|
|
|
(8,088
|
)
|
|
|
(2,982
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
241
|
|
|
|
523
|
|
Less: current portion
|
|
|
-
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
241
|
|
|
$
|
192
|
|
NOTE 10 – EQUITY COMPENSATION AND EMPLOYEE BENEFIT PLANS
Stock Options
The Company has five Equity Compensation Plans: The 2008 Equity Compensation Plan (the “2008 Plan”), the 2007 Consultant Stock Plan (the “2007 Plan”), the 2006 Incentive Stock Plan (the “2006 Plan”), the 2004 Consultant Stock Plan, and the 2002 Incentive Stock Plan (the “2002 Plan”). These plans provide for the grant of incentive stock options and non-statutory options to employees, directors and consultants to the Company. The 2004 Consultant Stock Plan covers 1 million shares, none of which have been granted. The Company granted incentive stock options and non-statutory options at exercise price per share equal to the fair market value per of the common stock on the date of grant. The vesting term is generally, three years, and exercise provisions were determined by the Board of Directors, with a maximum life from five to ten years.
Option activity under the 2008 Plan, 2007 Plan, 2006 Plan and 2002 Plan are as follows (in thousands):
|
|
2008 Plan
|
|
|
2007 Plan
|
|
|
2006 Plan
|
|
|
2002 Plan
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2011
|
|
|
19,294
|
|
|
$
|
0.37
|
|
|
|
1,500
|
|
|
$
|
0.51
|
|
|
|
3,290
|
|
|
$
|
0.72
|
|
|
|
2,694
|
|
|
$
|
0.92
|
|
Granted
|
|
|
6,985
|
|
|
|
0.47
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
|
|
Exercised
|
|
|
(1,801
|
)
|
|
|
0.27
|
|
|
|
(116
|
)
|
|
|
0.41
|
|
|
|
(3
|
)
|
|
|
0.94
|
|
|
|
(100
|
)
|
|
|
0.25
|
|
Forfeited
|
|
|
(790
|
)
|
|
|
0.33
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,295
|
)
|
|
|
0.44
|
|
|
|
(80
|
)
|
|
|
1.16
|
|
Outstanding at December 31, 2011
|
|
|
23,688
|
|
|
$
|
0.41
|
|
|
|
1,384
|
|
|
$
|
0.51
|
|
|
|
1,992
|
|
|
$
|
0.90
|
|
|
|
2,514
|
|
|
$
|
1.04
|
|
Granted
|
|
|
1,780
|
|
|
|
0.19
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Forfeited
|
|
|
(616
|
)
|
|
|
0.10
|
|
|
|
--
|
|
|
|
|
|
|
|
(1,002
|
)
|
|
|
0.90
|
|
|
|
(1,049
|
)
|
|
$
|
1.04
|
|
Outstanding at December 31, 2012
|
|
|
24,852
|
|
|
$
|
0.41
|
|
|
|
1,384
|
|
|
$
|
0.51
|
|
|
|
990
|
|
|
$
|
0.89
|
|
|
|
1,465
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the year ended December 31, 2012 and 2011 was $0.19 and $0.47.
The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
2011
|
2012
|
Dividends
|
None
|
None
|
Expected
volatility
|
104.6 to
105.4
|
146.54 and 127.78
|
Risk free interest
rate
|
1.14% to
2.01%
|
0.79% to 1.11%
|
Expected life
|
5.0 to 6.06 years
|
6.06 years
|
The following table provides information about options under the 2008 Plan, 2007 Plan, 2006 Plan and 2002 Plan that are outstanding and exercisable at December 31, 2012. (In thousands):
Plan
|
|
Exercise Price
Range
|
|
|
Options
Outstanding at
December 31,
2012
|
|
|
Options
exercisable at
December 31,
2012
|
|
2008
|
|
$
|
0.10 - $1.50
|
|
|
|
24,852
|
|
|
|
19,266
|
|
2007
|
|
$
|
0.25 - $1.15
|
|
|
|
1,384
|
|
|
|
1,384
|
|
2006
|
|
$
|
0.81 - $0.94
|
|
|
|
990
|
|
|
|
990
|
|
2002
|
|
$
|
0.25 - $1.32
|
|
|
|
1,465
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
28,691
|
|
|
|
23,104
|
|
At December 31, 2012, the Company has outstanding stock options for employees, consultants and board members to purchase 23.1 million shares at exercise prices ranging from $0.25 to $1.50.
401K Retirement Savings Plan
The Company has an Employees’ Retirement Savings Plan (“the 401K Plan”). Employees are eligible to participate in the 401(K) Plan if they have been continuously employed for three months or more. The Company may match each employee’s 401(K) elective deferrals in common stock. At December 31, 2012, the Company has not matched any of the employee’s elective deferrals in common stock.
