NOTES TO CONDENSED 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 Group”). ZAP Group markets electric, alternative energy, and fuel efficient automobiles and commercial vehicles, motorcycles and scooters, and other forms of personal transportation. The Company’s business strategy is 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 and 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 Auto”). The Company believes its 51% acquisition of Jonway Auto will enable it to access the rapidly-growing Chinese market for electric vehicles (“EV”) and to expand its EV business and distribution network around the world. The Company also believes Jonway Auto’s ISO 9001 certified manufacturing facility provides the competitive production capacity and resources to support production of ZAP Group’s new line of electric SUV, minivan, and Neighborhood EV (“NEV”).
Jonway Auto 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 Xiaoying (the daughter of Wang Huaiyi and all three individuals collectively referred to as the “Wang Family”).
ZAP has a wholly owned subsidiary, ZAP Hong Kong, a Hong Kong limited company. ZAP Hong Kong was established in 2011 as a wholly foreign owned enterprises (“WOFE”) and has no operation since incorporated. Jonway Auto established three wholly-owned subsidiaries, namely, Taizhou Selling Co., Ltd., focusing on vehicles marketing and distribution, Taizhou Fuxing Vehicle Sale Co., Ltd., focusing on minivan marketing and distribution in China, and Taizhou Vehicle Leasing Co., Ltd., focusing on the vehicle leasing business in Taizhou.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2016, our current liabilities exceeded the current assets by approximately $73.4 million and our equity deficiency was $13.4 million, which raise substantial doubt about our ability to continue as a going concern. In addition, we have recurring net losses. Given our expected capital expenditure in the foreseeable future, we have comprehensively considered our available sources of funds as follows:
|
·
|
Financial support and credit guarantee from related parties; and
|
|
·
|
Other available sources of financing from domestic banks and other financial institutions given our credit history.
|
The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the next twelve months. The Company plans to substantially increase our cash flows from operations and revenue derived from our products. If the Company’s revenues do not reach the level anticipated in our plan and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In assessing our liquidity, we monitor and analyze our cash on-hand, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES – continued
In June 2015, we were approved for up to an aggregate of $7.2 million of a credit line from Everbright Bank, with 50% restricted cash deposited and credit exposure of $3.6 million. The credit line expires in June 2016. As of March 31, 2016 and December 31, 2015, $7.1 million was drawn down as notes payable. The amount of restricted cash deposited with the bank was $3.6 million. As of March 31, 2016, the line of credit has been fully utilized.
In March 2014, the Company has obtained up to an aggregate of $15.5 million of credit line with the credit exposure of $5.7 million from CITIC Sanmen Branch through Jonway Auto. The line is secured by land and building owned by Jonway Auto and guaranteed by the related party – Jonway Group. As of March 31, 2016, the Company borrowed aggregated $3.6 million loans with various due dates in April 28, 2016 to March 25, 2017. The loans carried at annual interests from 5.92% to 5.96%. The Company has also drawn down $9.3 million in the form of notes payable as of March 31, 2016. The Company deposited $7.2 million restricted cash as collateral for these notes payable. These notes are due from April 2016 to September 2016. As of March 31, 2016, the unused line of credit was approximately $8,000. The Company renewed the credit line of approximately $23.3 million from CITIC Sanmen Branch through Jonway Auto. The new credit line is secured by
a land use right and a building with a total carrying amount of $5.2 million as of March 31, 2016. The shareholder and CEO Alex Wang also personally guaranteed on this credit line. The credit line expires on March 31, 2018.
In March 2014, we were approved up to an aggregate of $5.1 million of a credit line from ICBC. This credit line was secured by land and buildings owned by Jonway Auto and guaranteed by related parties. As of March 31, 2016, the total outstanding loan under this credit line was $3.9 million. The annual interest rates are from 5.9% to 6.7%. The loans are due in various dates from June 2016 to November 2016. As of March 31, 2016, the unused line of credit was approximately $1.2 million.
Jonway Auto intends to utilize the above credit lines to expand its electric vehicle business as well as other future vehicle models. This includes on-going working capital needs, electric vehicle production equipment requirements, testing, homologation and new EV product molds. Also our principal shareholder, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through December 31, 2016 in the event that we require additional liquidity. In addition, China Electric Vehicle Corporation (“CEVC”) has renewed the convertible note with an extension through December 31, 2016, as of July 30th, 2015 (see Note 8).
We will require additional capital to expand our current operations. In particular, we require additional capital 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. 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.
Jonway Group has continued to provide support in financing the capital requirements of Jonway Auto. For the year ended December 31, 2015, Wang Gang, the Chief Executive Officer (“CEO”) and Jonway Group injected $5.4 million to the Company and plans to inject additional capital to support the critical on-going manufacturing operations to meet the delivery of the EV minivans and SUV orders in the pipeline.
NOTE - 3 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements include the financial statements of ZAP, and its subsidiaries, Jonway Auto and ZAP Hong Kong for the three months ended March 31, 2016 and the year ended December 31, 2015 and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Management considers subsidiaries to be companies that are over 50% controlled. Significant intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales, are also eliminated; non-controlling interests are included in equity. We account for our 37.5% interest in the ZAP Hangzhou and our 50% interest in Shanghai Zapple using the equity method of accounting because we have significant influence but not control. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2015 annual report on Form 10-K filed on April 14, 2016.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, warranty costs, stock based compensation, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
Revenue Recognition
The Company records revenues for non-Jonway Auto sales when all of the following criteria have been met:
|
-
|
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
|
|
-
|
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
|
|
-
|
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.
|
|
-
|
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
|
The Company records revenues for Jonway Auto sales only upon the occurrence of all of the following conditions:
|
-
|
The Company has received a binding purchase order from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale);
|
|
-
|
The purchase price has been fixed, based on the terms of the purchase order;
|
|
-
|
The Company has delivered the product from its factory to a common carrier acceptable to the customer; and
|
|
-
|
The Company deems the collection of the amount invoiced probable.
|
The Company provides no price protection. Sales are recognized net of sale discounts, rebates and return allowances.
