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EX-31.2 - EXHIBIT 31.2 - ZAPex31_2.htm
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EX-31.1 - EXHIBIT 31.1 - ZAPex31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _______________________

Commission file number: 0-303000
ZAP
(Name of small business issuer in its charter)


California
94-3210624
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
2 West 3rd Street
Santa Rosa, California
95401
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (707) 525-8658
 
Securities registered pursuant to Section 12(b) of the Act:  None.
 
Securities registered pursuant to Section 12(g) of the Act:  

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
 
 
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
o                       Accelerated filer
o
Non-accelerated filer
o                       Smaller reporting company
x
(Do not check if a smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold or the average bid and asked prices as of June 30, 2015 was $7,625,300.

There were a total of 578,465,159 shares of the Registrant’s Common Stock outstanding as of April 7, 2016.
 


 
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Item No.
 
PART I
TABLE OF CONTENTS
 
 
Page
     
Item 1.
Business.
5
     
Item 1A.
Risk Factors.
16
     
Item 1B.
Unresolved Staff Comments.
36
     
Item 2.
Properties.
36
     
Item 3.
Legal Proceedings.
37
     
Item 4.
Mine safety disclosures
38
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity
Securities.
38
     
Item 6.
Selected Financial Data
39
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
40
     
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
46
     
Item 8.
Financial Statements and Supplementary Data.
46
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
77
     
Item 9A.
Controls and Procedures.
77
     
Item 9B.
Other Information.
78
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance.
79
     
Item 11.
Executive Compensation.
80
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
81
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
82
     
Item 14.
Principal Accountant Fees and Services.
84
     
PART IV
   
     
Item 15.
Exhibits, Financial Statement Schedules.
85
     
Signatures
 
87

 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K, including the sections entitled “ “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and  “Business” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 obtain adequate working capital from Chinese banks to finance the manufacturing of the products ordered by the dealers;

 
·
our ability to raise additional funding to support the on-going capital investment needed to produce new models and stay competitive in the automobile market;

 
·
our ability to find the bank financing needed by the dealerships in China to support products to display in their show room and stock the warehouse inventory;

 
·
our ability to fund marketing and sales in order to establish and strengthen our sales network, product brand and promote the Company’s products;

 
·
our ability to maintain the key partnerships that support the electric vehicle orders placed with Jonway Auto;

 
·
our ability to maintain effective disclosure controls and procedures;

 
·
our ability not to be diluted from the 51% ownership of Jonway Auto due to the capital needs of Jonway Auto which may independently seek funding that would reduce ZAP’s 51% ownership

 
·
whether the convertible note from China Electric Vehicle Corporation (CEVC) which will be due December 31, 2016 will be extended, and if not this could be converted to Jonway Auto shares and would reduce ZAP’s ownership of Jonway Auto to significantly below 51%

 
·
our ability to utilize ZAP’s presence in the US to successfully market and sell Jonway’s products;

 
·
whether the Chinese government subsidies for electric vehicles will continue through 2020 at the levels that have been published;

 
·
our ability to attract and retain the personnel qualified to implement our growth strategies;

 
·
our ability to obtain type approval from government authorities for new 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; and

 
·
changes in our business plan and corporate strategies that may affect the financial performance of ZAP and Jonway.
 
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 annual report on Form 10-K 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.

 
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PART I

Item 1.   Business

Overview of Recent Developments

Wang Gang, Alex was appointed as Chairman of ZAP and Jonway Auto as of June 5, 2015 when Dr. Priscilla Lu stepped down as Chairman and director on the board of ZAP.  At the same time, Goman Chong also stepped down as director of the board of ZAP.  Cathaya Capital is entitled to three board seats for as long as the CEVC note is outstanding.  With the resignation of Dr. Lu and Goman Chong, Cathaya Capital appointed Otto Bai JianXiong and Tian Ming to replace the two board seats, both are independent directors with no prior affiliation with Cathaya Capital.  Otto Bai has a financial background and graduated from Beijing Union University in Business.  He is currently a partner at Unicorm Insights Consulting Company, and does business trade and business development in cultural design art and fashion.  Tian Ming holds an MBA from Tsinghua University’s School of Economics and Management.  She has a Bachelor’s Degree in Computer and Information from PLA Information Engineering School.  She is currently CEO of Bling Bling Health Management Center in Beijing.  The directors of ZAP’s board are Alex Wang Gang who is Chairman and CEO of ZAP and Jonway Auto, Huai Yi Wang, Chairman of Jonway Group, Co Nguyen, Cathaya Capital, Tian Ming and Otto Bai JianXiong, the latter are both independent directors with no affiliation to ZAP or Jonway Auto.

Chuck Schillings who was formerly the Co-CEO of ZAP stepped down at the end of December 2015.

In the interest of reducing cost overhead, ZAP has recently begun the process of dissolving ZAP’s Hangzhou Joint Venture, and ZAPPLE, the car leasing company set up for Shanghai city.   Jonway Auto has also aborted all sales of gasoline vehicles as of the end of 2015 in order to focus on pure electric vehicle products.  The EV minivan from Jonway Auto was type approved for passenger use as well as for delivery trucks in China in 2015.

ZAP designs, develops, manufactures and sells fully electric and advanced technology vehicles. The acquisition of 51% of the equity shares of Zhejiang Jonway Automobile Co. Ltd., or Jonway, in January 2011 was attained by funding of initially more than $36 million from Cathaya Capital, of which US$19 million of the $36 million was in the form of a convertible note with interest. The goal was to have access to an automobile manufacturing facility for producing electric vehicles and to have access to the electric vehicle market in China through Jonway Automobile’s dealership network.  We believed that this would help position ZAP as a significant supplier to electric vehicles in the Chinese market.

The acquisition of a majority interest in Jonway gives ZAP a full automobile production manufacturing facility to mass produce electric vehicle products and allows us to expand our distribution network for ZAP’s electric vehicles and provide access to the rapidly growing electric vehicle market  in  China  and internationally. The electric version of Jonway’s A380 SUV was type approved in 2013 in China, and the EV minivan was type approved in 2015, these products have been upgraded to comply to recent EV policy changes that dictate the boundary conditions for EV subsidies and the products have been improved to support more recent advanced lithium battery systems and improved electric power train.  In the first quarter of 2016, changes in the subsidy policies for EV batteries were announced, further clarification how these policies impact the amount of subsidy available to various types of vehicles are still being clarified, thus causing a slowdown in the orders and production of the EV minivan sales in the 1st quarter of 2016.

In 2014, Jonway transitioned away from its traditional gasoline vehicle business to focus on the electric vehicle market. This resulted in lower net income in 2015 compared to 2014, and increased the burdened cost of production due to lower volumes. Jonway’s gasoline SUV and minivan faced stiff competition in China in the last couple of years, due to increased number of larger companies who are now dominating this category of vehicles for gasoline cars. With increased competition, Jonway has had to lower its price for its gasoline SUV models, resulting in lower gross margins. The lower volume of gasoline vehicles produced due to the competitive SUV market, created a barrier for further material cost reduction. Due to the challenging environment for gasoline vehicle markets, in 2014 and 2015, ZAP Jonway realigned its focus on electric vehicle markets and launched the small low speed electric vehicle, while continuing to enhance and upgrade its EV SUV and EV minivan. The 2016 projected forecasts currently is focused only on EV minivan, which comes primarily from two of the subsidiaries of the single largest manufacturer of trucks and vans in China, Dong Feng Motors.
 
 
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The EV SUV and EV minivan currently is lithium based with eligibility to qualify for subsidies from the Chinese central government and certain local governments. The cost of lithium battery based electric vehicle has been expensive, with the batteries accounting for usually more than 60% of the cost of the vehicle. Without government subsidies, the lithium based EV would be too costly for the Chinese market. The Chinese government has committed to continue to reimbursed lithium based EVs until 2020, with gradual reduction of 5% per year in the amount subsidized. The subsidies from the government are reimbursed to the manufacturers after the EV has been sold. The time to get the reimbursement can be lengthy and the process arduous. As a result, the manufacturer would still need to put up the full amount of working capital in order to produce the EV and sell it, and then subsequently at some later date, get the reimbursement from the government. To mitigate the working capital requirements to fund the production of EVs with lithium batteries, Jonway is working on a lead acid battery version of the minivan and SUV; these are designed for city driving but will not be eligible for government subsidies because it is lead acid based.  However, the lower price of the lead acid EV may be equally competitive, especially for the minivan market where most buyers are using it for city deliveries with daily limited driving range. The lead acid minivan is targeting its price point to be only slightly above the gasoline minivans, and similarly for the SUV lead acid versions as well. Driving range for the lead acid battery vehicles will be 35% to 40% less than the lithium battery ones. However, the minimum range will still be over 100km. We started to sell these lead acid EVs with lower range and smaller engines, targeting small city driving in 2015, which is not dependent on reimbursements from the government subsidies.  We expect continuous growth in this market, as a result it will hopefully reduce the strain on working capital.

In order to more efficiently address the market demand for EVs, especially in the smaller cities, Jonway launched a smaller more economical lower speed vehicle (LSV), the Urbee which is lead acid based. This small lead acid battery EV is much cheaper than the lithium based EVs, but is not eligible for government subsidies.  The Urbee being a much lighter vehicle requires less battery and is able to sustain a reasonable range of 150km between charges.

The Urbee EV is targeting the lower end market in China and internationally. However, today China does not offer low speed vehicle (LSV) licenses, and most of the LSVs sold in China are in the Shandong and Hunan provinces where local governments have granted an exception to support LSVs. The LSV products in China are not eligible for subsidy, even if produced with lithium batteries, because China has not yet approved this as an automobile category. Although several hundred thousand LSVs were sold in 2014, these have been sold primarily in the provinces where local governments have granted such exceptions to support LSVs in small towns and villages. This support is given in order to enable consumers to have a lower cost alternative means of transportation without adding to air pollution.

The near term objective for the Company is to produce EV minivan, and work with a few partners in China initially as OEM manufacturers with Dong Feng Motors’ label, and subsequently to co-label with Dong Feng so that Jonway Auto will begin to get market recognition for its products.  , As for the Urbees, since China does not have a LSV category for its automobiles, many dealers are hesitant to carry Urbees.  Urbees as a LSV is not yet an authorized automobile category that can be registered with a license plate. The places where Urbees are sold in China are primarily in very small towns and villages where buyers are buying Urbees as an alternative to motorcycles for a safer and more comfortable means of transportation.  This market remains limited in China.  Since the Urbees are DOT approved for the US, the Company will begin a marketing effort to sell Urbees in special vertical markets in the US, such as retirement homes, resorts and university campuses.

Our strategy in the longer term is to focus on the EV minivan market for China’s city delivery fleets where EVs can help reduce pollution in the cities.  The Company’s EV minivan is ideal for this market and can be configured as a delivery van or a passenger van... 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 incentives to use EVs can be compelling for these markets.