NOTE 11 – LOSS PER SHARE
Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including convertible preferred stock, stock options and warrants, in the weighted average number of common shares outstanding for the period, if dilutive. The numerators and denominators used in the computations of basic and dilutive earnings per share are presented in the following table:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net loss used in computing basic earnings per share
|
|
$
|
(21,825)
|
|
|
$
|
(40,797)
|
|
Basic and diluted earnings per share
|
|
$
|
(0.07)
|
|
|
$
|
(0.19)
|
|
Basic weighted average shares outstanding
|
|
|
299,647
|
|
|
|
213,935
|
|
|
|
|
|
|
|
|
Potential common shares outstanding as of December 31:
|
|
|
|
|
|
|
|
|
Warrants outstanding
|
|
|
38,155
|
|
|
|
75,233
|
|
Options outstanding
|
|
|
28,691
|
|
|
|
29,578
|
|
For the years ended December 31, 2012 and 2011, 28.7 million and 29.6 million options, and 38.2 million and 75.2 million warrants, respectively were not included in the diluted earnings per share because the average stock price was lower than the strike price of these options and warrants.
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of non-cash investing and financing information is as follows (in thousands):
|
|
December 31, ,
|
|
|
|
2012
|
|
|
2011
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
Common stock issued for 50% interest in PE
|
|
$
|
-
|
|
|
$
|
896
|
|
Value of ZAP Shares Issued in the acquisition of Jonway
|
|
$
|
-
|
|
|
$
|
1,720
|
|
Option to purchase remaining 49%
|
|
$
|
-
|
|
|
$
|
2,385
|
|
Stock issued to affiliate for R&D expenses
|
|
$
|
-
|
|
|
$
|
15,400
|
|
Settlement of derivative Liability
|
|
$
|
-
|
|
|
$
|
5,888
|
|
Note discount for convertible senior debt
|
|
$
|
2,172
|
|
|
$
|
-
|
|
Common stock issued for debt settlement
|
|
$
|
204
|
|
|
$
|
-
|
|
NOTE 13 – SEGMENT REPORTING
Operating Segments
Financial Accounting Standards Board (“FASB”) ASC Topic 280,
Segment Reporting
(“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
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. Jonway and ZAP are also jointly developing various electric vehicles anticipated to enter into the electric vehicle market during 2012. 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 2012. 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 Co-Chief Executive Officers and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to allocate resources and in assessing performance. The performance of each segment is measured based on its profit or loss from operations before income taxes.
The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands):
Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
Jonway’s results of operations have been included since the acquisition date of January 21, 2011.
Individual company’s results are listed below:
|
|
Jonway
Auto
|
|
|
ZAP
|
|
|
Voltage
Vehicles
Car Lot
|
|
|
Portable
Energy
|
|
|
ZAP
Stores
|
|
|
Advanced
Technology
Vehicles
|
|
|
ZAP Hong
Kong
|
|
|
Totals
|
|
For the year ended
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
49,265
|
|
|
|
723
|
|
|
|
142
|
|
|
|
--
|
|
|
|
--
|
|
|
|
151
|
|
|
|
-
|
|
|
|
50,281
|
|
Gross profit (loss)
|
|
|
1,071
|
|
|
|
285
|
|
|
|
(230
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
499
|
|
|
|
-
|
|
|
|
1,625
|
|
Depreciation, amortization
|
|
|
5,062
|
|
|
|
2,770
|
|
|
|
6
|
|
|
|
--
|
|
|
|
--
|
|
|
|
26
|
|
|
|
-
|
|
|
|
7,864
|
|
Net loss
|
|
|
(19,057
|
)
|
|
|
(9,608
|
)
|
|
|
(1,859
|
)
|
|
|
--
|
|
|
|
--
|
|
|
|
(631
|
)
|
|
|
(8
|
)
|
|
|
(31,163
|
)
|
Total assets
|
|
|
91,396
|
|
|
|
23,979
|
|
|
|
235
|
|
|
|
--
|
|
|
|
--
|
|
|
|
354
|
|
|
|
|
|
|
|
115,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
54,299
|
|
|
|
622
|
|
|
|
876
|
|
|
|
27
|
|
|
|
3
|
|
|
|
410
|
|
|
|
|
|
|
|
56,237
|
|
Gross profit (loss)
|
|
|
5,023
|
|
|
|
118
|
|
|
|
111
|
|
|
|
(36
|
)
|
|
|
(11
|
)
|
|
|
(745
|
)
|
|
|
|
|
|
|
4,460
|
|
Depreciation, amortization
|
|
|
5,091
|
|
|
|
2,217
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
|
|
|
|
7,357
|
|
Net loss
|
|
|
(9,090
|
)
|
|
|
(33,697
|
)
|
|
|
(220
|
)
|
|
|
(52
|
)
|
|
|
(11
|
)
|
|
|
(2,456
|
)
|
|
|
|
|
|
|
(45,422
|
)
|
Total assets
|
|
|
93,011
|
|
|
|
27,674
|
|
|
|
493
|
|
|
|
45
|
|
|
|
-
|
|
|
|
|
|
|
|
265
|
|
|
|
121,488
|
|
Customer information
Approximately 97.98% or $49.3 million of our 2012 revenues are from sales in China. Jonway Auto distributes its products to an established network of over 100 factory level dealers in China with one customer contributing to more than 10% of our consolidated revenue
Supplier information
For the year ended 2012 and 2011, approximately 99% or $48.2 million and 89% or $45.8 million of the consolidated cost of goods sold were purchased in China. For the year ended December 31, 2012 and 2011, Haerbin Dongan Auto, Engine Manufacturing Co., Ltd., as the sole supplier of engine to Jonway, contributed more than 10% of our cost of goods sold.