NOTE - 3 SIGNIFICANT ACCOUNTING POLICIES - continued
Fair Value of Financial Instruments
Accounting Standards Update (“ASU”) 820, “Fair Value Measurements” and ASC 825, Financial Instruments, requires an entity to use observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
Level 2:
|
Inputs other than quoted prices in active markets that is directly or indirectly observable. The carrying value of the senior convertible debt (see Note 7), which approximates fair value, is influenced by interest rates and our stock price, and is determined by prices for the convertible debts observed in market trading, which are Level 2 inputs.
|
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.
|
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 condensed consolidated financial statements in this report:
|
March 31, 2016
|
March 31, 2015
|
December 31, 2015
|
|
|
|
|
Balance sheet items, except for share capital, additional
paid in capital and retained earnings
|
$ 1=RMB 6.4494
|
$ 1=RMB6.1206
|
$1=RMB6.4917
|
|
|
|
|
Amounts included in the statements of operations
and cash flows
|
$ 1=RMB 6.5402
|
$ 1=RMB 6.1444
|
$1=RMB 6.2288
|
NOTE - 3 SIGNIFICANT ACCOUNTING POLICIES – continued
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Changes to the current guidance include the accounting for equity investments, the presentation and disclosure requirements for financial instruments, and the assessment of valuation allowance on deferred tax assets related to available-for-sale securities. In addition, ASU 2016-01 establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected. Under this guidance, an entity would be required to separately present in other comprehensive income the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adoption on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is currently evaluating the impact of adoption on the consol
idated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
NOTE 4 – ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Accounts receivable – third parties
|
|
$
|
2,373
|
|
|
$
|
2,274
|
|
Accounts receivable – related parties
|
|
|
4,841
|
|
|
|
5,172
|
|
|
|
|
7,267
|
|
|
|
7,446
|
|
Less – Allowance for doubtful accounts
|
|
|
(1,965
|
)
|
|
|
(1,531
|
)
|
Total account receivable, net
|
|
$
|
5,249
|
|
|
$
|
5,915
|
|
Changes in the Company’s allowance for doubtful accounts during the nine months ended March 31, 2016 and the year ended December 31, 2015 are as follows:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Balance, beginning of period
|
|
$
|
1,531
|
|
|
$
|
439
|
|
Write-off
|
|
|
-
|
|
|
|
(76
|
)
|
Current provision (recovery)
|
|
|
434
|
|
|
|
1,168
|
|
Balance, end of period
|
|
$
|
1,965
|
|
|
$
|
1,531
|
|
NOTE 5 – INVENTORIES, NET
Inventories, net are summarized as follows:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Work in Process
|
|
$
|
3,607
|
|
|
$
|
2,237
|
|
Parts and supplies
|
|
|
3,824
|
|
|
|
3,616
|
|
Finished goods
|
|
|
957
|
|
|
|
3,186
|
|
|
|
|
8,388
|
|
|
|
9,039
|
|
Less - inventory reserve
|
|
|
(1,264
|
)
|
|
|
(1,296
|
)
|
Inventories, net
|
|
$
|
7,124
|
|
|
$
|
7,743
|
|
Changes in the Company’s inventory reserve during the three months ended March 31, 2016 and the year ended December 31, 2015 are as follows:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Balance, beginning of period
|
|
$
|
1,296
|
|
|
$
|
1,380
|
|
Current recovery for Jonway Auto
|
|
|
(32
|
)
|
|
|
(132
|
)
|
Current provision for inventory ZAP, net
|
|
|
-
|
|
|
|
48
|
|
Balance, end of period
|
|
$
|
1,264
|
|
|
$
|
1,296
|
|
NOTE 6 - DISTRIBUTION AGREEMENTS
Distribution agreements are presented below:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Better World Products - related party
|
|
$
|
2,160
|
|
|
$
|
2,160
|
|
Jonway Products
|
|
|
14,400
|
|
|
|
14,400
|
|
|
|
|
16,560
|
|
|
|
16,560
|
|
Less: amortization and impairment
|
|
|
(9,961
|
)
|
|
|
(9,601
|
)
|
|
|
$
|
6,599
|
|
|
$
|
6,959
|
|
Amortization expenses related to these distribution agreements for the three months ended March 31, 2016 and 2015 was $360,000. Amortization is based over the term of the agreements. No impairment loss was recorded for the three months ended March 31, 2016 and 2015, respectively. The estimated future amortization expense is as follows:
12 months ended March 31,
|
|
|
|
2017
|
|
$
|
1,440
|
|
2018
|
|
|
1,440
|
|
2019
|
|
|
1,440
|
|
2020
|
|
|
1,440
|
|
Thereafter
|
|
|
839
|
|
Total
|
|
$
|
6,599
|
|
NOTE 7 – LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES
Line of credit (Credit Exposure)
In June 2015, we were approved for up to an aggregate of $7.1 million of a credit line from Everbright Bank, with 50% restricted cash deposited and credit exposure of $3.6 million. The credit line expires in June 2016. As of March 31, 2016 and December 31, 2015, $7.1 million was drawn down as notes payable. The amount of restricted cash deposited with the bank was $3.6 million. As of March 31, 2016, the line of credit has been fully utilized.
In March 2014, the Company has obtained up to an aggregate of $15.5 million of credit line with the credit exposure of $5.7 million from CITIC Sanmen Branch through Jonway Auto. The line is secured by land and building owned by Jonway Auto and guaranteed by the related party – Jonway Group. As of March 31, 2016, the Company borrowed aggregated $3.6 million loans with various due dates in April 28, 2016 to March 25, 2017. The loans carried at annual interests from 5.92% to 5.96%. The Company has also drawn down $9.3 million in the form of notes payable as of March 31, 2016. The Company deposited $7.2 million restricted cash as collateral for these notes payable. These notes are due from April 2016 to September 2016. As of March 31, 2016, the unused line of credit was approximately $8,000. The Company renewed the credit line of approximately $23.3 million from CITIC Sanmen Branch through Jonway Auto. The new credit line is secured by
a land use right and a building with a total carrying amount of $5.2 million as of March 31, 2016. The shareholder and CEO Alex Wang also personally guaranteed on this credit line. The credit line expires on March 31, 2018.
In March 2014, we were approved up to an aggregate of $5.1 million of a credit line from ICBC. This credit line was secured by land and buildings owned by Jonway Auto and guaranteed by related parties. As of March 31, 2016, the total outstanding loan under this credit line was $3.9 million. The annual interest rates are from 5.9% to 6.7%. The loans are due in various dates from June 2016 to November 2016. As of March 31, 2016, the unused line of credit was approximately $1.2 million.