The high cost of lithium batteries and EV power train have created working capital challenges for Jonway. As a result, Jonway signed OEM agreements with companies such as Shi Kong from Hangzhou, who is partnered with Dong Feng (one of the largest government auto manufacturers in China) to manufacture and sell the Company’s EV minivan. Dong Feng has access to  very  large  working  capital  and  benefits  from  its  larger  distribution  channels  and  established  sales network. Under the OEM business model, Jonway is not directly selling into the distribution channels or end customers, so the margins would be lower but the large sales opportunities could drive volume and ultimately reduce the manufacturing material costs. This partnership arrangement mitigates the strain for working capital and cost of sales as well as operating expenses, and could help the net margins. This is in the near term one of the ways to address the market without straining for more working capital. Longer term, ZAP and Jonway would want to develop its own new EV distribution network, and to be able to fund this new channel development, both ZAP and Jonway are seeking additional funding from financial institutions and strategic partners.

Background and History

ZAP has twenty years of experience inventing, designing, manufacturing and selling innovative products. In 1995, we began marketing electric transportation on the internet through our website www.zapworld.com. We have been a pioneer in developing and marketing electric vehicles such as the zero- emission ZAP® electric bicycle, the ZAP Power System, which adapts to most bicycles and the ZAPPY® folding electric scooter. In 2003, we announced our first electric automobiles, including an electric automobile imported from our Chinese supplier. And in 2004, we introduced electric all-terrain vehicles. In 2005, we introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline. From 2006 to 2009, we introduced the all-electric Xebra Truck, ZAP Truck XL and ZAPVAN Shuttle.
 
 
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ZAP was incorporated in 1994 under the name “ZAP Power Systems,” and changed its name to “ZAPWORLD.COM” in 1999 and ZAP in 2001. ZAP’s principal executive offices are located at 2 West 3rd Street, Santa Rosa, California 95401. ZAP’s telephone number is (707) 525-8658. ZAP’s main company website is www.zapworld.com. Information contained on the website is not incorporated by reference herein and you should not consider information on the website to be part of this annual report on Form 10-K.

ZAP has twenty years of experience designing, developing, manufacturing and selling innovative electric transportation products and Jonway has more than ten years of automobile manufacturing production history, and holds the rights to the license for manufacturing SUVs and minivans (Chinese Auto License #6) issued out of the city of Hangzhou in Zhejiang Province. This is the only automobile license issued by Hangzhou city, which is considered one of the largest and more industrially advanced cities in China. Jonway’s factory has approximately 400 factory workers and engineers and around 1 million square feet of manufacturing space, with the ability to produce up to 50,000 automobiles per year, and an extensive sales distribution network in China.

China Fleet Market. ZAP Jonway intends to focus on the rapidly growing market for electric vehicles in China and abroad through the sale of plug in electric SUV and Van models to large taxi and corporate fleets in China and internationally. ZAP Jonway received type approval of its E380 in January 2013 and the EV minivan in 2015. A lead acid version of the minivan EV will also be offered for the low end market and the plan is to have the lithium acid version of the minivan which is standard high speed for highway use, be focused at the delivery logistic market for China and the EV lithium minivan is eligible for government subsidies. There is rapid adoption in the use of electric vehicles for fleets that are focused on delivery and logistic as well as minivans with passengers for car-sharing leasing companies in the densely populated cities.

ZAP Jonway also intends to market its vehicles to government and corporate fleets.  ZAP believes that the adoption of electric vehicles continues to be limited by the lack of adequate charging infrastructure, service and support. ZAP believes that these limitations can be more easily managed in fleet operations where vehicles may travel along predictable routes and have a central point of operation.  Accordingly, ZAP markets its vehicles to fleet customers.

Our Vehicles and Products

Jonway Automotive Products: Gasoline Model

Jonway’s current automotive product line includes the gas fueled A380 Five-Door SUV, the A380 Three-Door SUV and the Jonway Van.  The A380 Three-Door SUV has not been popular in China, and is offered only in limited quantities.  The gasoline version has been discontinued, and an EV version of this smaller 3-door SUV will be launched later this year to address the passenger EV market.

Jonway A380 Five-Door. The Jonway A380 Five-Door is a gasoline powered 4-speed sport utility vehicle available in 1.5 liter engines and the manufacturing of the gasoline version has been discontinued.


Jonway Van.  The Jonway Van is a conventional fuel small van. This product was launched in 2012.  Due to the competitive market for gasoline minivans in China, Jonway has not had large volume sales of gasoline minivans.  The target for volumes sales for the minivans will be in the EV models.  Jonway has discontinued the sale of the gasoline minivans.

ZAP Automotive Products: Electric Vehicles

ZAP Jonway SUV A380, E380 and E380-S. ZAP’s current automotive product line includes the all-electric E-380 SUV. The E-380 SUV has a range of 150km and speed of up to 130km per hour. It has a 25 kwatt engine, with peak performance of over 60kwatt. This has been type approved for China and is available for international markets.

ZAP Jonway Minivan. The Minivan which was introduced in 2012 is offered in the traditional gasoline model with a 1.1 liter engine. This minivan will be offered as EV with two options in 2015: one with lead acid for the low end market where range is limited to 80km and speed is no more than 100km per hour and a high end model with lithium batteries where speed is 130km per hour and range is over 200 km distance.

URBEE. The Urbee is a low-speed electric vehicle. With a driving range of over 150 km per charge, it is ideally suited for daily city driving with overnight recharging. The Urbee can hold up to two passengers is designed for corporate and university campuses, airports, warehouses, military bases, retirement communities and golf courses. A four passenger, four door version is now available in China, and has a higher power engine. The maximum speed for the Urbee is 60kph (~37 mph). The Urbee is type approved for Europe as L6 vehicle, and DOT approved as LSV in the U.S. As it is classified as a LSV (Low speed vehicle) the Urbee is limited by its controller to travel at speed up to 25 mph (the maximum for LSV’s) in the US and European markets. This vehicle is DOT compliant and the Company is obtaining CARB approval in the US for all the different versions of the Urbees and the European version for the 2-door had been type approved for Europe.

 
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Jonway Auto was issued the EV Catalogue License and factory certification for EV production manufacturing

China was issued the EV Catalogue License and factory certification for EV production manufacturing, and also received E380 SUV China type approval and Catalogue License. The EV Catalogue License issued to Jonway's factory for production manufacturing of Electrical Vehicles allows their factory in Sanmen, Zhejiang to manufacture and produce all current and future Electrical Vehicle products.  This certification process rigorously verifies the factory's safety procedures in handling production of EV products, and reviews the production processes, testing and handling of lithium battery packaging and installation.

ZAP Jonway also received the type approval for its E380 SUV. The E380 SUV represents the first international EV to receive Chinese type approval. The E380 SUV is the first electric vehicle allowed to be produced and sold in China from an international company, ZAP. The electric power train for the E380 SUV was designed by ZAP Hangzhou Joint Venture; a joint venture company formed to do engineering design for electric vehicles, and was principally responsible for achieving the type approval, working in conjunction with the factory engineers at Jonway Auto. This long arduous testing process took more than one year, and required extensive endurance and safety testing, as well as detailed engineering documentation of both the design and the test

Jonway and other Strategic Relationships

Jonway.

We acquired 51% of the equity shares of Jonway in January 2011.

Jonway is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China, or PRC, in April 2004 by Jonway Group Co., Ltd., or Jonway Group, and three individuals.

Under the laws of the People’s Republic of China, only an enterprise approved by Ministry of Industry and Information Technology and listed in the National Catalog for Whole Automobile Manufacturing Enterprises and Products, or the National Catalog, is allowed to manufacture whole automobiles and is limited to the models designated therein for each manufacturer. The National Catalog functions as a manufacturing permit or license to allow the enterprises to manufacture specified automobile models under specified brands, as listed in therein.

Neither Jonway nor Jonway Group is in the National Catalog or qualified directly to produce whole automobiles. Zhejiang UFO Automobile Manufacturing Co., Ltd., or Zhejiang UFO, to which Jonway Group is one of three shareholders with minority interest, is listed in the National Catalog as a qualified manufacturer of certain UFO-brand cars. Jonway currently has authorization from Zhejiang UFO to use Zhejiang UFO’s manufacturing permits and licenses to assemble and sell the automobiles manufactured by Jonway at the Sanmen branch of Zhejiang UFO, or the Sanmen Branch, pursuant to the Contractual Operation Agreement entered into among Zhejiang UFO, Jonway and Jonway Group on January 1, 2006, or the Operations Agreement. This agreement gives Jonway the authority to manufacture #6 Catalogue licensed vehicles which specifically includes SUVs and Minivans in China. This license is required in China for sales in China and for export internationally. Pursuant to the Operations Agreement:
 
 
Ÿ
Zhejiang UFO granted Jonway the full power to operate and manage the Sanmen Branch and manufacture the SUV and minivan products for which Zhejiang UFO has manufacturing permits or licenses, except for certain professional matters;
 
 
Ÿ
the parties agreed that the Sanmen Branch shall not manufacture or sell other automobiles or products without Zhejiang UFO’s authorization or conduct any business with a third party other than Jonway; and

 
Ÿ
Jonway agreed to pay certain contracting fees to Zhejiang UFO.  Zhejiang UFO and Jonway Group have mutually agreed that the Operations Agreement will be extended indefinitely for Jonway to produce and sell the SUV and minivan models.  .

We understand that laws of the People’s Republic of China do not expressly prohibit the aforementioned arrangements. However, it is possible that the government of the People’s Republic of China may decide that manufacturing Jonway automobiles under Zhejiang UFO’s license or the manufacturing of vehicles with a brand name other than the UFO brand listed in the National Catalog is not in full compliance with laws of the People’s Republic of China. In this case, Jonway could face sanctions from the government, including fines, an order to cease operations, and revocation of Jonway’s general business license. To be a qualified automobile manufacturer, Jonway may apply to the government of the People’s Republic of China to be separately listed on the National Catalog.  However, due to the current industry policies of the government of the People’s Republic of China, new manufacturing permits and licenses are rarely, if ever, granted and even then, applying for new models is likely to be a time-consuming process.  Also, if the government were to revoke Zhejiang UFO's license or if Zhejiang UFO refuses to apply for Jonway models under the National Catalog, Jonway may have to look for alternative partners that could lend the use of such a license for a fee. If this were to happen, it may take some time to formalize the agreement with the potential new partner. However, this is not uncommon, as currently, there are many companies in China already utilizing another company’s license to manufacture the automobiles.
 
 
8

 
 
Jonway has a general business license issued by the company registration authority of the People’s Republic of China, indicating that it is duly incorporated, validly existing and has an operation term of 36 years, or until 2040, which term may be extended, subject to government approval.

Under the laws of the People’s Republic of China, a foreign investor is not allowed to acquire more than a 50% equity interest in a company which is qualified to manufacture whole automobiles. As Jonway is not in the National Catalog and is not qualified to produce whole automobiles, ZAP’s acquisition of 51% of the equity shares of Jonway has been approved by the relevant governmental authorities.

In July 2010, ZAP entered into that Certain Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd, as amended with Jonway Group, or the Jonway Acquisition Agreement, for the acquisition of 51% of the total equity shares of Jonway, for a total purchase price of $31.75 million of which $29.03 million in cash was paid from the funding by Cathaya Capital into ZAP in order to attain the 51% equity purchase and an additional 8 million shares of ZAP stock valued at $2.72million have been paid for the total purchase price of $31.75 million. To complete this transaction, Cathaya Capital funded ZAP a total of US$36 million at the time when the transaction was closed. Out of this $36 million, $19 million was in the form of a convertible note through a special purpose vehicle China Electric Vehicle Corporation (CEVC). With interest accrual the current face value of the note is US$20,679,069.