NOTE- 14 SHAREHOLDERS’ EQUITY
Common stock
2012 ISSUANCES
ZAP issued
1,279,354 shares of common stock valued at $231,178 in exchange for consulting services. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 949,269 shares of common stock valued at $179,530 for employee compensation. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 2,109,689 shares of common stock valued at $203,957 to settle legal claims against the company. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
ZAP issued 363,637 shares of common stock valued at $40,000 to a departing board member. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with Zap and the fact that no public offering was involved.
Shares acquired through exercises of warrants for all Series other than Series B, C, D and K are restricted as to sale. However, the warrants may be assigned, sold, or transferred by the holder without restriction.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series.
Total warrants outstanding at December 31, 2012 are summarized as follows (in thousands):
|
|
Number of
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Dates
|
|
Series D-2-Restricted
|
|
|
55
|
|
|
|
1.09
|
|
|
|
7-1-12
|
|
$0.50 Warrants-Restricted
|
|
|
38,000
|
|
|
|
0.50
|
|
|
|
6-1-14
|
|
$0.70 Warrants-Unrestricted
|
|
|
100
|
|
|
|
0.70
|
|
|
|
6-2-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,155
|
|
|
|
|
|
|
|
|
|
2011 ISSUANCES
STOCK ISSUED FOR CASH. During 2011, the Company received $4.2 million in cash through the issuance of 8.2 million shares of common stock through private placements and exercise of employee stock options.
STOCK ISSUED FOR EXERCISE OF WARRANTS. In the first quarter of 2011, the Company issued 4.4 million shares of common stock valued at $5.9 million for the exercise of warrants.
STOCK ISSUED AS PAYMENT FOR DEVELOPMENT OF VEHICLES. In December, 2011
the Company issued 70 million shares of common stock valued at $15.4 million as payment to Jonway Group for the development and production of the Shuttle Van and Alias. See Note 15 Related parties
STOCK ISSUED FOR ACQUISITION. In December, 2011, the Company issued 4 million shares of common stock valued at $1.72 million for the final stock portion payment for the 51% acquisition of Jonway Automobile which was completed in January, 2011.
STOCK ISSUED FOR SETTLEMENT OF DEBT. In January 2011, the Company issued 800,000
shares of common stock valued at $896,000 to Al Yousuf as payment to settle outstanding debt.
STOCK ISSUED FOR SERVICES. In 2011, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the fair market value of the stock on the date of grant. During 2011, the Company issued grants for 569,000 shares as consideration under agreements for consulting and related services, and 174,000 shares were issued for employee compensation.
Shares acquired through exercises of warrants for all Series other than Series B, C, D and K are restricted as to sale. However, the warrants may be assigned, sold, or transferred by the holder without restriction.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series.
