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ZAAP > SEC Filings for ZAAP > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for ZAP


Quarterly Report


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

In May 2012, Jonway Auto established two wholly owned subsidiaries, 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, China. B ZAP believes these subsidiaries will facilitate its business diversification and new business model development.

ZAP operates its business in four reportable segments: Jonway Conventional Vehicles, Advanced Technology, Consumer Product and Car Outlet. We are in the process of liquidating the assets of the Car Outlet. These segments are strategic business units that offer different services. They are managed separately because each business requires different resources and strategies. The Jonway Conventional Vehicle Segment represents the manufacture and sales of vehicles through distributors in China and abroad. The Advanced Technology segment represents the sales activity of advanced technology vehicles to ZAP dealers throughout the U.S. The Consumer Product segment represents sales of our ZAPPY 3, a three wheeled electric scooter, and the overall corporate expenses of ZAP. Many of these expenses relate to the overall development of our core business, electric consumer products.

The board of ZAP has demanded that CO-CEO Alex Wang resolve the conflict of interest in Jonway Group's purchase of the Aptera assets and the formation of the new company Aptera (same name as the product) in the USA. Alex Wang has agreed to transfer the asset ownership of Aptera to Jonway Auto, but this currently remains unresolved.

Results of Operations

The following table sets forth, as a percentage of net sales, certain items
included in ZAP's Statements of Operations (see Financial Statements and Notes)
for the periods indicated:

                                                     Three Months
                                                    Ended March 31,
                                                   2013         2012
                Statements of Operations Data:
                Net sales                           100.0 %      100.0 %
                Cost of sales                      (94.8)       (94.2)
                Operating expenses                 (24.8)       (40.0)
                Loss from operations               (19.6)       (36.4)
                Net loss attributable to ZAP       (19.2)       (27.9)

These results of operations that have been derived from our 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.

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012

Net sales for the quarter ended March 31, 2013 were $14.4 million as compared to $12.2 million for the quarter ended March 31, 2012.

Jonway Auto's revenue for the quarter ended March 31, 2013 increased by $2.2 million from $12.0 million for the quarter ended March 31, 2012 compared to $14.2 million in first quarter ended March 31, 2013. The sales volume increased due to the following factors: (i) more SUV models were launched into market by China-based auto makers, which intensified the competition, (ii) Although Jonway 's upgraded A380, which was launched into the market to compete with these competitors, the resulting sales volume ramped up in this 1st quarter did not reach the expected volume (iii) increasing oil prices in China affected customer demand and (iv) China's overall economic condition worsened during the quarter (the GDP increase rate for this quarter compared to same quarter in 2012 was 7.7%, which is unexpected low).

Our first quarter sales of our Advanced Technology segment sales increased by $2,000 from $5,000 for the three months ended March 31, 2013 to $7,000 for the three months ended March 31, 2013. The increase is primarily due to a sale of our LSV Xebra XL. This is still far below our projections due to the tight United States credit market and general economic conditions negatively impacting our dealer sales in 2012. We also began the transition of moving our operations from the U.S. to China and switching suppliers for advanced technology vehicles from outside contract manufacturers to our auto manufacturing plant in China.

Our retail car lot experienced a decrease of $73,000 in sales for the first quarter from $73,000 in 2012 to $0.00 in 2013. We have closed the retail car lot and are currently settling our assets and inventory with Mr. Schneider, who is holding these assets until his claims are settled.

In our Consumer Product segment first quarter sales increased from $114,000 in 2012 to $123,000 in 2013. The increase is primarily due to a bulk sale to a major customer of our ZAPPY 3 electric scooters.

Gross profit increased by $48,000 from a gross profit of $702,000 for the three months ended March 31, 2012 to a gross profit of $750,000 for the three months ended March 31, 2013. Our margins declined from 5.8% to 5.2%.

Jonway Auto's gross profit decreased by $74,000 from $723,000 in the first quarter of 2012 to $649,000 for the first quarter ended March 31, 2013. The decrease was primarily due to a new price reduction program for the existing SUV models, which resulted in lower gross profit contributions in this first quarter, while the Company launched upgraded models. In order to deal with increasing competition in the SUV market in China, Jonway Auto initiated its price reduction program to end users throughout the three months ended March 31, 2013.

Advanced Technology vehicles gross profit increased $107,000 from a gross loss of $56,000 for the period ended March 31, 2012 to a gross profit of $51,000 for the period ended March 31, 2013. The increase was primarily due to increase in the amount of reserves included for inventory sold in 2013 that was fully reserved.

Our retail car lot gross profits decreased by $7,000 from $7,000 for the quarter ended March 31, 2012 to $0 for the quarter ended March 31, 2013. We have closed the retail car lot.

The Consumer Products segment experienced an increase in gross profit in the first quarter from $28,000 in 2012 to a profit of $50,000 in 2013. The increase was due to an increase in sales volume of our ZAPPY 3 Pro Flex.

Sales and marketing expenses decreased $367,000 from $2.1 million for the three month period ended March 31, 2012 to $1.7 million for the three months ended March 31, 2013. As a percentage of sales the expense decreased from 17.3% for the quarter ended March 31, 2012 to 10.0% for the quarter ended March 31, 2013 due to greater sales volume compared to the same period in 2012 and an overall decrease in sales and marketing expenses.

General and administrative expenses decreased by 679,000 from $2.1 million for the quarter ended March 31, 2012 to $1.4 million in 2013. The decrease was primarily a result of reductions in ZAP US operations due to the following: (i) less salaries and wages due to transferring of various functions to Jonway China, and (ii) less professional fees in 2013 as compared to the prior year in which we experienced non -recurring professional fees in connection with the Jonway acquisition in January, 2011.