On January 21, 2011, ZAP completed the acquisition of 51% of the equity shares of Jonway, which transaction was approved by the Department of Commerce of Zhejiang Province in September 2010. As of December 31, 2014, ZAP, Jonway Group, Wang Gang and Wang Xiao Ying held 51%, 39%, 8% and 2% of Jonway’s equity shares, respectively.  In June 2010, ZAP issued 40 million shares of stock valued at $10 million to Cathaya Capital, L.P., or Cathaya, in order to pay $10 million of the purchase price under the Jonway Acquisition Agreement. In January 2011, ZAP issued $19 million of convertible debt to CEVC, a subsidiary of Cathaya in order to pay an additional $19,030,000 under the Jonway Acquisition Agreement, including a foreign currency adjustment of $30,000. In March 2012, the convertible debt was extended to August 12, 2013 with no interest payments. This convertible note has been extended subsequently multiple times, each time for an additional year and the last extension puts the expiration date at August 12, 2015, with interest accrual as determined by the auditors, at 8% per annum. The accrued interest resulted in an increase in the value of the convertible note to $20,679,069. In the event that CEVC decides to call on the repayment, the repayment would likely be paid in Jonway Auto shares which according to the commitment signed in the convertible note would result in 0.003743% of Jonway equity for each multiple of $1000 on the value of the note. Currently this stands at 39.47% of the equity holding in Jonway Shares. If the repayment were made to CEVC, ZAP continues to retain all rights signed in former agreements with Jonway Auto, such as the exclusivity of all international distribution rights of Jonway Auto’s EV and Jonway Motorcycle EVs, signed with Goldenstone Worldwide Ltd in October 2010, which owns all international distribution rights of Jonway Auto. Through the distribution agreement rights signed with Goldenstone Worldwide Ltd, ZAP will continue to own the worldwide exclusive rights to distribute EVs produced by Jonway Auto, and also EV motorcycle for Jonway Motorcycle which is a subsidiary under Jonway Group, even if ZAP’s convertible note repayment to CEVC were made with Jonway Automobile’s shares.

Jonway is located at the Da Tang industry zone of Jiantiao Village, Sanmen County, Zhejiang Province in China.  Jonway has around 1 million square feet of manufacturing space, on 64 acres of land with the ability to produce up to 50,000 automobiles per year. Jonway distributes its vehicles through a network of more than three hundred factory and authorized dealers. The lack of working capital has constrained the production delivery of the SUVs despite orders in the backlog.  The reduced working capital caused delay in shipments for orders placed by the dealers.  This delay in shipment further aggravates the reduction of sales.   Chinese banks overall have been reducing the available credit to small and medium size companies in China, in order to increase the banks’ credit reserves.  Jonway’s loans with the banks, following market trends, have been reduced due to the bank’s credit reduction.  Jonway is seeking additional financing from Chinese banks and institutions.  If Jonway were successful in getting investors or strategic partners to do equity funding of the working capital and on-going manufacturing costs of Jonway, ZAP’s equity ownership of Jonway will be reduced to below 51%.  However, ZAP would still continue to own the rights for sales of the EV products of Jonway.

Jonway launched the five-door manual transmission A380 SUV and the five-door automatic transmission A380 SUV in March 2009 and in October 2010, respectively. In 2014, Jonway reduced the number of different SUV models offered to the dealers and focused on promoting the more cost competitive 1.5 liter model. Jonway has stopped the production of its gasoline SUVs and minivan due to its realignment to focus on electric vehicle market only. Jonway successfully introduced Urbee, a lead acid driven small electric vehicle in April 2014. This widens the product line of the company, and allows it to sell these smaller LSV EVs internationally.

In October 2010, ZAP entered into an International Distribution Agreement with Goldenstone Worldwide Limited, which has international distribution rights for all of Jonway Group’s products in the United States and internationally, in exchange for 30 million shares of ZAP’s common stock valued at $14.4 million. ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the worldwide distribution rights for Jonway products.  Therefore it was necessary for ZAP to acquire distribution rights for Jonway products.
 
 
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      ZAP Hangzhou. In 2009, ZAP and Better world formed a joint venture technology development company in Hangzhou. Currently, the joint venture is 37.5% owned by ZAP, 25% owned by Jonway Group, and 37.5% owned by Better World. The joint venture has been discontinued due to the cost of supporting a separate satellite office in Hangzhou.  The company registration will be dissolved this year.  All of the engineering formally done within this organization has been moved to Sanmen.

      Better World sales and distribution of Z-Chargers. ZAP USA has exclusive sales and distribution rights on Better World’s Z-Charger stations. Due to the limited resources of the Company and Jonway Auto’s focus on manufacturing only EV minivans in order to reduce capital costs, and operational overhead, the charging station business has been discontinued.

 
Technology

ZAP has developed expertise in electric drive train integration and ZAP Hangzhou JV has filed more than 10 patents, and has key technologies in the area of vehicle management system (VMS). This is the control system that manages and coordinates the functions between the motor, the battery management system and the auxiliary systems that require power from the batteries, such as power steering, power brakes, air conditioning and heating, power windows and locks.

Jonway’s research and development expenses were $1.5 million in 2015 and $0.6 million in 2014.

Sales and Marketing

ZAP currently markets and sells ZAP Jonway products internationally and to dealers in the U.S.  This sales effort has been underfunded and in 2015, the Company was unable to deliver sales in the US or South America.  As a result, the international sales effort has been on hold.  The Company will revisit the US LSV market to find partners to begin selling its Urbees, and hope to be able to establish new dealership channels for the LSV market.

With the new focus by Jonway to emphasize primarily on electric vehicle markets in China, the dealerships established for the gasoline products are not necessarily appropriate. Given the lack of readily available recharging infrastructure for electric vehicles, the main market for EVs seem to be with fleets. The current dealership networks from Jonway sell primarily to end customers. Fleet markets tend to be vertical markets that are better addressed by specialized sales force.  This new sales force or sales channel is currently being cultivated through the partnerships that Jonway is establishing with its minivan EV partners.

Historically, we spent a low level of marketing and sales expenditure due to the shortage of available funds, and as a result Jonway has relied more on the major partners that it has established recently to launch the sales of its EV products.
 
After-Sales Services

ZAP currently offers a limited one-year warranty on its fleet and utility vehicles and six- and three-month warranties on its consumer electric scooters and bicycles, respectively. ZAP offers factory-training for dealer and distributor service technicians.   In China, Jonway Auto provides a one year warranty on the products it delivers to Dong Feng Motors, and plans to follow the same service support model with other major EV partners.  The strategy for EV marketing and sales is to remain focused on working with major partners instead of developing local direct sales dealers due to Jonway’s focus on fleets which are primarily with strategic partners as well as the cost overhead of direct sales and marketing.

Manufacturing

ZAP Jonway manufactures the A380 electric SUV and the minivan at Jonway’s manufacturing facility in Sanmen, Zhejiang China.  This facility has the capacity to produce up to 50,000 vehicles per year, this includes the production of EV minivans.  Jonway produces the three-door and five-door A380 SUVs and spare parts at this facility. It also produced minivan starting from 2012. In 2014, Jonway commenced the production of Urbee with the production capacity of 30,000 vehicles per year. Jonway’s facility is certified under the ISO 9000 quality standards promulgated by the International Organization for Standardization.

Jonway’s manufacturing operations include pressing, welding, painting and assembling lines.

Sources and Availability of Parts and Supplies

Materials, parts, supplies and services used in ZAP Jonway’s business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our general operations, or our manufacturer’s operations and production of ZAP Jonway’s products. ZAP Jonway strives to have at least two sources for parts and supplies. ZAP Jonway continues to forge partnerships with top tier suppliers in the automotive and electric vehicle component business.  Mitsubishi currently supplies a complete drive train for the Jonway A380 SUV.

 
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Regulation

Vehicle Safety and Testing

In China, the vehicles sold have to undergo type approval for safety and compliance to local regulatory requirements for both gasoline and electric vehicles. These type approvals are granted only for vehicles that have been authorized as one of the catalogued registered license vehicles that the automobile manufacturer is allowed to manufacture and sell in China.

In the U.S., our vehicles are subject to numerous regulatory requirements established by the National Highway Traffic Safety Administration, or NHTSA, including all applicable United States federal motor vehicle safety standards, or FMVSS. As a manufacturer, we must self-certify that a vehicle meets or otherwise obtain an exemption from all applicable FMVSSs, as well as the NHTSA bumper standard, before the vehicle can be imported into or sold in the United States. There are numerous FMVSSs that apply to our vehicles. Examples of these requirements include:

 
Crash-worthiness requirements—including applicable and appropriate level of vehicle structure and occupant protection in frontal, side and interior impacts including through use of equipment such as seat belts and airbags which must satisfy applicable requirements;

 
Crash avoidance requirements—including appropriate steering, braking, electronic stability control and equipment requirements, such as, headlamps, tail lamps, and other required lamps, all of which must conform to various photometric and performance requirements;

 
Electric vehicle requirements—limitations on electrolyte spillage, battery retention, and avoidance of electric shock following specified crash tests;

 
Windshield defrosting and defogging—defined zones of the windshield must be cleared within a specified timeframe; and

 
Rearview mirror requirements—rearward areas that must be visible to the driver via the mirrors.

Several FMVSS regulations that NHTSA has promulgated or amended recently contain phase-in provisions requiring increasing percentages of a manufacturer’s vehicles to comply over a period of several model years. Those FMVSSs generally allow low volume manufacturers (those who manufacture fewer than 5,000 vehicles annually for sale in the United States) and limited line manufacturers (those who sell three or fewer vehicle lines in the United States) to defer compliance until the end of the phase-in period. Under U.S. law, we are required to certify compliance with, or obtain exemption from, all applicable federal motor vehicle safety standards.

We are also required to comply with other NHTSA requirements of federal laws administered by NHTSA, including the Corporate Average Fuel Economy standards, consumer information labeling requirements, early warning reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls, and owner’s manual requirements.

Our vehicles sold in Europe are subject to European Union safety testing regulations. Many of those regulations, referred to as European Union Whole Vehicle Type Approval, or WVTA, are different from the federal motor vehicle safety standards applicable in the United States and may require redesign and/or retesting. The Small Series WVTA permits the manufacture and sale in the European Union of no more than 1,000 vehicles per year. ZAP Jonway plans to keep European sales of ZAP Jonway vehicles at less than 1,000 vehicles per year, and has no plans to commence testing of ZAP Jonway vehicles for the WVTA to assure compliance with the European Union requirements to permit unlimited sales. Similarly, Japan has additional testing regulations applicable to high volume manufacturers, in addition to import rules. We also plan to keep Japanese sales of ZAP Jonway vehicles at a low volume, and have no plans to comply with the Japanese requirements to permit high volume sales in these jurisdictions.