NOTE 7 – LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES - continued
Short term loans
Short term loans as of March 31, 2016 and December 31, 2015 are presented below:
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Loan from CITIC bank
|
(a)
|
|
$
|
3,629
|
|
|
$
|
3,081
|
|
Loan from ICBC
|
(b)
|
|
|
3,878
|
|
|
|
4,621
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
7,507
|
|
|
$
|
7,702
|
|
.
|
(a)
|
In October 2015, Jonway Auto borrowed a half year short-term loan of $3.1 million at annual interest rate of 5.9%. The loan is due on April 28, 2016. On March 25, 2016, Jonway Auto further borrowed a one year loan of $0.5 million at annual interest rate of 6.0%. The loan is due on March 25, 2017. All loans are secured by a Maximum Amount Mortgage Contract between Jonway Auto and CITIC dated November 3, 2014, in which a land use right and a building with a total carrying amount of $5.2 million as of March 31, 2016 has been pledged as security for these loans. The shareholder and CEO Alex Wang also personally guaranteed these loans. Subsequent to March 31, 2016, the Company renewed the loan of $3.1 million at annual interest of 5.9% with CITIC bank upon the loan’s maturity on April 28, 2016.
|
|
(b)
|
In March 2015, the company borrowed a one year short-term loan of $0.8 million from ICBC at an annual interest of 5.4% and fully repaid the loan upon maturity in March 2016. In June 2015, the company borrowed a one year short-term loan of $0.3 million from ICBC at an annual interest rate of 5.92%. In July 2015, the Company borrowed a one year short-term loan of $1.1 million from ICBC at an annual interest rate of 6.7%. In October 2015, the Company borrowed a one year short-term loan of $1.4 million at an annual interest of 6.4%. In November 2015, the Company borrowed a one year short-term loan of $1.1 million at an annual interest rate of 6.1%. These loans were guaranteed by related parties including Jonway Group, the shareholder Wang Huaiyi and the shareholder and CEO Alex Wang. The Company also pledged buildings and a land use right with a carrying value of $1.4 million with ICBC.
|
The weighted average interest rates were 6.1% and 6.9% for the three months ended March 31, 2016 and 2015, respectively.
Bank acceptance notes
As of March 31, 2016, the Company has bank acceptance notes payable in the amount of $17.2 million. The notes are guaranteed to be paid by the banks and are usually for a short-term period of nine months. The Company is required to maintain cash deposits of 50% or 100% of the notes payable with these bank, in order to ensure future credit availability. As of March 31, 2016, the restricted cash for the notes was $11.6 million. Bank acceptance notes are presented below:
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Bank acceptance notes payable to China Everbright Bank
|
(a)
|
|
$
|
7,135
|
|
|
$
|
7,086
|
|
Bank acceptance notes payable to CITIC Bank
|
(b)
|
|
|
9,345
|
|
|
|
6,428
|
|
Bank acceptance notes payable to Shanghai Pudong
Development bank
|
(c)
|
|
|
769
|
|
|
|
852
|
|
|
|
|
$
|
17,249
|
|
|
$
|
14,366
|
|
|
(a)
|
Notes payable to China Everbright bank have various maturity dates in June 2016. The notes payable are guaranteed by a land use right and a building with a total carrying value of $2.0 million. The Company is also required to maintain cash deposits at 50% of the notes payable with the bank, in order to ensure future credit availability.
|
|
(b)
|
Notes payable to CITIC bank will be due in April to September 2016. Except for the note payable utilizing credit exposure of $2.1 million, 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 Shanghai Pudong Development Bank will be due in May and June, 2016. The company is required to maintain cash deposits at 100% of the notes payable with the bank.
|
NOTE 8 - CONVERTIBLE DEBT
Convertible debts are presented below:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Senior convertible debt – CEVC (a)
|
|
$
|
20,679
|
|
|
$
|
20,679
|
|
Convertible debt – Mr. Luo Hua Liang (b)
|
|
|
786
|
|
|
|
786
|
|
|
|
$
|
21,465
|
|
|
$
|
21,465
|
|
|
(a)
|
Senior convertible debt - CEVC
|
On January 12, 2011, the Company entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Agreement”) with CEVC, a British Virgin Island company whose sole shareholder is Cathaya Capital, L.P., and a Cayman Islands exempted limited partnership (“Cathaya”). Priscilla Lu was the former chairwoman 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 $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 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.
This convertible note was extended until December 31, 2016 with interest accrual at 8% per annum with original maturing date of February 12, 2012. According to Accounting Standard Codification (“ASC”) 470-10, the market interest should be imputed for the non-interest bearing loan between the related parties; therefore in the extended agreement the Convertible Note bears a market interest rate at 8%. With the new extension, the principal of $20.7 million has the same conversion terms to cash, and will also be convertible in part or in whole to shares of ZAP or Jonway Auto at maturity date or at any time with a 90 day notice. Beginning August 12, 2013 within 10 calendar days following the end of each fiscal quarter, the Company is required to pay Holder the Additional Interest accrued during such fiscal quarter by issuing the Holder or a party designated by the Holder, the number of shares of the Company’s Common Stock equal to the Additional Interest accrued during such fiscal quarter divided by the average of the Closing Prices for each trading day during such fiscal quarter ending on (and including) the last Trading Day of such fiscal quarter. The Additional Interest Rate may be amended from time to time with the written consent of the Holder and the Company. In addition, the warrants issued in connection with the CEVC note were amended for the change of the terms of conversion and for the extension of the maturity date until December 31, 2016.