Total warrants outstanding at December 31, 2011 are summarized as follows (in thousands):
|
|
Number of
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Dates
|
|
Series B-Unrestricted
|
|
|
2,693
|
|
|
|
1.09
|
|
|
|
7-1-12
|
|
Series B-2-Restricted
|
|
|
1,019
|
|
|
|
1.09
|
|
|
|
7-1-12
|
|
Series C-Unrestricted
|
|
|
5,388
|
|
|
|
1.08
|
|
|
various
|
|
Series C-2-Restricted
|
|
|
1,239
|
|
|
|
1.09
|
|
|
|
10-9-12
|
|
Series D-Unrestricted
|
|
|
6,705
|
|
|
|
1.08
|
|
|
|
7-1-12
|
|
Series D-2-Restricted
|
|
|
1,294
|
|
|
|
1.09
|
|
|
various
|
|
Series K-Unrestricted
|
|
|
4,356
|
|
|
|
0.91
|
|
|
|
7-1-12
|
|
Series K-2-Restricted
|
|
|
4,106
|
|
|
|
0.91
|
|
|
|
7-1-12
|
|
$0.50 Warrants-Restricted
|
|
|
38,000
|
|
|
|
0.50
|
|
|
various
|
|
$0.70 Warrants-Unrestricted
|
|
|
100
|
|
|
|
0.70
|
|
|
|
6-2-13
|
|
$0.91 Warrants-Unrestricted
|
|
|
2,470
|
|
|
|
0.91
|
|
|
various
|
|
$1.20 Warrants-Restricted
|
|
|
6,565
|
|
|
|
1.20
|
|
|
various
|
|
$1.36 Warrants Restricted
|
|
|
935
|
|
|
|
1.36
|
|
|
various
|
|
$2.27 Warrants Restricted
|
|
|
363
|
|
|
|
2.27
|
|
|
|
2-15-12
|
|
|
|
|
75,233
|
|
|
|
|
|
|
|
|
|
NOTE 15 – RELATED PARTIES
Due from (to) related parties
Amount due from related parties are principally for advances in the normal course of business for parts and suppliers used in manufacturing
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Sanmen Branch of Zhejiang UFO
Automobile Manufacturing Co., Ltd
|
|
$
|
3,093
|
|
|
$
|
978
|
|
Jonway Group
|
|
|
-
|
|
|
|
159
|
|
Total
|
|
$
|
3,093
|
|
|
$
|
1,137
|
|
Amount due to related parties are follows:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
Jonway Group
|
|
$
|
122
|
|
|
$
|
2,104
|
|
Jonway Motor Cycle
|
|
|
181
|
|
|
|
18
|
|
Taizhou Huadu
|
|
|
431
|
|
|
|
-
|
|
Shanghai Zapple
|
|
|
36
|
|
|
|
-
|
|
Hangzhou Zapple
|
|
|
147
|
|
|
|
-
|
|
Betterworld
|
|
|
152
|
|
|
|
-
|
|
Cathaya Capital
|
|
|
90
|
|
|
|
-
|
|
Total
|
|
$
|
1,159
|
|
|
$
|
2,122
|
|
Advance payments to Jonway Group
|
|
$
|
--
|
|
|
$
|
11,616
|
|
Issuance of stock to Jonway Group for the Development and Production of Vehicles
On December 11, 2011, ZAP entered into a Payment Agreement with Jonway Group pursuant to which ZAP paid Jonway Group for the already completed interior and exterior design, R&D activities, testing and trial production and molding equipments etc. of the mini-van product platform, and the Alias interior and exterior design and molding, which is underway. Pursuant to the Payment Agreement, ZAP agreed to grant Jonway Group 70 million shares of ZAP’s Common Stock valued at $15.4 million. All intellectual property rights related to the work performed by Jonway Group for the mini-van and Alias shall be owned by ZAP. During the year ended December 31, 2011, $3.78 million of the payment of $15.4 million was recognized as R&D expense in ZAP, with the remaining $11.6 million, which was recorded as an advance payment to Jonway Group, has been reclassified to machinery and equipment during the year ended December 31, 2012.
Promissory notes and Down Payment Convertible Note from Jonway Group
On December 11, 2011 Jonway entered into a Promissory Note with Jonway Group pursuant to which Jonway borrowed $3 million to be repaid on demand. 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. All unpaid principal, together with any then unpaid and accrued interest, are due and payable within ten (10) calendar days following demand by Jonway Group. Payment shall be made in the form of cash. As of December 31, 2011, $1.6 million had been advanced to Jonway Auto under the Promissory Note arrangement and was repaid in January 2012.
On December 11, 2011, ZAP entered into a Down Payment Convertible Note agreement with Jonway Group pursuant to which ZAP may borrow $3 million for the production of seventy-five Alias electric vehicles to be delivered and sold in 2012. The unpaid principal amount of the note bears interest at a rate per annum equal to 8%, calculated on the basis of a 365 day year and the actual number of days lapsed. Upon the completion of selling seventy-five Alias vehicles, ZAP will repay the unpaid principal, together with any then unpaid and accrued interest, on or before December 31, 2012. Repayment shall be made at the option of Jonway Group in the form of either cash or ZAP’s Common Stock priced as of the date the principal was deposited into Jonway’s bank account on behalf of ZAP. As of December 31, 2012, no advance has been made to ZAP from Jonway Group.
Transactions with Jonway Group
Jonway Group is considered as a related party as the Wang Family, one of the shareholders of the Company, has controlling interests in Jonway Group. Jonway Group supplies some of plastics spare parts to Jonway and gave guarantees on Jonway short term bank facilities from China-based banks. Jonway made such purchase from Jonway Group for a total of $1.18 million and $1.36 million for the years ended December 31, 2012 and 2011, respectively.
Rental Agreements
The Company rented office space, land and warehouse space from its former CEO and major shareholder. Mr. Steven Schneider. These properties were used to operate a car outlet and to store inventory. Rental expense was approximately $54,000 for the year ended December 31, 2011. The company discontinued paying rent in August, 2011. Unpaid amounts have been accrued for on ZAP’s books.
Management Agreement with Cathaya Capital, L.P.