The EPA requires us to calculate and display the range of our electric vehicles on a label we affix to the vehicle’s window. The EPA specifies that we follow testing requirements set forth by the Society of Automotive Engineers, or SAE, which further requires that we test using the United States EPA’s combined city and highway testing cycles. The EPA announced in November 2009 that it would develop and establish new energy efficiency testing methodologies for electric vehicles. Based on initial indications from the EPA, we believe it is likely that the EPA will modify its testing cycles in a manner that, when applied to our vehicles, could reduce the advertised range of our vehicles. To the extent that the EPA adopts these procedures in place of the current procedures from the SAE, this could impair our ability to advertise ZAP vehicles at their current advertised range. Moreover, such changes could impair our ability to deliver the Alias and the electric Jonway A380 SUV with the initially advertised range. Although the real life customer experience of the range of our electric vehicles will not change due to the changes in the EPA standards, the reduction in the advertised range could negatively impact our sales and harm our business.
 
 
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The Automobile Information and Disclosure Act require manufacturers of motor vehicles to disclose certain information regarding the manufacturer’s suggested retail price, optional equipment and pricing. In addition, the Act allows inclusion of city and highway fuel economy ratings, as determined by EPA, as well as crash test ratings as determined by NHTSA if such tests are conducted. As a manufacturer of only electric vehicles, compliance with the EPA labeling requirements on fuel economy is currently optional for ZAP.

EPA Emissions & Certificate of Conformity

For ZAP Business

The Clean Air Act requires that we obtain a Certificate of Conformity issued by the EPA and a California Executive Order issued by the California Air Resources Board, or CARB, with respect to emissions for our vehicles, particularly greenhouse gasses. The Certificate of Conformity is required for vehicles sold in states covered by the Clean Air Act’s standards and both the Certificate of Conformity and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales of vehicles. The EPA and CARB are both moving forward with more stringent regulations regarding greenhouse gases for future model years and ZAP may face increased cost in complying with these regulations for conventional fuel vehicles.  The EV Urbee is CARB and DOT approved for the US market.

Manufacturers who sell vehicles without a Certificate of Conformity may be subject to penalties of up to $37,500 per violation and be required to recall and remedy any vehicles sold with emissions in excess of Clean Air Act standards.

For Jonway Business

The China government has adopted various measures to institute a uniform supervision and administration system with respect to vehicle emissions, including an automobile product authentication procedure and a network of testing centers across China. The State Environmental Protection Administration from time to time publishes notices to inform the public of new vehicle models that comply with its regulatory emission standards. Automobile manufacturers are not allowed to produce or register vehicle model or automobile product that failed to comply with such regulatory emission standards.

The State Environmental Protection Administration limits exhaust emission on the basis of China I, II, III and IV. Different limits of exhaust emission and testing measures in these standards shall be applied to different types of vehicles.

As of September 1, 2003, the PRC government ceased to follow China I Standards and began to implement China II standards. The PRC government began implementation China III Standards in selected cities, such as in Beijing in December 2005 and Guangzhou in September 2006 respectively. In 2008, China III standards were complied with by all newly produced vehicles in China. From January 1, 2010, China IV standards were implemented. These emission standards imposed substantially higher compliance expenditures on the PRC automobile manufacturers, including R&D costs, to satisfy engine and vehicle design and engineering requirements.

Battery Safety and Testing

Our battery pack conforms to mandatory regulations that govern transport of “dangerous goods” that may present a risk in transportation, which includes lithium-ion batteries. The governing regulations, which are issued by the Pipeline and Hazardous Materials Safety Administration, or PHMSA, are based on the UN Recommendations on the Safe Transport of Dangerous Goods Model Regulations, and related UN Manual Tests and Criteria. The regulations vary by mode of transportation when these items are shipped such as by ocean vessel, rail, truck, or by air.

We have completed the applicable transportation tests for our prototype and production battery packs demonstrating our compliance with the UN Manual of Tests and Criteria, including:

 
·
Altitude simulation—simulating air transport;

 
·
Thermal cycling—assessing cell and battery seal integrity;

 
·
Vibration—simulating vibration during transport;

 
·
Shock—simulating possible impacts during transport;

 
·
External short circuit—simulating an external short circuit; and

 
·
Overcharge—evaluating the ability of a rechargeable battery to withstand overcharging.
 
 
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The cells in our battery packs are composed mainly of lithium metal oxides. The cells do not contain any lead, mercury, cadmium, or other hazardous materials, heavy metals, or any toxic materials. In addition, our battery packs include packaging for the lithium-ion cells. This packaging includes trace amounts of various hazardous chemicals whose use, storage and disposal is regulated under federal law. The NHTSA is likely to issue regulations regarding lithium ion batteries and electronic control systems in the future and ZAP will face the cost of complying with such regulations.

Automobile Manufacturer and Dealer Regulation

State law regulates the manufacture, distribution and sale of automobiles, and generally requires motor vehicle manufacturers and dealers to be licensed. We are registered as both a motor vehicle manufacturer and dealer in California and are obtaining or have obtained certification in other states.

To the extent possible, we plan to secure dealer licenses (or the equivalent of a dealer license) and engage in activities as a motor vehicle dealer in other states as appropriate and necessary. Some states, such as Texas, do not permit automobile manufacturers to be licensed as dealers or to act in the capacity of a dealer. To sell vehicles to residents of states where we are not licensed as a dealer, to the extent permitted by local law, both the actual sale and all activities related to the sale would generally have to occur out of state. In this scenario, it is possible that activities related to marketing, advertising, taking orders, taking reservations and reservation payments, and delivering vehicles could be viewed by a state as conducting unlicensed activities in the state or otherwise violating the state’s motor vehicle industry laws. Regulators in these states may require us to hold and meet the requirements of appropriate dealer or other licenses and, in states in which manufacturers are prohibited from acting as dealers, may otherwise prohibit or impact our planned activities.

In jurisdictions other than California, a customer may try to purchase our vehicles over the internet. However, some states, such as Kansas, have laws providing that a manufacturer cannot deliver a vehicle to a resident of such state except through a dealer licensed to do business in that state which may be interpreted to require us to open a store in the state of Kansas in order to sell vehicles to Kansas residents. Such laws may be interpreted to require us to open a store in such state before we sell vehicles to residents of such states. If we sell vehicles to such a state without having opened a store there, the state could take action against us; including levying fines or requiring that we refrain from certain activities at that location. In addition, some states have requirements that service facilities be available with respect to vehicles sold in the state, which may be interpreted to also require that service facilities be available with respect to vehicles sold over the internet to residents of the state, thereby limiting our ability to sell vehicles in states other than California.

The foregoing examples of state laws governing the sale of motor vehicles are just some of the regulations we will face as we sell our vehicles. In many states, the application of state motor vehicle laws to our specific sales model is largely without precedent, particularly with respect to sales over the internet, and would be determined by a fact specific analysis of numerous factors, including whether we have a physical presence or employees in the applicable state, whether we advertise or conduct other activities in the applicable state, how the sale transaction is structured, the volume of sales into the state, and whether the state in question prohibits manufacturers from acting as dealers. As a result of the fact specific and untested nature of these issues, and the fact that applying these laws intended for the traditional automobile distribution model to our sales model allows for some interpretation and discretion by the regulators, state legal prohibitions may prevent us from selling to consumers in such state.

California laws, and potentially the laws of other states, restrict the ability of licensed dealers to advertise or take deposits for vehicles before they are available. We have not received any communications on our Alias reservations from the New Motor Vehicle Board or the Department of Motor Vehicles, or DMV, which has the power to enforce these laws. There can be no assurance that the DMV will not take the position that our vehicle reservation or advertising practices violate the law. We expect that if the DMV determines that we may have violated the law, it would initially discuss its concerns with us and request voluntary compliance. If we are ultimately found to be in violation of California law, we might be precluded from taking reservation payments, and the DMV could take other actions against us, including levying fines and requiring us to refund reservation payments. Resolution of any inquiry may also involve restructuring certain aspects of the reservation program. The DMV also has the power to suspend licenses to manufacture and sell vehicles in California, following a hearing on the merits, which it has typically exercised only in cases of significant or repeat violations and/or a refusal to comply with DMV directions.
 
Certain states may have specific laws which apply to dealers, or manufacturers selling directly to consumers, or both. For example, the state of Washington requires that reservation payments or other payment received from residents in the state of Washington must be placed in a segregated account until delivery of the vehicle, which account must be unencumbered by any liens from creditors of the dealer and may not be used by the dealer. We do not have a segregated account for reservations of Washington residents, but the reservations are freely refundable and ZAP has not used the capital provided by such reservations. Our failure to comply with this requirement could require us to return or refund the reservation, or result in other fines or penalties. There can be no assurance that other state or foreign jurisdictions will not require similar segregation of reservation payment received from customers. Our inability to access these funds for working capital purposes could harm our liquidity.
 
 
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Furthermore, while we have performed an analysis of the principal laws in the European Union relating to our distribution model and believe we comply with such laws, we have not performed a complete analysis in all foreign jurisdictions in which we may sell vehicles. Accordingly, there may be laws in jurisdictions we have not yet entered or laws we are unaware of in jurisdictions we have entered that may restrict our vehicle reservation practices or other business practices. Even for those jurisdictions we have analyzed, the laws in this area can be complex, difficult to interpret and may change over time.

In addition to licensing laws, specific laws and regulations in each of the states and their interpretation by regulators may limit or determine how we sell, market, advertise, and otherwise solicit sales, take orders, take reservations and reservation payments, deliver, and service vehicles for consumers and engage in other activities in that state. We have not performed a complete analysis in all jurisdictions in which we may sell vehicles. Accordingly, there may be laws in jurisdictions where we sell vehicles that may restrict our vehicle reservation practices or other business practices.

Warranties

Under the Magnuson-Moss Warranty Act, our written warranties must disclose, fully and conspicuously, in simple and readily understood language, the terms and conditions of the warranty to the extent required by rules of the Federal Trade Commission. Our warranties must comply with certain federal and state mandated requirements. We currently offer three and six-month warranties on our products.

Non-Highway Vehicle Regulations

The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of certain of our products. The federal government is currently the primary regulator of product safety. The NHTSA has federal oversight over product safety issues related to NEVs and low speed vehicles.  We have regulated the speed of our NEVs to comply with NHTSA requirements.

China Regulations for Jonway Vehicles

Filing or Approval Requirement for Automobile Manufacturing Projects

On May 21, 2004, the People’s Republic of China’s National Development and Reform Commission, or NDRC, promulgated the Policy on Developing the Automotive Industry, or the Developing Policy, which requires certain investment projects for automobile manufacturing to obtain an approval from the NDRC at the proper level and meet certain requirements regarding parts manufactured, technology development capacity, total investment and production scale. For example, to establish a new auto manufacturing company, the total investment shall be no less than RMB 2 billion, among which the self-owned capital shall be no less than RMB 800 million. The project must establish a research and development center and the investment in the research and development center shall be no less than RMB 500 million. Investment projects of newly established passenger car or heavy-cargo vehicle manufacturer shall also manufacture engines that match the complete vehicles.

Under the laws of the People’s Republic of China, a foreign investor may not acquire more than a 50% equity interest in a company qualified to manufacture whole automobiles. A foreign investor-backed automobile manufacturer must also be structured such that the Chinese party owns not less than 50% of the equity shares of such a joint venture. The State Council, through the national NDRC and the Ministry of Commerce or its competent local delegate, must approve newly established projects for manufacturing automobiles with foreign investment.