Upon expiration date of the CEVC note, this convertible note will likely be repaid by ZAP in the form of Jonway Auto shares in order to reduce the liability of ZAP. If the CEVC note is repaid by Jonway Auto shares, ZAP’s ownership of Jonway Auto would be reduced to less than majority interest, resulting in need to reconsider eligibility for consolidation. Due to the increasing accumulation of debt from Jonway Auto, largely because of the lack of working capital to fulfill orders, Jonway Auto may seek equity funding in order to meet its operational financial needs. If this were to happen, then the additional equity investment into Jonway Auto would also reduce ZAP’s majority equity ownership in Jonway Auto. The qualification to meet consolidation for ZAP would have to be reassessed based on ZAP’s financial control, board and management control of Jonway Auto.
|
(b)
|
convertible debt – Mr. Luo Hua Liang
|
On September 3, 2015, the board approved issuance of a convertible note to Mr. Luo Hua Liang (Mr. Wang Alex’s brother in-law) for his investment of RMB 5 million immediately deposited within one week of signing of the agreement and another investment up to RMB 5 million within one month of signing of the agreement. Both notes have one year terms at the interest rate of 12% per annum. The investment was transferred to Jonway Auto as the loan from the Company to Jonway Auto. The convertible note shall either be repaid in cash from Jonway Auto or be paid in ZAP shares. The convertible note’s conversion price is $0.06 per share.
NOTE 9 – SEGMENT REPORTING
Operating Segments
The Company has identified three reportable segments consisting of Jonway Auto, ZAP (Consumer Product) and ZAP Hong Kong. The Jonway Auto segment represents sales of the gas fueled Jonway A380 three and five-door sports utility vehicles, EV minivan and EV SUVs and spare parts principally through distributors in China. The ZAP Consumer Product segment represents rechargeable portable energy products, our Zapino scooter, and our ZAPPY3 personal transporters. These segments are strategic business units that offer different services. They are managed separately because each business requires different resources and strategies. The Company’s chief operating decision making group, which is comprised of the CEO and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to allocate resources and in assessing performance.
The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows:
For the three months ended March 31, 2016
|
|
Jonway
Auto
|
|
|
ZAP
|
|
|
ZAP Hong
Kong
|
|
|
Total
|
|
Net sales
|
|
$
|
3,378
|
|
|
$
|
4
|
|
|
$
|
-
|
|
|
$
|
3,382
|
|
Gross profit
|
|
$
|
65
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
66
|
|
Depreciation and amortization
|
|
$
|
1,271
|
|
|
$
|
651
|
|
|
$
|
-
|
|
|
$
|
1,922
|
|
Net loss
|
|
$
|
(2,230
|
)
|
|
$
|
(1,159
|
)
|
|
$
|
-
|
|
|
$
|
(3,389
|
)
|
Total assets
|
|
$
|
62,443
|
|
|
$
|
14,011
|
|
|
$
|
-
|
|
|
$
|
79,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
8,186
|
|
|
$
|
176
|
|
|
$
|
-
|
|
|
$
|
8,362
|
|
Gross profit (loss)
|
|
$
|
(587
|
)
|
|
$
|
75
|
|
|
$
|
-
|
|
|
$
|
(512
|
)
|
Depreciation and amortization
|
|
$
|
1,435
|
|
|
$
|
657
|
|
|
$
|
-
|
|
|
$
|
2,092
|
|
Net profit (loss)
|
|
$
|
(3,272
|
)
|
|
$
|
(1,404
|
)
|
|
$
|
-
|
|
|
$
|
(4,676
|
)
|
Total assets
|
|
$
|
69,799
|
|
|
$
|
19,077
|
|
|
$
|
8
|
|
|
$
|
88,884
|
|
Customer information
Approximately 99.9% or $3.4 million of our revenues for the three months ended March 31, 2016 are from sales in China. Jonway Auto distributes its products to an established network of over 70 factory level dealers in China with two customers contributing to 33% and 11% of our consolidated revenue, respectively. Approximately 97.9% or $8.2 million of our revenues for the three months ended March 31, 2015 are from sales in China. Jonway Auto distributes its products to an established network of over 63 factory level dealers in China with no customer contributing to more than 10% of our consolidated revenue.
Supplier information
For the three months ended March 31, 2016 and 2015, approxima
tely 99.9% or $3.4
million and 98.8% or $8.7 million of the consolidated cost of goods sold were purchased in China. For the three months ended March 2016, two venders contributed to 19% and 17% of our purchases, respectively. For the three months ended March 31, 2015, one supplier accounted for 11% of the total purchases.
NOTE 10 – RELATED PARTY TRANSACTIONS
Due from (to) related parties
Amount due from related parties are principally for advances in the normal course of business for parts and suppliers used in manufacturing.
Amount due from related parties are as follows (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Sanmen Branch of Zhejiang UFO Automobile
Manufacturing Co., Ltd
|
|
$
|
1,015
|
|
|
$
|
998
|
|
Jonway Economy and Trade Co., Ltd.
|
|
|
620
|
|
|
|
616
|
|
|
|
$
|
1,635
|
|
|
$
|
1,614
|
|
In addition, accounts receivable included in accounts receivable due from related parties as follows (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Jonway EV selling Ltd.
|
|
$
|
4,379
|
|
|
$
|
4,659
|
|
Sanmen Branch of Zhejiang UFO Automobile Manufacturing Co., Ltd
|
|
|
160
|
|
|
|
212
|
|
Jonway Motorcycle
|
|
|
302
|
|
|
|
301
|
|
|
|
$
|
4,841
|
|
|
$
|
5,172
|
|
Amount due to related parties are follows (in thousands):
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Jonway Group
|
|
$
|
14,064
|
|
|
$
|
12,606
|
|
Jonway Motor Cycle
|
|
|
64
|
|
|
|
64
|
|
Taizhou Huadu
|
|
|
1,096
|
|
|
|
846
|
|
Shanghai Zapple
|
|
|
35
|
|
|
|
35
|
|
Mr. Alex Wang
|
|
|
74
|
|
|
|
74
|
|
Mr. Huaiyi Wang
|
|
|
14
|
|
|
|
-
|
|
Betterworld
|
|
|
149
|
|
|
|
149
|
|
Zhejiang Jonway Painting Co., Ltd.
|
|
|
23
|
|
|
|
11
|
|
Cathaya Operations Management Ltd.
|
|
|
241
|
|
|
|
193
|
|
|
|
$
|
15,760
|
|
|
$
|
13,978
|
|
NOTE 10 – RELATED PARTY TRANSACTIONS - continued
Transactions with Jonway Group
Jonway Group is considered as a related party as the Wang Family, one of the principal shareholders of the Company, has controlling interests in Jonway Group. Jonway Group supplies some of plastics spare parts to Jonway Auto and gave guarantees on Jonway short term bank facilities from China-based banks. Jonway made such purchase from Jonway Group for a total of $0.6 million and $0.8 million as for the three months ended March 31, 2016 and 2015, respectively.