Research and development expenses decreased by $129,000 from $279,000 for the first quarter ended March 31, 2012 to $ 150,000 for the first quarter ended March 31, 2013. The decrease was primarily due to fewer projects scheduled for the first quarter of 2013. In the prior year's quarter ended March 31, 2012, we incurred Research and Development fees relating to refinement of the automatic transmission for Jonway's three and five door sport utility vehicles.

Interest expense increased by $336,000 from $486,000 in first quarter 2012 to $822,000 in the first quarter of 2013. In 2013, the amortization of the previous year's discount on the convertible debt was significantly higher and we are incurring interest on our notes and short term borrowings.

Other income decreased by $48,000 from $235,000 for the period ended March 31, 2012 to $187,000 for the period ended March 31, 2013. This amount mainly represents a decrease in the sales of metal scrap, increase of interest income, and the reversal of selling expenses booked in 2012 in Jonway.

Liquidity and Capital Resources

In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in related party securities, and our operating and capital expenditure commitments. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. At March 31, 2013, we believe that we will have sufficient liquidity required to conduct operations through May 15, 2014.

In January 2011, ZAP issued $19 million of convertible debt to China Electric Vehicle Corporation ("CEVC") to make a partial payment in connection with the Jonway Acquisition. On March 31, 2012, ZAP entered into an amendment to the note which extended the maturity date of the note from August 12, 2012 to August 12, 2013. This amendment changed the terms of the note requiring adjustment of the conversion price of note for dilutive issuances by ZAP. In addition, the warrant issued in connection with the CEVC note was amended to change the terms of conversion and to extend the maturity date until February 12, 2014. The interest accrued through the maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. The total amount of the convertible note is approximately $20.7 million with a new maturity date of August 12, 2013.

At present, the Company will require additional capital to expand our current operations. In particular, we require additional capital to expand our presence into Asia, to continue development of our methodology for converting gasoline vehicles to electric and to continue building our dealer network and expanding our market initiatives. We also require financing to purchase consumer inventory for the continued roll-out of new products to add qualified sales and professional staff to execute our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias and other fuel efficient vehicles.

We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments. However, we may not be able to obtain this additional financing on terms acceptable to us or at all.

In the first three months of 2013, net cash used for operating activities was $4.7 million. Cash used in the first three months of 2013 was comprised of the net loss incurred for the three months of $3.9 million plus net non-cash expenses of $2.8 million and the net increase of $3.9 million in operating assets and liabilities. In the first three months of 2012, net cash used for operating activities was $1.9 million.

Investing activities used cash of $335,000 and $597,000 in the first three months ended March 31, 2013 and 2012, respectively. Investing activities were used for the purchase of equipment for the period ended March 31, 2013 and 2012, respectively.

Financing activities for the three months ended March 31, 2013 provided cash of $4.7 million compared with financing activities that used cash of $1.4 million in 2012. During the first three months of 2013, we provided cash of $18.9 million in short term loan and notes and 18.7 million from proceeds from related parties. We used cash of $10.0 million in repayment of notes and short term borrowings and $10.0 for repayment of related party borrowings. Restricted cash changed by $4.2 million for the three months ended March 31, 2013.

The Company had cash of $1.2 million at March 31, 2013 as compared to $1.7 million at December 31, 2012. The Company had working capital deficits of $53.1 million and $54.3 million for the periods ended March 31, 2013 and December 31, 2012 respectively.

In the event that we require additional liquidity, one of our shareholders, Jonway Group, has agreed to provide the necessary support to meet our financial obligations through May 2014.

On May 6, 2013, the U.S. Department of Justice filed a complaint for declaratory and injunctive relief and for civil penalties against the Company. The complaint was filed in the U.S. District Court for the District of Columbia as United States v. ZAP; Civil Action No. 13-646. The action was brought under the National Traffic and Motor Vehicle Safety Act of 1966. The complaint alleges that the Company failed to develop and implement a remedy to bring its 2008 ZAP Zebra into compliance with minimum safety requirements; failed to timely and properly notify the National Highway Traffic Safety Administration ("NHTSA") about the vehicle recalls; and was uncooperative and evasive with NHTSA. The Company has discontinued the sale of the Zebra vehicles after these 2008 models. The 2008 Zebra vehicles were manufactured by a company called, Fula, based in Shandong Province, China, that ZAP had imported from.

The complaint seeks relief, which amount other things, would impose penalties of $6000 to $7000 for each violation. Because the total amount of the penalties would exceed the maximum civil penalties for the series of alleged violations, the complaint seeks to impose the statutory maximum of $17,350,000 in civil penalties.

The Company will respond to the complaint after appropriate consultation with its legal counsel. This legal proceeding is subject to many uncertainties, and the outcome of this complaint is not predictable with assurance. The extent of our financial exposure to this matter is difficult to estimate at this time. However, the negative outcome of this complaint could adversely affect the Company's liquidity and resources.

Critical Accounting Policies and Use of Estimates


The preparation of the unaudited condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates

Stock Based Compensation

The Company accounts for stock-based compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the "Black-Scholes model"). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.

The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.

Allowance for Doubtful Accounts

The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.


Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out basis) or market (net realizable value or replacement cost). The Company maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company's products and corresponding demand were to decline, then additional reserves may be deemed necessary. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.

Off-Balance Sheet Arrangements


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