National Catalog

Under the law of the People's Republic of China, only an enterprise approved by Ministry of Industry and Information Technology and listed in the National Catalog is allowed to manufacture whole automobiles and is limited to the models listed therein.  Any new vehicle model must be listed in the National Catalog. Based on a contract by and among the Sanmen Branch of Zhejiang UFO Automobile Manufacturing Co., Ltd. (“Zhejiang UFO”), Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006, and all parties have agreed that this will be extended beyond this period indefinitely. All of Jonway Automobile’s vehicles’ applications for National Catalog have been done by Zhejiang UFO. The National Catalog license under UFO authorizes the manufacturing of SUVs and minivans, and the agreement between Zhejiang UFO and Jonway Group is that Jonway Automobile will have exclusivity on this National Catalogue license to manufacture and sell the approved SUVs and minivans applied through UFO’s license

According to the Developing Policy, an investment project for manufacturing automobile components and parts must be filed with the provincial NDRC and a company with foreign investment must be approved by the Ministry of Commerce, or its competent local delegate. Jonway has complied with all the government regulations.
 
 
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China Compulsory Certification

The Provisions on the Administration of Compulsory Product Certification promulgated by the People’s Republic of China’s State Administration on Quality Supervision, Inspection and Quarantine require the compulsory product certification, or CCC, for certain products, such as automobiles, which must be so marked before they leave the factory, are sold, are imported or are used in other business activities shall administer the compulsory product certification throughout the country. The SUVs manufactured by Jonway at the Sanmen Branch have this certification.

Competition

ZAP Jonway currently faces strong competition from established automobile manufacturers, including manufacturers of all-electric vehicles such as the Nissan LEAF. The electric vehicles from Tesla and other models from Mitsubishi are already on the market or will be introduced soon. In addition, several manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles, such as the Chevrolet Volt, which is a plug-in hybrid vehicle that operates purely on electric power for a limited number of miles, at which time an internal combustion engine engages to recharge the battery.

Moreover, it has been reported that Daimler, Lexus, Audi, Renault, Mitsubishi, Volkswagen and Subaru are also developing electric vehicles. Several other companies have also announced plans to enter the market for performance electric vehicles, although none of these have yet come to market. Finally, electric vehicles have already been brought to market in China and other foreign countries where ZAP Jonway operates or hopes to operate and we also expect a number of those manufacturers to enter the United States market as well.

ZAP Jonway faces competition on its conventional fuel vehicles in China from established automobile manufacturers Honda and Ford, and from China- based manufacturers Chery, Zongtai and Great Wall Auto.

Our competitors generally have more significant financial resources, established market positions, longstanding relationships with customers and dealers, and more significant name recognition, technical, marketing, sales, manufacturing, distribution and other resources than ZAP Jonway does. The resources available to ZAP Jonway’s competitors to develop new products and introduce them into the marketplace exceed the resources currently available to ZAP Jonway. ZAP Jonway also faces competition from smaller companies with respect to ZAP’s consumer products, such as ZAP’s electric bicycle and scooter. ZAP Jonway expects to face competition from the makers of consumer batteries and small electronics with respect to the ZAP portable energy line. This intense competitive environment may require ZAP Jonway to make changes in our products, pricing, licensing, services, distribution or marketing to develop, maintain and improve ZAP Jonway’s current technology and market position.

Seasonal Variations

ZAP Jonway’s business is subject to seasonal influences for consumer products. Sales volumes in this industry typically slow down during the winter months from November to March in the United States and during the spring and summer months in China.

Inflation

ZAP and Jonway’s raw materials and finished products and automobiles are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our product sources.

Intellectual Property

ZAP Jonway’s success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, ZAP Jonway relies on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. As of December 31, 2015, ZAP had 20 issued patents and approximately 28 pending patent applications with the United States Patent and Trademark Office and internationally in a broad range of areas. Our issued patents start expiring in 2014. We intend to continue to file additional patent applications with respect to our technology.

As of December 31, 2015, Jonway had 16 issued patents (including 4 utility model patents and 12 exterior design patents). Jonway’s issued patents start expiring in 2019.

ZAP Jonway does not know whether any of ZAP or Jonway’s pending patent applications will result in the issuance of patents or whether the examination process will require ZAP or Jonway to narrow their claims. Even if granted, there can be no assurance that these pending patent applications will provide ZAP Jonway with protection.

Subsidiaries

ZAP has the following wholly-owned subsidiaries:  Voltage Vehicles, a Nevada company, ZAP Hong Kong, a Hong Kong limited company. Voltage Vehicles is not currently an operating subsidiary. Voltage Vehicles stopped operations in October 2013. ZAP Hong Kong was established in 2011 as a wholly foreign owned enterprises (“WOFE”) and has no operation since incorporated.
 
 
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We hold 51% of the equity shares of Jonway. As of December 31, 2015, Jonway has the following wholly-owned subsidiaries: Jonway Taizhou Selling Company, Jonway Taizhou Leasing Company and Taizhou Fuxing Vehicles Sale Co., Ltd. We also have 37.5% equity investment in ZAP Hangzhou Joint Venture and 50% equity investment in Shanghai Zapple Joint Venture.  Both the ZAP Hangzhou Joint Venture and Shanghai Zapple Joint Venture are no longer in operation.

Employees

As of April 15, 2016, the Company’s subsidiary of Jonway Auto had a total of over 400 employees, all of whom are full-time employees.  In 2015, Jonway Auto replaced or retrained the majority of its factory staff in order to realign the skills of the employees to support EV production.

Item 1A. Risk Factors

If ZAP Jonway is unable to obtain adequate working capital from Chinese banks to finance the manufacturing of the products ordered by the dealers, Jonway may not be able to meet delivery commitments and would have to refund deposits made by dealers that have placed orders and paid down payments.

If there is severe shortage in working capital in Jonway Auto, and suppliers demand a shorter payment cycle, Jonway Auto may need to raise additional money through equity investors.  Any amount of equity investment in Jonway Auto would dilute ZAP’s 51% ownership, and would result in ZAP’s inability to consolidate Jonway Auto’s financial under ZAP.  Thus far, the funding to Jonway Auto has been in the form of loan, mostly from local Chinese banks to support working capital, and also from Jonway Group.

ZAP’s convertible note with CEVC is due on December 31, 2016.  CEVC may or may not extend this convertible note, and the note if not repaid in full by ZAP, gives CEVC the right to trigger repayment by ZAP with 39% of Jonway Auto shares that ZAP owns.  This repayment of the entire convertible note valued at US$20.7 million will result in reduction of ZAP’s ownership in Jonway Auto from 51% to 12%, thus affecting ZAP’s ability to consolidate.

ZAP Jonway has been experiencing a shortage of working capital, and has continued to manage cash flow by delaying delivery of products that have been ordered and has received portions of the payments.  Jonway has relied on a revolving credit line from the Chinese banks, but with the banks reducing the credit availability, Jonway may not be able to meet delivery commitment dates which would result in order cancellation and shrinkage of backlog.  This may reduce dealership confidence in the Jonway and their interest to continue to market and sell the products.

If ZAP Jonway is unable to raise additional funding to support the on-going capital investment needed to produce new models and stay competitive in the automobile market, then this would erode the competitiveness of its products.

ZAP Jonway has been trying to raise funding to support on-going product development and next generation new models in order to stay competitive.  To remain competitive, ZAP Jonway has to launch new models every 18 months in order to keep up with market trends and technology advancements.  Inability to raise adequate funding would reduce the ability of ZAP Jonway to produce new models of its products.

If ZAP Jonway is unable to find the bank financing needed by the dealerships in China to support the dealers’ show room and stock their warehouse inventory, then dealers may decide to choose other products to sell in their dealerships, and the lack of stock in the warehouse also may deter interest by the dealers to continue promoting the products.

Due to the tight bank credits available to small businesses, many dealers now are in need of the automobile companies to provide financing and guarantees in order to fund the showroom stock and the warehouse.  Without the financing support, many dealers may not be able to continue selling our products.

If ZAP Jonway is unable to adequately fund marketing and sales in order to establish and strengthen our sales network, product brand and promote the Company’s products, then ZAP Jonway may be limiting the growth of the revenues and the expansion of the business.

ZAP Jonway may not be able to adequately fund marketing and sales, and thereby limiting the exposure needed to promote the products and bring market awareness of its product line. This would limit the growth and expansion of the overall business.

If ZAP Jonway does not maintain proper disclosure controls and procedures, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, operating results, and financial condition.
 
 
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While the audit of our financial statements by our independent registered public accounting firm has included a consideration of internal control over financial reporting as a basis of designing audit procedures, our independent registered public accounting firm has not considered internal controls over financial reporting for the purpose of expressing an opinion with respect to the effectiveness of our internal controls over financial reporting. If such an evaluation had been performed, material weaknesses or other control deficiencies may have been identified. In addition, material weaknesses and other control deficiencies may be identified when our management performs evaluations of internal controls in the future. Ensuring that ZAP has adequate internal financial and accounting controls and procedures that allows us to produce accurate financial statements on a timely basis is costly and time-consuming, and we are required to evaluate these controls frequently.

ZAP has a history of losses and ZAP Jonway’s future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on ZAP Jonway’s business and the value of ZAP’s common stock.

The Company incurred net losses attributable to ZAP of $14.1 million and $17.6 million, for years ended December 31, 2015, and 2014, respectively and has had net losses in each quarter since its inception. The Company has outstanding short term loans in total of US$7.7 million as of December 2015 with multiple Chinese banks, and the collateral used for the loan has used up all of Jonway Auto’s factory building and land. This loan has been used to finance Jonway’s losses over the last few years. Additionally outstanding notes payable amounts to $14.4 million as of December 2015. Due to the slowdown of the economy of China, Chinese banks have reduced the credit line available to small and medium size businesses in order to increase their credit reserves, anticipating the continuing down turn in the economy. Despite orders in the pipeline for both the SUV and minivan, Jonway without adequate working capital, has not been able to keep up with manufacturing the products to meet the delivery. Jonway anticipates that the other short term loans that remain may also be reduced which will further negatively impact the working capital.

ZAP Jonway believes that it may continue to incur operating and net losses for our gasoline and electric vehicles until at least the time ZAP Jonway begins significant volume deliveries of the new models of Jonway’s electric vehicle models, and when the international sales of the EVs picks up volume. We expect to begin international sales of the electric vehicles in limited quantities for key countries in 2015. However, due to the uncertainty of type approval processes in different countries, this international sales volume and the EV sales may be delayed in some of the countries if the testing process requires substantial investment and corrective changes to the vehicles. Even if we are able to successfully obtain type approvals in all the required countries for the electric vehicle models, there can be no assurance that it will be commercially successful as it depends on market adoption of full electric vehicles in the sales regions that ZAP Jonway targeted. Our profitability will be dependent upon the successful development of new and additional sales EV dealership networks and successful commercial introduction and acceptance of our electric vehicles models, which may not reach our targeted volumes to achieve profitability this year. Gross margins were deficits in both fiscal 2015 and 2014 due to the low volume and the competitive pricing of new competitors into the SUV markets in China. The unexpectedly low of economic growth in China in 2014 also affected the sales of vehicle. The reduction of bank credit has reduced the financial support needed by dealers to grow their business, place larger orders and continue to expand market and sell the products. Increased cost in sales and marketing also contributed to increased operating costs, which increased the net loss of the overall business. The rising RMB has created challenges in competitiveness of the Chinese products internationally, as a result, the gross margins of international sales also suffered as a result of the RMB float.