Jonway Agreement with Zhejiang UFO
Based on a contract by and among the Zhejiang UFO, Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006.
According to the contract, Jonway Auto shall pay Zhejiang UFO a variable contractual fee which is calculated based on the number of SUVs that Jonway assembles in the Sanmen Branch every year, at the following rates (historical exchange rate):
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. For the three months ended March 31, 2016 and 2015, $0.1 million and $Nil were recorded as assembling fees, respectively.
Other Related Party Transactions
For the three months ended March 31, 2016, Jonway purchased parts in amount of $0.4 million and $1.8 million from Jonway Motor Cycle and Taizhou Huadu, respectively. For the three months ended March 31, 2015, Jonway did not purchased spare parts from Jonway Motor Cycle and Taizhou Huadu.
NOTE 11 - SHAREHOLDERS’ EQUITY
Common stock
2015 ISSUANCES
On February 11, 2015, the cancellation of 1,182,558 shares of common stock was processed to pay back the proceeds from convertible notes, and a partial repayment representing a principal reduction of $100,000 and $8,433 of interest was paid on the Company’s outstanding convertible bond held by Yung. For the year ended December 31, 2015, the Company repurchased 4,811,633 shares of common stock at cost of $406,872 from Yung and cancelled those shares. The balance of the outstanding note issued to Korea Yung was $133,116 after the payment and cancellation of these shares. Yung is allowed to engage in open market sales of the shares through December 31, 2015. In the event the gross proceeds realized from the sale of the shares by Yung is greater than the principal and interest due on the bond as of the maturity date, Yung will be entitled to retain all proceeds. If the proceeds from the sale of shares are less than the principal and interest due on the bond as of the maturity date, ZAP will pay the shortfall to Yung in cash within five business days of written notice from Yung.
In September 2015, the Company issued 89,194,715 shares to Mr. Wang Alex, the Chief Executive Officer of the Company for his investment of $5,351,683 in the Company (approximately $4.5 million investment was loan by the Company to its subsidiary Jonway Auto).
In September 2015, the amount of $814,863 investment from Cathaya Management Co Ltd and $350,000 due to Cathaya Management Co Ltd have been converted into 13,581,051 and 5,833,333 shares of common stock at price of $0.06, respectively.
In September 2015, China Electric Vehicle Corporation (CEVC) has elected to convert the interest of $1,237,345 due on the $20.7 million convertible note to 14,454,743 shares of common stock at the average price of $0.086.
NOTE 12 – LITIGATION
ZAP is in arrears with the settlement payment to Hogan & Lovells. The current negotiated balance due is $779,500. Hogan & Lovells agreed to reduce the total amount owed by $453,827, as long as we did not default on our payment agreement. If Hogan & Lovells does seek a judgment, the total balance due immediately would be $1,233,327. Currently ZAP is seeking additional funding, and is working with prospective investors or lenders so ZAP can resume the installment payments to Hogan & Lovells. As of March 31, 2016 and December 31, 2015, the Company accrued approximately $0.7 million for this litigation.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Guarantees
Jonway Auto guaranteed certain financial obligations of outside third parties including suppliers and customers 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 $2.2 million at March 31, 2016 (December 31, 2015 - $2.3 million). The guarantee expires at variance dates from March 31, 2016 to December 2019. Our performance risk under these guarantees is reviewed regularly, and has resulted in no changes to our initial valuations.
Jonway Auto pledged a land use right and a building to Shanghai Pu Dong Development Bank to secure a bank loan of $1.0 million offered to a related company, Taizhou Jonway Jing Mao Trading Ltd., which is a subsidiary of Jonway Group. The period of guarantee was five years from 2014 to 2019. The net value of the land use right and the building pledged as at March 31, 2016 and December 31, 2015 were $0.4 million and $0.5 million, respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This quarterly report including the following management’s discussion and analysis, and other reports filed by the registrant from time to time with the securities and exchange commission (collectively the “filings”) contain forward-looking statements which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. you can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
|
·
|
our ability to establish, maintain and strengthen our brand;
|
|
·
|
our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
|
|
·
|
our ability to maintain effective disclosure controls and procedures;
|
|
·
|
our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
|
|
·
|
whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
|
|
·
|
our ability to attract and retain the personnel qualified to implement our growth strategies;
|
|
·
|
our ability to obtain approval from government authorities for our products;
|
|
·
|
our ability to protect the patents on our proprietary technology;
|
|
·
|
our ability to fund our short-term and long-term financing needs;
|
|
·
|
our ability to compete against large competitors in a rapidly changing market for electric and conventional fuel vehicles;
|
|
·
|
changes in our business plan and corporate strategies; and
|
|
·
|
Other risks and uncertainties discussed in greater detail in various sections of this report, or set forth in part I, Item 1A of our Annual Report on Form 10-K under the heading “Risk Factors”.
|
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
In this quarterly report on Form 10-Q the term “ZAP” refers to ZAP, the term “Jonway” refers to Zhejiang Jonway Automobile Co. Ltd., of which ZAP owns 51% of the equity shares, “ZAP Jonway” refers to both ZAP and Jonway on a consolidated basis, and “we,” “us” and “our” refer to ZAP or ZAP Jonway, as the context indicates.
Recent Developments
On April 10, 2015, ZAP received notification from the United States Postal Service (“USPS”) that ZAP has been selected as one of the pre-qualified companies to participate in the USPS Federal Business Opportunity (“FBO”) RFP. In January 2015, USPS had issued a new request for response to its FBO for its Next Generation Delivery Vehicle (NGDV) Program. ZAP submitted a new proposal based on new guidelines for a complete new USPS delivery truck designed to use clean energy and environmentally friendly technologies. ZAP’s proposal submitted for this new USPS NGDV Program has been accepted for consideration. As one of the pre-qualified companies, ZAP will proceed with detailed response to the RFP, and undergo trial for the product proposed. This trial is anticipated to last for more than one year.