On August 6, 2009, Cathaya purchased 20 million shares of the Company’s Common Stock. On August 6, 2009, the Company entered into a Secured Convertible Promissory Note with Cathaya for aggregate principal advances of up to $10 million. In addition, the Company issued one warrant to Cathaya exercisable for shares of the Company’s Common Stock.
On July 9, 2010, Cathaya entered into a securities purchase agreement, pursuant to which, Cathaya purchased 44 million shares of the Company’s Common Stock at a price of $0.25 per share for an aggregate purchase price of $11 million.
Priscilla Lu, the chairman of the board of directors of ZAP, is also a general partner of Cathaya.
On November 10, 2010, ZAP entered into a Management Agreement with Cathaya, for the payment of $2.5 million in exchange for Cathaya’s prior and ongoing transaction advisory, financial and management consulting services for the year ended December 31, 2010. Pursuant to the agreement, principals of Cathaya will be available to serve on the Board and will devote such time and attention to the Company’s affairs as reasonably necessary to accomplish the purposes of the agreement. The agreement is renewable yearly but fees paid in subsequent periods are subject to renegotiation based on the fair market values of services rendered, and the management fee was payable in cash or in common stock of ZAP at $0.50 per share. Five million shares were issued to Cathaya Capital L.P. in payment of this fee for the year ended December 31, 2010. As of December 31, 2011, ZAP has accrued
$
350,000 for management fees due to Cathaya Capital L.P. The fee for 2011 was an agreed upon amount between Cathaya and the Company. The management agreement was terminated effective December 31, 2011.
Jonway Agreement with Zhejiang UFO
Based on a contract by and among the Zhejiang UFO, Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006.
According to the contract, Jonway shall pay Zhejiang UFO a variable contractual fee which is calculated based on the number of SUVs that Jonway assembles in the Sanmen Branch every year, at the following rates:
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. December 2011, Zhejiang UFO, Jonway Group and Jonway amended the above contract, and agreed that the accumulated payable to Zhejiang UFO for the above variable contractual fees as of December 31, 2011 were not repaid. From 2012 onwards, Jonway still has obligation to pay such fees based on the number of SUVs assembled by Zhejiang UFO. During 2012, $807,000 was recorded as assembling fees. Also during 2012, Jonway sold SUV at the amount of $415,000 and spare parts at the amount of $3,516,000 to Zhejiang UFO.
Other Related Party Transactions
During 2012, Jonway purchased spare parts at the amount of $154,000 and $1,173,000 from Jonway Motor Cycle and Taizhou Huadu, respectively.
NOTE 16 – LITIGATION
1) On January 11, 2013, Cathaya Capital, L.P., a ZAP shareholder (“Cathaya”), and Priscilla Lu, Chairman of the ZAP Board of Directors (“Lu”) (collectively “Plaintiffs”), filed a lawsuit in the Superior Court of California, County of Los Angeles, styled
Cathaya Capital, L.P. et al. v. ZAP, et al.
, Case No. BC499106 (the “Cathaya Lawsuit”). By the Cathaya Lawsuit, Plaintiffs, derivatively on behalf of the nominally-named defendant ZAP, asserted claims for breach of fiduciary duty and conversion against the following three members of the ZAP Board of Directors: Mark Abdou, Steven Schneider and Wang Gang a/k/a Alex Wang (the “Minority Board Member Defendants”). In addition, Plaintiffs, derivatively on ZAP’s behalf, sought declaratory and injunctive relief against the Minority Board Member Defendants for their alleged tortious misconduct and breaches of fiduciary duty. Plaintiffs also asserted causes of action on their own behalf pursuant to California Corporations Code sections 304 and 709, for a judgment as to the rightful composition of the Board and to remove the Minority Board Member Defendants from the Board.
On February 19, 2013, the Minority Board Member Defendants filed a Cross-Complaint in the Cathaya Lawsuit (the “Cross-Complaint”). In the Cross-Complaint, the Minority Board Member Defendants joined in bringing a cross-claim for a determination as to the rightful composition of the Board pursuant to California Corporations Code section 709. (On March 14, 2013, Wang Gang a/k/a Alex Wang filed a Request for Dismissal withdrawing as a cross-complainant.) The Cross-Complaint also 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 thereunder; (4) Mark Abdou’s claim for “breach of the covenant of good faith and fair dealing” against ZAP based on the alleged breaches of the Abdou Director Agreement; and (5) a claim against Lu for tortious interference with contractual relations (although the Cross-Complaint is unclear as to who is bringing the tortious interference claim against Lu and the factual basis for the claim). The Cross-Complaint seeks an unspecified amount of damages and other consideration.
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’s response to the Cross-Complaint is not yet due. ZAP intends to vigorously defend the Cross-Complaint.