ZAP Jonway expects the rate at which we will incur losses to continue in the foreseeable future as we:

 
·
Build the new EV dealership networks in China

 
·
increase our business development and manufacturing activities for the new van model and electric vehicles in China;

 
·
begin international business development, marketing and sales which requires expensive type approval testing

 
·
develop international semi-knock down kit (SKD) manufacturing activities that may be required in some of the countries to attain favorable import tax rates;

 
·
continue to design, develop new models to keep up with demands of the market and compete against new models from competitors and manufacture our follow on planned new gas and electric vehicles;

 
·
bolstering our after-sale services network especially internationally;

 
·
build inventories of parts and components for our new gas and electric vehicles;

 
·
develop and equip manufacturing facilities to produce our new gas and electric vehicle models;

 
·
expand our design, development, maintenance and repair capabilities;

 
·
increase our sales and marketing activities to support new models promotion;
 
 
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·
increase our general and administrative functions to support our growing operations; and

 
·
Overall rising RMB is likely to continue which will increase the cost of operations in China.
 
Because ZAP Jonway will incur the costs and expenses from these efforts before we receive substantial incremental revenues to offset the operational costs with respect thereto, ZAP Jonway’s losses in future periods will likely to continue to incur. In addition, we may find that these efforts are more expensive than we currently anticipated or that these efforts may not result in increases in our revenues, which could further increase ZAP Jonway’s losses.
 
ZAP Jonway’s limited operating history makes evaluating our business and future prospects difficult, and may increase the risk of your investment.

You must consider the risks and difficulties we face as a company with a limited operating history. If ZAP Jonway does not successfully address these risks, our business, prospects, operating results and financial condition will be materially and adversely harmed. ZAP was formed in September 1994, but only began manufacturing electric automobiles in 2006. ZAP Jonway’s net losses attributable to ZAP were $14.1 million and $17.6 million for the year ended December 31, 2015 and 2014, respectively. ZAP acquired 51% of the equity shares of Jonway in January 2011. ZAP Jonway as a combined Company has a very limited operating history on which investors can base an evaluation of our business, operating results and prospects. To date, ZAP has derived revenues principally from sales of customized versions of our standard vehicles, and to a lesser extent on consumer products. Jonway has derived revenues principally from sales of its conventional fuel SUVs. ZAP Jonway intends in the foreseeable future to derive a significant portion of its revenues from the sales of our planned electric and the main 1.5L gasoline SUV product. ZAP Jonway has no operating history with respect to its newer vehicles, which limits our ability to accurately forecast the cost of supporting the sales and customer service of the vehicles.

It is difficult to predict ZAP Jonway’s future revenues and appropriately budget for our expenses, and we have limited insight into trends that may emerge and affect our business, and what competition will likely introduced in the electric vehicle space. Despite wide interests in the major targeted countries, USA and China, in electric vehicles, the competition in this space is growing, with many new models offering plug-in hybrids which pose a more durable range compared to the full electric vehicles that ZAP Jonway plans to offer in its product plans.

ZAP’s primary revenue, sales and manufacturing is from Jonway Auto, based in China and Jonway’s sales revenues are mostly in China currently, and subject to the market conditions, economy, as well as regulations of the Chinese government.

Most of ZAP Jonway’s revenues and sales, as well as manufacturing production operations are in China, and is subject to the market and economic conditions as well as government regulations in China.  Over the years, the Chinese government regulations and policies have tended to have very direct impact on the development of specific industry sectors, whether this is in the form of restrictions, or in the form of incentives and credit availability. Many smaller dealerships were unable to continue to get bank lines to support inventory purchases and display new products on their show room floors. This credit tightening by the Chinese government on the banks will continue this year. ZAP Jonway has replaced the smaller dealers with dealers that have a stronger financial backing in larger cities, in anticipation that bank credits will not loosen up much this year.

Automobile manufacturing is a strictly regulated industry and ZAP Jonway uses the valuable auto license granted from a subsidiary of its holding group Jonway Group that holds the UFO license (issued in Hangzhou). Regulations, policies and incentives from central and provincial government vary over time and could hinder or help the overall ZAP Jonway sales in China.  This is especially the case with electric vehicles where the government has put forth incentives from both central and selective large provincial and city governments. These incentives which are substantial could be eliminated without warning and any business plans that rely on these incentives to succeed would be vulnerable to being severely impacted.

The Chinese government is exercising precaution in managing the economic growth of China. The GDP forecast for China for this year and the subsequent years will be lower than prior years, as the government puts control on escalating property value, restrictions on issuing licenses for new constructions and as well as restricting licenses for new auto ownerships in the major cities, in order to reduce traffic on the road for these large cities. However, the government has waived controls on full electric vehicles and also in some cities waived the auto license fees for EVs, which in Shanghai and Beijing can be as high as $7,000 or more. These incentives could be removed any time without warning and EVs would then be subject to the same dis-incentives as traditional gasoline vehicles.

Due to the continued losses incurred by both ZAP and Jonway Auto, Jonway Auto has been borrowing money from Chinese banks using the land and buildings from its factory in Sanmen. These loans are used for both working capital as well as supplementing the losses over the last few years.  Currently all of its land and building has been used as collateral against the loans made by Jonway Automobile in order to fund the losses incurred over the last couple of years.

 
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As of December 31, 2015, Jonway Auto has outstanding loans of approximately $7.7 million and bank acceptance notes of approximately $14.4 million to support the losses incurred and $70.9 million in deficit working capital. These loans and bank acceptance notes are from multiple Chinese commercial banks. Interest rates for these loans range from 5% to 9% per annum and continue to be a burden on the profitability of the company.

ZAP Jonway’s financial results may vary significantly from period-to-period due to the seasonality of our business and cost fluctuations in our operating

ZAP Jonway’s operating results may vary significantly from period-to-period due to many factors, including seasonal factors that may have an effect on the demand for our gas and electric vehicles. Demand for new cars in the automobile industry in general, and for electric vehicles in particular, typically decline over the winter season in the United States, while sales are generally higher as compared to the winter season during the spring and summer months. In China, sales declined over the spring, first quarter of the year due to holidays during Chinese New Year and summer months and were higher in the autumn and winter seasons, fourth quarter of the year due to promotions and year-end inventory clearance sales. ZAP Jonway expects sales of our vehicles to fluctuate on a seasonal basis and dependent on the country where the sales originated. However, ZAP Jonway’s limited operating history and its early entry into the international markets makes it difficult for us to judge the exact nature or extent of the seasonality of our business. Also, any unusually severe weather conditions in some markets may impact demand for ZAP Jonway’s vehicles. ZAP Jonway’s operating results could also suffer if we do not achieve revenue consistent with our expectations for this seasonal demand because many of our variable sales and marketing expenses are based on anticipated levels of annual revenue.

ZAP Jonway also expects our period-to-period operating results to vary based on our operating costs which we anticipate will increase significantly in future periods as we, among other things, design, develop and manufacture our planned vehicles, build and equip new manufacturing facilities to produce them, type approval both in China and international for the new models, incur costs for spare parts provisioning, warranty repairs or product recalls, if any, increase our sales and marketing activities, and increase our general and administrative functions to support our growing operations.

As a result of these factors, ZAP Jonway believes that quarter-to-quarter comparisons of our operating results are not necessarily meaningful until there is more history built up of the combined companies’ performance and that these comparisons cannot be relied upon as indicators of future performance. Moreover, ZAP Jonway’s operating results may not meet expectations of equity research analysts or investors that may compare the results to established auto companies, since ZAP Jonway is in the early stages of building its business in the electric vehicle space, leveraging on the experience and resources available from its sales and manufacturing of gasoline vehicle business. If this occurs, the trading price of ZAP’s common stock could vary substantially depending on the results of the new business developments.

The future growth of our electric vehicle business is dependent upon consumers’ willingness to adopt electric vehicle

ZAP Jonway’s growth is highly dependent upon the adoption by consumers of, and we are subject to an elevated risk of any reduced demand for, alternative fuel vehicles in general and electric vehicles in particular. If the market for electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be harmed. The market for alternative fuel vehicles is relatively new, rapidly evolving, characterized by rapidly changing technologies, price competition, additional competitors, evolving government regulation and industry standards, frequent new vehicle announcements and changing consumer demands and behaviors. Factors that may influence the adoption of alternative fuel vehicles, and specifically electric vehicles, include:

·
perceptions about electric vehicle quality, safety (in particular with respect to lithium-ion battery packs), design, performance and cost, especially if adverse events or accidents occur that are linked to the quality or safety of electric vehicles;

·
perceptions about vehicle safety in general, in particular safety issues that may be attributed to the use of advanced technology, including vehicle electronics and regenerative braking systems, such as the possible perception that Toyota’s recent vehicle recalls may be attributable to these systems;

·
the limited range over which electric vehicles may be driven on a single battery charge;

·
the decline of an electric vehicle’s range resulting from deterioration over time in the battery’s ability to hold a charge;

·
Concerns about electric grid capacity and reliability, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline;

·
the availability of alternative fuel vehicles, including plug-in hybrid electric vehicles;

·
improvements in the fuel economy of the internal combustion engine;
 
 
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·
the availability of service for electric vehicles;

·
the environmental consciousness of consumers;

·
volatility in the cost of oil and gasoline;

·
consumers’ perceptions of the dependency of the United States on oil from unstable or hostile countries;

·
government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;

·
access to charging stations, standardization of electric vehicle charging systems and consumers’ perceptions about convenience and cost of charging an electric vehicle;

·
the availability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation requiring increased use of nonpolluting vehicles;

·
perceptions about and the actual overall cost of electric vehicles; and

·
Macroeconomic factors.

In addition, recent reports have suggested the potential for extreme temperatures to affect the range or performance of electric vehicles. To the extent customers have concerns about such reductions or third party reports which suggest reductions in range greater than our estimates gain widespread acceptance, ZAP Jonway’s ability to market and sell our vehicles, particularly in colder climates, may be adversely impacted.

Additionally, ZAP Jonway may become subject to regulations that may require us to alter the design of our vehicles, which could negatively impact consumer interest in our vehicles. For example, ZAP Jonway’s electric vehicles make less noise than internal combustion vehicles. We are aware of advocacy groups, such as the United States National Federation of the Blind, which are lobbying for regulations to require electric vehicle manufacturers to adopt minimum sound standards.

The influence of any of the factors described above may cause current or potential customers not to purchase ZAP Jonway’s electric vehicles, which would materially adversely affect ZAP Jonway’s business, operating results, financial condition and prospects.

If ZAP Jonway is unable to keep up with advances in electric vehicle technology, we may suffer a decline in our competitive position.

ZAP Jonway may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. Any failure to keep up with advances in electric vehicle technology would result in a decline in ZAP Jonway’s competitive position which would materially and adversely affect our business, prospects, operating results and financial condition. ZAP Jonway’s research and development efforts may not be sufficient to adapt to changes in electric vehicle technology. As technologies change, we plan to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology, in particular battery cell technology. However, ZAP Jonway’s vehicles may not compete effectively with alternative vehicles if ZAP Jonway is not able to source and integrate the latest technology into our vehicles. For example, we do not manufacture engines, which make us dependent upon other suppliers of engine technology for our vehicles.

Manufacturing internationally may cause problems and present risks for ZAP Jonway.