The principal activities of Jonway Auto until recently were the production and sales of gasoline models of the SUVs and minivans in China using the consigned UFO license from an affiliate of Jonway Group. Over the past several years, Jonway Auto continued the production and sales of its gasoline model SUV and minivan, while developing and ramping production of its EV product line. Jonway Auto received type approval of its EV SUV and EV certification of its manufacturing facility from the Chinese government. It also developed two different full electric EV models for its minivan, one with lithium batteries, which has longer range and more power, and the other with lead acid batteries, intended for lower speed and shorter range. Jonway Auto began production on a new NEV, the “Urbee”, in 2014 and 2015. The primary market for the Urbee is the growing aging and young adult population in China that generally do not hold a driver’s license.
ZAP Group believes the China government’s incentives, combined with the elimination of sales tax, consumer tax, and license plate registration fees on full electric vehicles (which can total more than US$20,000 for gas vehicles in some cities like Shanghai), are creating a strong economic incentive for the purchase of electric vehicles and a substantial market opportunity for Jonway Auto’s new EV SUV and EV minivan product line. Jonway Auto’s EV SUV and EV minivan have been reconfigured with smaller engines to support lower power consumption. The EV SUV has a 20kwatt (40kwatt peak) engine. The EV minivan which is a much lighter vehicle has a 13.5kwatt engine. These newly reconfigured EVs adapted to maximize range at optimal speeds are available for mass production.
ZAP and Jonway Auto are focused on the EV fleet markets in China. With the recent reinforced subsidies and requirements for government entities to purchase full electric vehicles, the Company believes Jonway Auto’s new EV SUV is particularly suited for use by government officials and personnel. Jonway Auto’s SUV currently has an advantage in China because most auto companies to date have focused primarily on producing small electric sedans, some with only two seats that are not very practicable for use by government officials on a daily basis. Jonway Auto’s SUV is a larger 5-person vehicle with comfortable seating and legroom.
Jonway Auto’s EV minivan is well-positioned for government city utility and maintenance transportation and service. The minivan was designed with removable rear seats so that it may also serve as a delivery van for use in the projected rapid growth market of EVs used for the transport of goods and packages in China. This EV minivan comes in both lithium battery configuration which is eligible for government subsidies as well as lead acid version which is much cheaper but is not eligible for subsidy. Currently, the Jonway Auto has received certain orders from major customers for Jonway Auto’s type approved EV minivan. This capacity requires working capital that is currently beyond the Company’s ability to produce and deliver and the Company is seeking alternative financing to support the working capital requirements for these orders. Additional to these orders, Jonway Auto’s existing dealership networks also have requested delivery of the EV minivan and EV SUVs but due to strain on working capital, Jonway Auto has not accepted any additional orders of either product at this point. Jonway Auto began to focus its business on EV over the last year and its manufacturing plant has been modified to support mass production of several full electric vehicle models this year. With the urgent priority to provide multiple manufacturing EV production lines to support multiple models of EVs, Jonway Auto reduced its resource investment in the traditional gasoline vehicle products and cut back on funding the sales and marketing of its gasoline SUV and gasoline minivans. This resulted in turnover of many of the dealership networks that are currently not focusing on selling EVs. The overall dealership network has shrunk over the last year and the plan is to re-establish new dealership networks in regions with EV subsidies and EV market demands.
Jonway Auto has reorganized to support the ramp up of electric vehicle production and realigned its resources to support sales and marketing to fleet markets and large clients, including to leasing companies and government organizations in the major cities.
The combined companies’ new EV product lines now include the A380 SUV EV, minivan EV, and the Urbee. Both the EV SUV and EV minivan products leverage the production moldings and the manufacturing engineering infrastructure and facilities currently in place for the gasoline models of these vehicles. The new Urbee started its first production delivery in 2014. The first production deliveries of the EV SUV and Minivans occurred in 2015.
ZAP and Jonway Auto has increased its factory production capacity and running its operations at seven days per week, single shift, with production of around 50 EV minivans per day in order to meet pressing backlog orders from Dong Feng Motor Corporation. Jonway Auto is on target to produce 800 EV minivans for October, and will be ramping up to meet the 3,000 EV minivans. A second shift with additional factory equipment may have to be added to reliably meet volumes of 2,000 or more per month. The target is to reach sales of no less than 20,000 of Jonway’s EV minivans in 2016 and aggregating to sales of 100,000 of ZAP and Jonway’s EV minivans as projected by Dong Feng over the next three years. The partnership with Dong Feng Motor facilitated by Shi Kong from Hangzhou enables Jonway Auto to offload the cost of lithium battery and the electric motor cost to Dong Feng and Shi Kong. This represents more than half of the cost of materials for the EV minivans.
ZAP and Jonway is seeking funding and partnerships to manage the sales and production demands of the EV fleet market in China. Ultimately, the objective is to be able to build its own financial strength in order to sell and produce the whole EV minivan so that direct sales to major customers, partners or dealers can be achieved to further improve gross margins. Due to the high demand for some of the critical supplier parts, ZAP and Jonway Auto is currently in discussions regarding potential partnerships with companies producing lithium batteries and EV motors in order to help mitigate the risk of availability of parts and to finance working capital of these high cost items.
Jonway Auto recently launched the E-3D SUV, an attractively designed 3 door SUV that comfortably accommodates 4 passengers. The model’s chassis and body had previously undergone and passed European crash tests, and ZAP is currently exploring dealership partners to complete the EV type approval for the European overseas market. Potentially in the future, this E-3D SUV competitively priced would also be suitable for the US market after type approval and certification in the US. The E-3D SUV comes in lithium battery version with range of over 200km or 125 miles, and achieves a top speed of 140km per hour or over 85 miles per hour. The lead acid version of the E-3D SUV has a lower top speed of 55 mph and shorter range of 80 miles but with a range extender option, it can go for more than 150 miles.
The near term objective is to produce enough volume of the Urbees in order to cover the overhead cost of Jonway’s factory, despite the lower gross margins of the Urbees. Our target is to be able to produce and sell around 1500 to 2000 per month which will cover part of the overhead cost of the factory. However, the Urbees are limited by the constraint that LSV is not an approved category for automobiles in China, although in many provinces local governments have allow these vehicles to be operating in small towns and country roads. There are many LSV companies lobbying with the government to approve this as a legal category so that LSVs can receive automobile license plates and operate legally in all of the cities. Jonway’s strategy currently is to address the EV city market by offering the SUV and minivan with the shorter range and smaller engines targeting city drivers and short distance delivery van markets because both the SUV and the minivan are approved categories under the Chinese automobile license that Jonway has.