The Court has already heard and determined the parties’ respective claims seeking a determination as to the proper composition of the ZAP Board of Directors. On February 2, 2013, the Court ruled on Plaintiffs’ application seeking such determination pursuant to California Corporations Code section 709, ruling that the purported actions taken by the Minority Board Member Defendants at a purported December 31, 2012 meeting of the ZAP Board of Directors, including the appointment of Luo Hua Lian and Juan Gao to fill alleged vacancies on the Board, were null and void. On March 1, 2013, the Court denied the Minority Board Member Defendants’ application pursuant to California Corporations Code section 709, which had sought an order declaring that Co Nguyen and Aileen Kao were not validly appointed to the ZAP Board of Directors in October 2012.
As a result of the Court’s rulings on the parties’ respective applications under California Corporations Code section 709, the Board is comprised of the directors that were members of the Board prior to the purported December 31, 2012 Board meeting, except for the previously announced resignation of Alex Wang at a meeting of the Board held on January 20, 2013, and the appointment of Wang Huai Yi as a member of the Board at the same meeting to fill the vacancy created by Alex Wang’s resignation.
There is no trial date set regarding the parties’ remaining claims.
2. A derivative lawsuit filed by Cathaya Capital against Steve Schneider, Mark Abdou, and Alex Wang is awaiting court hearing date to be announced and is being taken over by the Company, which is currently pursuing Steve Schneider to return inventory and assets that were removed from the Company’s warehouse, as well as cash that was redirected to a new account.
3.
Integrity Automotive, LLC and Randall Waldman v. ZAP Motor Manufacturing,
Inc., et al.,
Complaint filed on March 2, 2010, Case No. 10 CI-01383 in the Jefferson Circuit Court, Division Ten, of the Commonwealth of Kentucky. The Complaint alleges causes of action for civil conspiracy, breach of fiduciary duties, conversion, and breach of contract and that the Defendants conspired against plaintiffs in connection with certain business transactions in Kentucky. Although no specific monetary demand is included, the Complaint seeks punitive damages, actual damages, and interest. All of the defendants answered and cross-complained on March 29, 2010, and discovery was served on plaintiffs requiring responses in early May 2010. The Company intends to defend itself vigorously in this matter and has recently learned that plaintiff Randall Waldman was arrested in Kentucky in late April, 2010, and charged with felonious criminal conduct. The Court indicated an intent to dismiss the case for failure to prosecute in early 2012 but the plaintiffs retained new counsel and successfully opposed the dismissal. There has been no activity in the case that we are aware of in the past several months.
4 .
Rainbow Cycle
&
Marine
&
Siloam Springs Cycle, v. Voltage Vehicles,
Arkansas Motor Vehicle Commission, Case No. 10-008. On April 1, 2010, Rainbow Cycle
&
Marine
&
Siloam Spring Cycle (the "Dealer"), an automobile dealer in the State of Arkansas, submitted a
complaint to the Arkansas Motor Vehicle Commission (the "Commission") regarding 6 Xebra
vehicles purchased from the Company in 2008, each at the price of $8,750.00. The Dealer
requested that the Commission order the Company to refund all monies paid by the Dealer to the
Company for the vehicles, to pay all transportation costs, and in addition to assess penalties and
interest charges against the Company in an unspecified amount. The Commission issued a
Notice of Hearing on August 11, 2010, setting a hearing for September 15, 2010 on the Dealer's
Complaint. The Company responded with a Motion to Dismiss, which the Commission set for
hearing on December 15, 2010 and at the same time continued the hearing on the Dealer's
Complaint to the same date. After the hearing, the Commission ruled that the Company was required to refund the Dealer's purchase price for the vehicles and to pay for transportation of the vehicles off of the Dealer's premises. In response, the Company's local counsel filed a Petition for Judicial Review on March 1, 201 1 in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. On November 11, 201 1, the Circuit Court upheld the decision of the Commission, and the Company filed a notice of Appeal on December 16, 201 1, and the Arkansas Supreme Court reversed and remanded to the Commission for further proceedings on October 11, 2012. There has been no subsequent activity in this matter since that time of which we are aware. In the event of a final, unfavorable outcome, the potential loss to the Company associated with the refund would be approximately $57,000.
5 .
Long v. ZAP, et al.,
Case No. SW-250380, filed in the Superior Court of the State of California, County of Sonoma on September 20, 201 1. The Complaint alleges causes of action for injunctive relief and damages for breach of contract, breach of the implied covenant of good faith and fair dealing, failure to pay wages, wrongful termination, fraud, defamation, and illegal recording in violation of privacy rights. Included as defendants are ZAP, Jonway, Steve Schneider, William Hartman, and Priscilla Lu. The Company entered into a settlement agreement with the plaintiff in early September 2012 and made an installment payment on September 21, 2012. The case was settled in December 2012.