ZAP Jonway has been focusing on manufacturing internationally, particularly in China. There are many risks associated with international business.  These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements, and greater exposure of ZAP Jonway’s intellectual property to markets where a high probability of unlawful appropriation may occur.  A failure to successfully mitigate any of these potential risks could damage our business.

ZAP Jonway is required to comply with all applicable domestic and foreign export control laws, including the International Traffic in Arms Regulations and the Export Administration Regulations, or EAR. Some items manufactured by us are controlled for export by the United States Department of Commerce’s Bureau of Industry and Security under the EAR. In addition, ZAP Jonway is subject to the Foreign Corrupt Practices Act and international counterparts that generally bar bribes or unreasonable gifts for foreign governments and officials. Violation of any of these laws or regulations could result in significant sanctions, including large monetary penalties and suspension or debarment from participation in future government contracts, which could reduce ZAP Jonway’s future revenue and net income.
 
 
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Because ZAP Jonway manufactures and sell a substantial portion of our products abroad, its operating costs are subject to fluctuations in foreign currency exchange rates. If the U.S. dollar weakens against the foreign currencies in which we denominate certain of our trade accounts payable, fixed purchase obligations and other expenses, the U.S. dollar equivalent of such expenses would increase. We can provide no assurances that we will not experience losses arising from currency fluctuations in the future, which could be significant.

The range of ZAP’s electric vehicles on a single charge declines over time, which may negatively influence potential customers’ decisions whether to purchase our vehicles.

The range of ZAP electric vehicles on a single charge declines principally as a function of usage, time and charging patterns. For example, a customer’s use of their ZAP vehicle as well as the frequency with which they charge the battery of their vehicle can result in additional deterioration of the battery’s ability to hold a charge. Battery deterioration and the related decrease in range may negatively influence potential customer decisions whether to purchase ZAP Jonway’s vehicles, which may harm our ability to market and sell our vehicles.

Developments in alternative technologies or improvements in the internal combustion engine may materially adversely affect the demand for ZAP Jonway’s vehicles.

Significant developments in alternative technologies, such as advanced diesel, ethanol, fuel cells or compressed natural gas, or improvements in the fuel economy of the internal combustion engine, may materially and adversely affect our business and prospects in ways ZAP Jonway does not currently anticipate. For example, fuel which is abundant and relatively inexpensive in North America, such as compressed natural gas may emerge as consumers’ preferred alternative to petroleum based propulsion. Any failure by ZAP Jonway to develop new or enhanced technologies or processes, or to react to changes in existing technologies, could materially delay our development and introduction of new and enhanced vehicles, which could result in the loss of competitiveness of our vehicles, decreased revenue and a loss of market share to competitors.

ZAP Jonway’s future success will depend upon our ability to design and achieve market acceptance of new vehicle models.

ZAP anticipates that a substantial amount of its revenue in the future will be generated from the sale of its electric vehicles. Jonway currently generates a substantial amount of its revenue from the sale of its gas fueled vehicles. Of ZAP Jonway’s planned vehicles, our electric vehicles, such as the Alias, electric A380 SUV and the improved gas fueled vehicle models are expected to be in production in 2014. All of our planned products require significant investment prior to commercial introduction, and may never be successfully developed or commercially successful. There can be no assurance that ZAP Jonway will be able to design future models of electric or gas vehicles that will meet the expectations of our customers or that our future model will become commercially viable. Additionally, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, ZAP Jonway may in the future be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As technologies change in the future for automobiles in general and performance electric vehicles specifically, we will be expected to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology. To date ZAP Jonway has limited experience simultaneously designing, testing, manufacturing and selling our vehicles.

Any changes to the Federal Trade Commission’s electric vehicle range testing procedure or the United States Environmental Protection Agency’s energy consumption regulations for electric vehicles could result in a reduction to the advertised range of ZAP Jonway’s electric vehicles which could negatively impact our sales and harm our business.

The Federal Trade Commission, or FTC, requires us to calculate and display the range of ZAP Jonway’s electric vehicles sold in the United States on a label we affix to the vehicle’s window. The FTC specifies that we follow testing requirements set forth by the Society of Automotive Engineers, or SAE, which further requires that we test vehicles sold in the United States using the United States Environmental Protection Agency’s, or the EPA’s, combined city and highway testing cycles. The EPA recently announced that it would develop and establish new energy efficiency testing methodologies for electric vehicles. However, there can be no assurance that the modified EPA testing cycles will not result in a greater reduction. Any reduction in the advertised range of ZAP Jonway vehicles could negatively impact our vehicle sales and harm our business.

If ZAP Jonway is unable to reduce and adequately control the costs associated with operating our business, including our costs of manufacturing, sales and materials, our business, financial condition, operating results and prospects will suffer.

If ZAP Jonway is unable to reduce and/or maintain a sufficiently low level of costs for designing, manufacturing, marketing, selling and distributing and servicing our vehicles relative to their selling prices, our operating results, gross margins, business and prospects could be materially and adversely impacted. We have made, and will be required to continue to make, significant investments for the design, manufacture and sales of our vehicles. There can be no assurances that our costs of producing and delivering our vehicles will be less than the revenue we generate from sales at the time of the launch of such vehicle or that we will ever achieve a positive gross margin on sales of any specific vehicle.
 
 
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ZAP Jonway incurs significant costs related to contracting for the manufacture of our vehicles, procuring the materials required to manufacture our electric cars, assembling vehicles and compensating our personnel. Although we expect manufacturing expenses to proportionally decrease with the localization of manufacturing in Jonway’s facilities, if ZAP Jonway is unable to keep our operating costs aligned with the level of revenues we generate, our operating results, business and prospects will be harmed. Many of the factors that impact our operating costs are beyond our control. For example, the costs of our raw materials and components, such as lithium-ion battery cells used in our vehicles could increase due to shortages as global demand for these products increases. Indeed, if the popularity of electric vehicles exceeds current expectations without significant expansion in battery cell production capacity and advancements in battery cell technology, shortages could occur which would result in increased materials costs to us.

The automotive market is highly competitive and ZAP Jonway may not be successful in competing in this industry. ZAP Jonway currently faces competition from established competitors and expect to face competition from others in the future.

The worldwide automotive market, particularly for alternative fuel vehicles, is highly competitive today and ZAP Jonway expects it will become even more so in the future. ZAP Jonway currently faces strong competition from established automobile manufacturers, including manufacturers of all-electric vehicles such as the Nissan LEAF, Tesla, Ford, Volkswagen, Chevy Volt, Renault and many others.

Most of ZAP Jonway’s current and potential competitors have significantly greater financial, manufacturing, marketing and other resources than we do and may be able to devote greater resources to the design, development, manufacturing, distribution, promotion, sale and support of their products. Virtually all of our incumbent competitors have more extensive customer bases and broader customer and industry relationships than we do. In addition, many of these companies have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to design, develop, market and sell their products more effectively.

Furthermore, certain large manufacturers offer financing and leasing options on their vehicles and also have the ability to market vehicles at a substantial discount, provided that the vehicles are financed through their affiliated financing company. ZAP Jonway does not currently offer or plan to offer, any form of direct financing on our vehicles. ZAP Jonway has not in the past, and does not currently nor in the foreseeable future intend to, offer substantial customary discounts on our vehicles. The lack of direct financing options and the absence of substantial customary vehicle discounts could put ZAP Jonway at a competitive disadvantage.

ZAP Jonway expects competition in our industry to intensify in the future in light of increased demand for conventional and alternative fuel vehicles, continuing globalization and consolidation in the worldwide automotive industry. Factors affecting competition include product quality and features, innovation and development time, pricing, reliability, safety, fuel economy, customer service and financing terms. Increased competition may lead to lower vehicle unit sales and increased inventory, which may result in a further downward price pressure and adversely affect ZAP Jonway’s business, financial condition, operating results and prospects. ZAP Jonway’s ability to successfully compete in our industry will be fundamental to our future success in existing and new markets and our market share. There can be no assurances that ZAP Jonway will be able to compete successfully in our markets. If our competitors introduce new cars or services that compete with or surpass the quality, price or performance of our cars or services, ZAP Jonway may be unable to satisfy existing customers or attract new customers at the prices and levels that would allow us to generate attractive rates of return on our investment. Increased competition could result in price reductions and revenue shortfalls, loss of customers and loss of market share, which could harm our business, prospects, financial condition and operating results.

Demand in the automobile industry is highly volatile.

Volatility of demand in the automobile industry may materially and adversely affect our business, prospects, operating results and financial condition. The markets in which we currently compete and plan to compete in the future have been subject to considerable volatility in demand in recent periods. Demand for automobile sales depends to a large extent on general, economic, political and social conditions in a given market and the introduction of new vehicles and technologies. As a newer automobile manufacturer and low volume producer, ZAP Jonway has less financial resources than more established automobile manufacturers to withstand changes in the market and disruptions in demand. As our business grows, economic conditions and trends in other countries and regions where we sell our vehicles will impact our business, prospects and operating results as well. Demand for ZAP Jonway’s vehicles may also be affected by factors directly impacting automobile price or the cost of purchasing and operating automobiles such as sales and financing incentives, prices of raw materials and parts and components, cost of fuel and governmental regulations, including tariffs, import regulation and other taxes. Volatility in demand may lead to lower vehicle unit sales and increased inventory, which may result in further downward price pressure and adversely affect ZAP Jonway’s business, prospects, financial condition and operating results. These effects may have a more pronounced impact on our business given our relatively smaller scale and financial resources as compared to many incumbent automobile manufacturers.

Difficult economic conditions may affect consumer purchases, such as ZAP Jonway’s vehicles.
 
 
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Over the last three years, the deterioration in the global financial markets and continued challenging condition of the macroeconomic environment has negatively impacted consumer spending and we believe has adversely affected the sales of our vehicles. The Chinese economy is slowing down, and due to government regulation that restricts the purchase of vehicles for major cities such as Shanghai and Beijing due to massive congestion and pollution problems, the demand for automobiles may decline. Despite strong incentives from government to promote the adoption of EVs by subsidies and lifting restrictions to waive EV purchases, consumers’ reluctance may continue to persist due to the lack of charging infrastructures and consumers’ concern with the reliability and safety of EVs. Difficult economic conditions could therefore temporarily reduce the market for vehicles in ZAP Jonway’s price range. Discretionary consumer spending also is affected by other factors, including changes in tax rates and tax credits, interest rates and the availability and terms of consumer credit.

If the current difficult economic environment improvement is transient, we may experience a decline in the demand for new vehicles and thus ZAP Jonway’s vehicles as well, which could materially harm our business, prospects, financial condition and operating results. Accordingly, any events that have a negative effect on the United States or China’s economy or on other foreign economies or that negatively affect consumer confidence in the economy, including disruptions in credit and stock markets, and actual or perceived economic slowdowns, may harm ZAP Jonway’s business, prospects, financial condition and operating results.

Marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining ZAP Jonway’s business.