Our strategy in the longer term is to serve the growing fleet EV market with the EV minivan and EV SUV, with emphasis initially on the EV minivan for delivery market. While many electric vehicle companies are focused on passenger cars and sedans for mainstream consumers, ZAP Jonway believes government and corporate fleets can more quickly and more successfully deploy electric vehicles because they are more likely to have adequate charging infrastructure, service and support and the vehicles may travel along predictable routes and have a central point of operation. Fleet markets or delivery vehicles are more sensitive to the economics of fuel cost and when electric vehicles can be offered at comparable prices to gasoline vehicles, given the support of subsidies, the proposition to use EVs can be compelling for these markets.
The high cost of lithium battery EV power train has created working capital challenges for Jonway. As a result, Jonway signed partnership agreements with companies that has access to capital and has orders from larger distribution channels. Since Jonway is not directly selling into the distribution channels or end customers, and will be selling the EV minivans through the partnerships, the margins are slimmer, and the EV power train will be configured according to the partnerships’ specification. This partnership arrangement mitigates the strain for working capital and cost of sales, but this also significantly reduces the margins. This is in the near term one of the ways to address the market without adequate working capital.
As Chinese government continues to offer excellent incentives for EVs, moving away from the amount of lithium batteries to incentivizing longer range of the EV models, the market is now more readily adopting EVs for utility markets where recharging is less of an issue due to the use of central depot for charge stations. The smaller EV products of both SPARKEE and URBEE are focused on addressing urban commuter markets. The plan going forward is to adapt these models to support EMS vehicles for deliveries and service industries.
With the demand for high working capital, outstanding liability that Jonway Auto has accrued and the lack of bank financing because of Chinese bank credit crunch, ZAP Jonway is looking at several options to address the financial needs and outstanding liabilities. Jonway may in the future be looking for equity financing in China which may reduce ZAP’s majority ownership of Jonway Auto. Therefore, ZAP is considering reorganizing the company to reduce the financial burdens of the bank loans and supplier payables that were carried over from the gasoline vehicle business under Jonway Automobile and separating this from the business associated with the sales and marketing of EVs produced by Jonway and potentially with other partner companies’ electric vehicles, such as the recent agreement signed with Dong Feng Automobile for the EV minivans. Currently the sales and marketing organization of Jonway Auto is under a separate subsidiary of Jonway Auto, and this may be retained by ZAP while reorganizing the manufacturing production arm of Jonway Auto. The repayment of the CEVC convertible note would also reduce the outstanding liability of ZAP, while maintaining control of the sales and marketing of Jonway Auto’s business with the sales subsidiary.
Results of Operations
The following table sets forth, as a percentage of net sales, certain items included in ZAP’s condensed consolidated statements of operations (see Condensed Consolidated Financial Statements and Notes) for the periods indicated:
|
|
Three Months
Ended March 31,
|
|
Statements of Operations Data:
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
-98.1
|
%
|
|
|
-106.1
|
%
|
Operating expenses
|
|
|
-87.7
|
%
|
|
|
-41.7
|
%
|
Loss from operations
|
|
|
-85.7
|
%
|
|
|
-47.8
|
%
|
Net loss attributable to ZAP
|
|
|
-67.9
|
%
|
|
|
-36.7
|
%
|
These results of operations that have been derived from our condensed consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America and that include the results of operations of Jonway since the date of ZAP’s acquisition of 51% of the equity shares of Jonway on January 21, 2011.
Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
Net sales
for the three months ended March 31, 2016 were $3.4 million as compared to $8.4 million for the three months ended March 31, 2015.
Jonway Auto’s revenue for the three months ended March 31, 2016 decreased by $5.0 million from $8.4 million for the quarter ended March 31, 2015 compared to $3.4 million for the quarter ended March 31, 2016. The sales volume decreased because of the drop of sales for SUV and Urbee . The sales of SUV and Urbee decreased by $6.2 million from $7.8 million for the three months ended March 31, 2015 to $1.6 million for the first quarter ended March 31, 2016. However, the sales for
EV minivans
increased significantly, from $0.02 million for the three months ended March 31, 2015 to $1.5 million for the first quarter ended March 31, 2016.
Gross profit (loss)
increased by $0.6 million from a gross loss of $0.5 million for the three months ended March 31, 2015 to a gross profit of $0.1 million for the three months ended March 31, 2016. Our margins increased from a -6.1% to a 2.0%.
Jonway Auto’s gross profit (loss) increased by $652,000 from a gross loss $587,000 for the three months ended March 31, 2014 to a gross loss of $65,000 for the first quarter ended March 31, 2016. The gross profit for SUV and electronic vehicle improved significantly for the first quarter ended March 31, 2016, comparing to the same period in 2015.
Sales and marketing expenses
decreased $0.40 million from $0.99 million for the three months ended March 31, 2015, to $0.59 million for the three months ended March 31, 2016. The percentage of sales and marketing expense to net sales increased from 11.86% for the three months ended March 31, 2015 to 17.30% for the three months ended March 31, 2016 due to the decrease in net sales.
General and administrative expenses
increased by $0.4 million from $1.9 million for the quarter ended March 31, 25 to $2.3 million for the quarter ended March 31, 2016. This was principally due to the increase of bad debt provision for the three months ended March 31, 2016.
Research and development expenses
decreased by $0.5 million from $0.6 million for the three months ended March 31, 2015 to $0.1 million for the three months ended March 31, 2016.
Interest expense
decreased $0.2 million, from $0.8 million in the first quarter of 2015 to $0.6 million in the first quarter of 2016. The decrease was due to repayment of convertible notes and bank acceptance notes.
Other income
decreased by $17,000 from $81,000 for the three months ended March 31, 2015 to $64,000 for the three months ended March 31, 2016.
Critical Accounting Policies and Use of Estimates
Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Changes to the current guidance include the accounting for equity investments, the presentation and disclosure requirements for financial instruments, and the assessment of valuation allowance on deferred tax assets related to available-for-sale securities. In addition, ASU 2016-01 establishes an incremental recognition and disclosure requirement related to the presentation of fair value changes of financial liabilities for which the fair value option has been elected. Under this guidance, an entity would be required to separately present in other comprehensive income the portion of the total fair value change attributable to instrument-specific credit risk as opposed to reflecting the entire amount in earnings. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adoption on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842 (“ASC 842”), “Leases” which replaces the existing guidance in ASC 840, Leases. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. ASC 842 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. The Company is currently evaluating the impact of adoption on the consol
idated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period. The Company does not expect any material impact of this new standard on its consolidated financial statements.