6 . Alvarez Lincoln
-
Mercury, Inc. vs. ZAP, Voltage Vehicles, Luizhou Wuling
Motors Co., Ltd., Pricilla Lu, and Steve Schneider, Complaint filed on May 30, 2012, in the Superior Court of the State of California, County of Riverside, Case No. RIC 1208152. The Complaint alleges causes of action for breach of written contract, money had and received, fraud by intentional misrepresentation, fraud by concealment, and fraud by negligent misrepresentation. The allegations contained in the Complaint include a claim that plaintiff believed it was purchasing 2010 model year vehicles but that in fact the vehicles were model year 2009. No trial date has as yet been set, and the parties continue to negotiate a possible resolution. The Company intends to vigorously defend itself in this matter if plaintiff refuses to enter into a reasonable settlement.
7. . Railroad Square vs. ZAP, Case No. SCV-251968 filed July, 2012, in the
California Superior Court, County of Sonoma, alleging unlawful detainer and seeking possession of ZAP'S leased premises, along with damages. The case was settled in early August, 2012.
8. Railroad Square vs. ZAP and Priscilla Lu, Case No. SCV-252102, filed on
August 8, 2012, in the Superior Court of California, County of Sonoma. The Complaint alleges causes of action for breach of written contract, negligence, breach of the implied covenant of good faith and fair dealing, intentional misrepresentation, and negligent misrepresentation. The Complaint contains allegations that ZAP misrepresented its intentions in connection with property leased from Railroad Square in the City of Santa Rosa, California. The case was settled on November 14,2012.
9. Susan Sher v. ZAP, Case No. SCV-253158, filed on February 1, 2013, in the Superior Court of California, County of Sonoma. The Complaint alleges causes of action for breach of implied warranty and reimbursement under the California "Lemon Law" statutes. The Complaint contains allegations that ZAP failed to repair a 2008 Xebra purchased by plaintiff in violation of the statutes and an implied warranty of merchantability. The parties are discussing settlement, but the Company is prepared to defend itself vigorously if plaintiff refuses to enter into a reasonable settlement.
10. The Company was in litigation over fees owed to a professional legal service company. A settlement was reached in March 2013.
11.
The Company was in binding arbitration with a law firm over professional services rendered. A settlement was reached on April 8, 2013
.
12. A letter was received in May 2012 from a shareholder regarding various prior transactions of the Company which the Company is working to address and clarify. A tolling agreement was reached between the Company and shareholder on October 22, 2012 whereas the company, through its legal council shall provide a written summary of the actions taken during the preceding month with respect to the matters regarding the prior transactions in question by the shareholder. These transactions include, but are not limited to, a) ZAP, Jonway Group, Jonway Auto and Cathaya Capital shall each in all respects comply with their executory obligations with respect to the continued funding of ZAP, b) resolve the litigation regarding the former contracted employee, c) use reasonable efforts to defend, compromise and/or settle any pending and future litigations and ZAP shall use all reasonable efforts to cause all officers, directors and such other individuals who are or were employees, agents or representatives of ZAP to fully cooperate in the defense of future arbitrations or litigations. This agreement is binding through December 31, 2015.
Other Regulatory Compliance Matters
ZAP has filed with the National Highway Transportation Safety Agency (NHTSA) that they are 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 has 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 was ordered to respond to NHTSA and to take certain other actions by November 26, 2012. ZAP is in on-going discussions with NHTSA on this matter.
The Company has accrued for estimated expenses related to above claims.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
Employment agreements
On June 18, 2012, the Company entered into an employment agreement with Charles Schillings as its Chief Operating Officer. The agreement provides for an annual salary of $144,000 with a three month initial term with an automatic extension of nine months. After one year, annual renewals will continue unless the agreement is terminated by either party. On August 8, 2012, Mr. Schillings was appointed as the Co-Chief Executive Officer (Co-CEO) to lead U.S. and International operations alongside Alex Wang, the Co-CEO for ZAP Jonway's China division.
Charles Schillings, a veteran technology executive was appointed as Co-Chief Executive Officer to lead U.S. and International operations.
Mr. Schillings has previous operating experience in telecommunications and semiconductor technologies as former CEO of Strasbaugh. Schillings’ background is financial and he has had extensive sales and marketing experience selling to large Asian technology companies. At ZAP, he will oversee U.S. operations and support ZAP and Jonway Auto's international partnerships as well as support for the sales and marketing activities.
Mr. Schillings currently serves on the Board of Directors for Strasbaugh, where he was President & CEO from 2005 to 2010. He also held executive management positions at Strasbaugh subsidiary R. H. Strasbaugh between 1994 and 2001, including Marketing, Sales, President and CEO. He led the business development and sales in Japan and other parts of Asia, working with companies like Fujitsu, Hyundai, Samsung, NEC and others, increasing revenues from a start-up to more than US$40 million annual sales.
Schillings' prior experience includes mortgage securities, running a non-profit organization as well as due diligence analysis at a securities broker-dealer. He holds an M.S.B.A. in International Business from San Francisco State University and a B.S. in Business Finance with an Economics Minor from San Diego State University.
Changes to the Board of Directors
Georges-Penalver and Patrick Sevian resigned from the Board of Directors of ZAP effective October 18, 2012. for personal reasons. Prior to their resignation, the board approved their replacements.
The board approved the appointment of Co Nguyen as the director replacing Georges Penalver.
Mr. Nguyen serves as Chief Financial Officer of Cathaya Capital. He has in-depth experience in corporate finance and corporate management. Mr. Nguyen was previously Corporate Finance Director of Jaccar Holdings Vietnam. Before joining Jaccar Holdings in 2008, he was Deputy Director of Corporate Strategy and Finance Department of Prudential Life Insurance (Vietnam). Mr. Nguyen also has spent 7 years with FedEx in France as Senior Financial Advisor and 3-year professional experience with Ernst & Young as an auditor. Mr. Nguyen received his Master in Auditing and Consulting from “Ecole Supérieure de commerce de Paris”, France and MBA in International Business in 2000.
The Board approved the appointment of Aileen Kao as the director replacing Patrick Sevian.
Aileen Kao is Deputy General Manager at ZAP (Hangzhou) Electric Vehicle Co., Ltd, a joint venture company with a focus on green transportation technology. Under her leadership, ZAP (Hangzhou) has built a great technical savvy team to provide know-how solutions to meet China’s emerging and dynamic new energy automobile industry. Ms. Kao came to ZAP with broad experience in several established companies including BASF, Eastman Kodak, Bell Atlantic, Cisco and interWAVE Communications, all of which afforded her with increased responsibilities and helped transition her from a hands-on software engineer to a seasoned executive at ZAP. She also served on the Saratoga school governing board in 1998 and then was elected to the Saratoga City Council in 2004 and served as Mayor in 2007. Ms. Kao holds a BS in Pharmacy from Taipei Medical University, Taiwan and a MS in Chemistry from University of Rhode Island, Rhode Island, USA.
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 $1.7 million at December 31, 2012. The guarantee expires in November 2013. Our performance risk under these guarantees is reviewed regularly, and has resulted in no changes to our initial valuations.
NOTE 18 – SUBSEQUENT EVENTS
On December 31, 2012, Steve Schneider, Mark Abdou called a board meeting and proceeded to appoint new directors to the board without a quorum and in violation of the covenant signed by the Company with Cathaya Capital which committed the Company to allow 3 Cathaya Capital directors out of the 7 directors, and the right to appoint a fourth independent director; thus holding 4 out of the 7 board seats.
On January 11, 2013 Cathaya Capital filed a lawsuit against Steve Schneider, Mark Abdou and Alex Wang who attended the meeting held on December 31, 2012 in the meeting that launched the attempted takeover of the board. The claim that was filed against them was not only the improper board takeover, but also other items including breach of fiduciary duties as a director of the Company, conversion, imposition of constructive trust, and accounting.
On February 4
th
, at a hearing in the Superior Court of the State of California, County of Los Angeles (Case No. BC499106) held on February 4, 2013, the Court ruled from the bench that the purported actions taken at the December 31, 2012 meeting of the Board of Directors (the “Board”) of ZAP (the “Company”), including the appointment of Luo Hua Lian and Juan Gao to alleged vacancies on the Board, were null and void. As a result of the rulings made by the Court, the Board is comprised of the directors that were members of the Board prior to the December 31, 2012 meeting, except for the recently announced resignation of Alex Wang at a meeting of the Board held on January 18, 2013, and the appointment of Wang Huai Yi as a member of the Board at the same meeting to fill the vacancy created by Alex Wang’s resignation
The directors of the Company are currently Priscilla Lu (Chairman of the Board), Goman Chong, Co Nguyen, Aileen Kao, Mark Abdou, Steve Schneider and Huai Yi Wang. (who replaced Alex Wang as director as of January 20
th
, 2013). Executive management of the Company remains the same as before the December 31, 2012 Board meeting, where Chuck Schillings remains the Co-CEO of ZAP USA, and Michael Ringstad is the finance controller of ZAP USA.
On February 19, 2013, Steve Schneider, Mark Abdou and Alex Wang filed a cross complaint against the Company, Priscilla Lu and Cathaya Capital whereby they challenged the decision made by the judge who upheld the original board of directors prior to the coup on December 31, 2012. In addition to challenging the decision made on
February 4
th
, 2013 by the judge, Steve Schneider and Mark Abdou also claimed that the Company owed them compensation. Hearing for this counter suit challenging the board composition was held on March 1
st
, 2013, and again the judge confirmed that the actions taken on December 31, 2012 were nullified and that the board remains to be the same as the directors that were appointed prior to the December 31, 2012 coup.
On January 20
th
, 2013, a ZAP board meeting was held whereby Alex Wang appointed his father Wang Huai Yi to replace him on the board of ZAP.
See “Litigation” section for certain subsequent events.