In April 2016, the FASB released ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. While aimed at reducing the cost and complexity of the accounting for share-based payments, the amendments are expected to significantly impact net income, EPS, and the statement of cash flows. Implementation and administration may present challenges for companies with significant share-based payment activities. The ASU is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In April 2016, FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
Liquidity and Capital Resources
As of March 31, 2016, our current liabilities exceeded the current assets by approximately $72.7 million and our equity deficiency was $13.4 million, which raise substantial doubt about our ability to continue as a going concern. In addition, we have recurring net losses. Given our expected capital expenditure in the foreseeable future, we have comprehensively considered our available sources of funds as follows:
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·
|
Financial support and credit guarantee from related parties; and
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|
·
|
Other available sources of financing from domestic banks and other financial institutions given our credit history.
|
The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the next twelve months. The Company plans to substantially increase our cash flows from operations and revenue derived from our products. If the Company’s revenues do not reach the level anticipated in our plan and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all, the Company may be unable to implement its current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In assessing our liquidity, we monitor and analyze our cash on-hand, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.
In June 2015, we were approved for up to an aggregate of $7.2 million of a credit line from Everbright Bank, with 50% restricted cash deposited and credit exposure of $3.6 million. The credit line expires in June 2016. As of March 31, 2016 and December 31, 2015, $7.1 million was drawn down as notes payable. The amount of restricted cash deposited with the bank was $3.6 million. As of March 31, 2016, the line of credit has been fully utilized.
In March 2014, the Company has obtained up to an aggregate of $15.5 million of credit line with the credit exposure of $5.7 million from CITIC Sanmen Branch through Jonway Auto. The line is secured by land and building owned by Jonway Auto and guaranteed by the related party – Jonway Group. As of March 31, 2016, the Company borrowed aggregated $3.6 million loans with various due dates in April 28, 2016 to March 25, 2017. The loans carried at annual interests from 5.92% to 5.96%. The Company have also drawn down $9.3 million in the form of notes payable as of March 31, 2016. The Company deposited $7.2 million restricted cash as collateral for these notes payable. These notes are due from April 2016 to September 2016. As of March 31, 2016, the unused line of credit was approximately $0.01 million. The Company renewed the credit line of approximately $23.3 million from CITIC Sanmen Branch through Jonway Auto. The new credit line is secured by
a land use right and a building with a total carrying amount of $5.2 million as of March 31, 2016. The shareholder and CEO Alex Wang also personally guaranteed on this credit line. The credit line expires on March 31, 2018.
In March 2014, we were approved up to an aggregate of $5.1 million of a credit line from ICBC. This credit line was secured by land and buildings owned by Jonway Auto and guaranteed by related parties. As of March 31, 2016, the total outstanding loan under this credit line was $3.9 million. The annual interest rates are from 5.9% to 6.7%. The loans are due in various dates from June 2016 to November 2016. As of March 31, 2016, the unused line of credit was approximately $1.2 million.
Jonway Auto intends to utilize the above credit lines to expand its electric vehicle business as well as other future vehicle models. This includes on-going working capital needs, electric vehicle production equipment requirements, testing, homologation and new EV product molds. Also our principal shareholder, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through December 31, 2016 in the event that we require additional liquidity. In addition, China Electric Vehicle Corporation (“CEVC”) has renewed the convertible note with an extension through December 31, 2016, as of July 30th, 2015.
We will require additional capital to expand our current operations. In particular, we require additional capital 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. 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.
Jonway Group has continued to provide support in financing the capital requirements of Jonway Auto. For the year ended December 31, 2015, Wang Gang, the Chief Executive Officer (“CEO”) and Jonway Group injected $5.4 million to the Company and plans to inject additional capital to support the critical on-going manufacturing operations to meet the delivery of the EV minivans and SUV orders in the pipeline.
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide disclosure pursuant to this Item 3.
Item 4. Controls and Procedures
As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015, we identified a lack of sufficient control in the area of technical competency in review and approval of financial reporting processes. This control weakness allowed for reconciliations, reports and other documents to be insufficiently reviewed prior to being approved by management and audit adjustments to be identified by our auditors as part of their year-end audit work. This material weakness resulted in errors in the recording of non-routine and complex accounting transactions in the preparation of our annual consolidated financial statements and disclosures. The Company is considering utilizing outside accounting experts to assist us in accounting for future complex transactions.
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Co- Chief Executive Officers and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report.
Changes in internal control over financial reporting
No significant changes were made in our internal control over financial reporting during this quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
ZAP is in arrears with the settlement payment to Hogan & Lovells. The current negotiated balance due is $779,500. Hogan & Lovells agreed to reduce the total amount owed by $453,827, as long as we did not default on our payment agreement. If Hogan & Lovells does seek a judgment, the total balance due immediately would be $1,233,327. Currently ZAP is seeking additional funding, and is working with prospective investors or lenders so ZAP can resume the installment payments to Hogan & Lovells. As of March 31, 2016 and December 31, 2015, the Company accrued approximately $0.7 million for this litigation.
Item 1A. Risk Factors
There have been no material changes to the Company’s risk factors which are included and described in the annual report on Form 10-K for the fiscal year ended December 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Mine safety disclosure
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
(b) Exhibits
.
Exhibit
Exhibit
Number
|
|
Description
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to 13a-14/15d-14 of the Exchange Act as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
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|
101.INS
|
|
XBRL Instance Document
|
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
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101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
Furnished herewith, XBLR (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 16, 2016
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|
By: /s/ Alex Wang
|
|
|
|
Name: Alex Wang
|
|
|
|
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|
|
|
Title: Chief Executive Officer
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|
|
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|
(Principal Executive Officer).
|
|
Dated: May 16, 2016
|
|
By: /s/ Michael Ringstad
|
|
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|
Name: Michael Ringstad
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|
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Title: Interim Chief Financial Officer
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(Interim Principal Financial Officer)
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33