If ZAP Jonway is unable to establish and maintain confidence about ZAP Jonway’s liquidity and business prospects among consumers and within our industry, then our financial condition, operating results and business prospects may suffer materially. ZAP Jonway’s vehicles are highly technical products that require maintenance and support. If we were to cease or cut back operations, even years from now, buyers of ZAP Jonway’s vehicles from years earlier might have much more difficulty in maintaining their vehicles and obtaining satisfactory support. As a result, consumers may be less likely to purchase our vehicles now if they are not convinced that our business will succeed or that our operations will continue for many years. Similarly, suppliers and other third parties will be less likely to invest time and resources in developing business relationships with ZAP Jonway if they are not convinced that our business will succeed. If ZAP Jonway is required to downsize in the future, such actions may result in negative perceptions regarding our liquidity and long-term business prospects.

Accordingly, in order to build and maintain our business, ZAP Jonway must maintain confidence among customers, suppliers and other parties in our liquidity and long-term business prospects. In contrast to some more established auto makers, we believe that, in ZAP Jonway’s case, the task of maintaining such confidence may be particularly complicated by factors such as the following:

·
ZAP Jonway’s limited operating history;

·
ZAP limited revenues and lack of profitability to date;

 
Jonway Auto’s outstanding loan and line of credit for working capital;

·
unfamiliarity with or uncertainty about our electric vehicles;

 
lack of infrastructure to support the refueling/recharging of EV and new energy vehicles;

·
uncertainty about the long-term marketplace acceptance of alternative fuel vehicles generally, or electric vehicles specifically;

·
the prospect that ZAP Jonway may need ongoing infusions of external capital to fund our planned operations;

·
the size of our expansion plans in comparison to our existing capital base and scope and history of operations; and

·
the prospect or actual emergence of direct, sustained competitive pressure from more established auto makers.

Many of these factors are largely outside of ZAP Jonway’s control, and any negative perceptions about our liquidity or long-term business prospects, even if exaggerated or unfounded, would likely harm our business and make it more difficult to raise additional funds when needed.

ZAP Jonway may need to raise additional funds and these funds may not be available to us when we need them. If we cannot raise additional funds when we need them, ZAP Jonway’s operations and prospects could be negatively affected.

The design, manufacture, sale and servicing of automobiles is a capital intensive business. For example, for the year ended December 31, 2015, the Company incurred net losses of approximately $20.1 million and used approximately $2.6 million of cash in operations while recognizing approximately $29.5 million in revenue. As of December 31, 2015, ZAP Jonway had cash and cash equivalents of $0.06 million.  We cannot be certain that additional funds will be available to ZAP Jonway on favorable terms when required, or at all. If we cannot raise additional funds when we need them, our financial condition, results of operations, business and prospects could be materially adversely affected. Future issuance of ZAP equity or equity-related securities will dilute the ownership interest of existing ZAP shareholders and our issuance of debt securities could increase the risk or perceived risk of our company. Jonway Auto’s cash flow depends heavily on continuing orders from its domestic and international markets, and using the payments to finance the bulk of the required working capital to deliver the products in order to fulfill the sales orders. If the future orders were to slow down, or get substantially reduced, ZAP and Jonway Auto would need more funding to support its cash flow in order to make payment to its suppliers and meet its working capital cash needs.
 
 
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If ZAP Jonway’s vehicles fail to perform as expected, we may have to recall our products and our ability to develop, market and sell our electric vehicles could be harmed.

ZAP Jonway’s vehicles may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. ZAP has received an order from Department of Transportation (DOT) in the U.S. to recall its 2008 Xebra vehicles with buy back because the proposed fix submitted in 2012 was not acceptable to DOT. ZAP has discontinued the sale of Xebras since 2011 and also issued recall notices last year with respect to the 2008 Xebra® model. This recall is due to the 2008 Xebras inability to meet the braking distance requirements when the vehicle is operating at its maximum speed. On November 14, 2012, NHTSA determined that ZAP has not reasonably met its recall remedy and notification requirements and ordered ZAP to take specified actions to meet its requirements. ZAP’s recall includes 627 units sold in U.S. market. ZAP and the United States reached a settlement that is incorporated into a Consent Decree that was entered and approved by the U.S. District Court on July 17, 2013.  Pursuant to the Consent Decree, ZAP agreed to initiate a buy-back program whereby it would offer to provide a refund of $3,100 to each eligible MY 2008 ZAP Xebra owner. ZAP began repurchasing vehicles in March, 2014. As of December 31, 2015 ZAP had received 317 eligible refund requests.

As for other models, while we have performed extensive internal testing, we currently have a limited frame of reference by which to evaluate the performance of our vehicles, particularly our electric vehicles, in the hands of our customers. While it has not initiated any product recalls to date, Jonway has had a relatively short operating history and there can be no assurances that Jonway will not be required to recall products in the future. There can be no assurance that ZAP Jonway will be able to detect and fix any defects in the vehicles prior to their sale to consumers. In the future, ZAP Jonway may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles or their components prove to be defective. Such recalls, voluntary or involuntary, involve significant expense and diversion of management attention and other resources, which would adversely affect our brand image in our target markets and could adversely affect our business, prospects, financial condition and results of operations. ZAP Jonway’s electric vehicles may not perform consistent with customers’ expectations or consistent with other vehicles currently available. For example, ZAP Jonway’s vehicles may not have the durability or longevity of current vehicles, and may not be as easy to repair as other vehicles currently on the market. Any product defects or any other failure of our vehicles to perform as expected could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to ZAP Jonway’s brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects.

ZAP Jonway has very limited experience servicing our vehicles and ZAP Jonway is using a different service model in the US through third party service contracts with US partners. If ZAP Jonway is unable to address the service requirements of our existing and future customers our business will be materially and adversely affected.

If ZAP Jonway is unable to successfully address the service requirements of our existing and future customers our business and prospects will be materially and adversely affected. In addition, we anticipate the level and quality of the service we provide our customers will have a direct impact on the success of our future vehicles. If ZAP Jonway is unable to satisfactorily service our current customers, our ability to generate customer loyalty, grow our business and sell additional vehicles could be impaired.

ZAP Jonway plans to service our vehicles by shipping parts to dealers, sending our authorized service personnel as necessary, providing service at our Santa Rosa location and arranging to have local US partners take up the service contracts with new vehicles delivered in the US supported by Jonway’s service personnel in China. ZAP Jonway’s customer service centers are distributed all over China and are trained to provide local support within their territories. We are adopting similar models internationally where ZAP will sign up local in-country partners who have presence in the major cities to provide customer service support, and provide these partners with service training and spare parts.  Jonway’s service facilities in China are not yet equipped to handle ZAP Jonway electric vehicles and will have to be updated and the personnel trained for this purpose. There can be no assurance that these service arrangements or ZAP Jonway’s limited experience servicing our vehicles will adequately address the service requirements of our customers to their satisfaction, or that we will have sufficient resources to meet this service requirement in a timely manner as the volume of vehicles ZAP Jonway is able to deliver annually increases.

A number of potential customers may choose not to purchase ZAP Jonway’s vehicles because of the lack of a more widespread service network. If we do not adequately address our customers’ service needs, our brand and reputation will be adversely affected, which in turn, could have a material and adverse impact on our business, financial condition, operating results and prospects.
 
 
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Traditional automobile manufacturers do not provide maintenance and repair services directly. Consumers must rather service their vehicles through franchised dealerships or through third party maintenance service providers. ZAP does not have any such arrangements with third party service providers and has not yet established US dealership network. It is unclear when such third party service providers will be able to acquire the expertise to service ZAP Jonway’s vehicles. As our vehicles are placed in more locations, ZAP’s may encounter negative reactions from our consumers who are frustrated that they cannot use local service stations to the same extent as they have with their conventional automobiles and this frustration may result in negative publicity and reduced sales, thereby harming our business and prospects.

In addition, the motor vehicle industry laws in many jurisdictions require that service facilities be available with respect to vehicles physically sold from locations in the jurisdiction. Whether these laws would also require that service facilities be available with respect to vehicles sold over the internet to consumers in a state in which ZAP Jonway has no physical presence is uncertain. While we believe our service practices would satisfy regulators in these circumstances, there are no assurances that regulators will not attempt to require that we provide physical service facilities in their states. If issues arise in connection with these regulations, certain aspects of our service program would need to be restructured to comply with state law, which may require additional investment and affect the efficiencies and operations of our business processes.

ZAP Jonway may not succeed in continuing to establish, maintain and strengthen the ZAP and Jonway brands, which would materially and adversely affect customer acceptance of our vehicles and components and our business, revenues and prospects.

Our business and prospects are heavily dependent on our ability to develop, maintain and strengthen the ZAP and Jonway brands. Any failure to develop, maintain and strengthen our brands may materially and adversely affect our ability to sell our existing and planned vehicles. If ZAP Jonway does not continue to establish, maintain and strengthen our brands, we may lose the opportunity to build a critical mass of customers. Promoting and positioning our brands will likely depend significantly on our ability to provide quality vehicles and maintenance and repair services, and we have limited experience in these areas, which are through third party arrangements. Jonway’s service facilities in China are not yet equipped to handle ZAP electric vehicles and will have to be updated and the personnel trained for this purpose. In addition, we expect that our ability to develop, maintain and strengthen the ZAP and Jonway brands will also depend heavily on the success of our marketing efforts. To date, Jonway has limited experience with marketing activities as we have relied primarily on the internet, word of mouth and attendance at industry trade shows to promote our brands and Jonway has relied primarily on its distribution network. To further promote our brands, we may be required to change our marketing practices, which could result in substantially increased advertising expenses, including the need to use traditional media such as television, radio and print. The automobile industry is intensely competitive, and we may not be successful in building, maintaining and strengthening the ZAP and Jonway brands. Many of our current and potential competitors, particularly automobile manufacturers headquartered in Detroit, Japan and the European Union, have greater name recognition, broader customer relationships and substantially greater marketing resources than we do. If we do not develop and maintain strong brands, our business, prospects, financial condition and operating results will be materially and adversely impacted.

ZAP Jonway is dependent on our suppliers, a significant number of which are single or limited source suppliers, and the inability of these suppliers to continue to deliver, or their refusal to deliver, necessary components of our vehicles at prices and volumes acceptable to us could have a material adverse effect on our business, prospects and operating results.

While ZAP obtains components from multiple sources whenever possible, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. We refer to these component suppliers as our single source suppliers. To date we have not qualified alternative sources for most of the single sourced components used in our vehicles and we generally do not maintain long-term agreements with our single source suppliers.

While ZAP believes that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for our single source components, we may be unable to do so in the short term or at all at prices or costs that are favorable to us. In particular, while ZAP believes that we will be able to secure alternate sources of supply for almost all of our single sourced components on a relatively short time frame, qualifying alternate suppliers or developing our own replacements for certain highly customized components of our electric vehicles may be time consuming and costly.

Jonway obtains most of its components, such as its engines, from multiple third party suppliers, except for interior trim plastic components, which it obtains from Jonway Group.

Changes in business conditions, wars, governmental changes and other factors beyond ZAP Jonway’s control or which we do not presently anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significant increased demand, or need to replace our existing suppliers, there can be no assurance that additional supplies of component parts will be available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our requirements or fill our orders in a timely manner. The loss of any single or limited source supplier or the disruption in the supply of components from these suppliers could lead to delays in vehicle deliveries to ZAP Jonway’s customers, which could hurt our relationships with our customers and also materially adversely affect our business, prospects and operating results.

 
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Increases in costs, disruption of supply or shortage of materials, in particular lithium-ion cells, could harm ZAP Jonway’s business.

ZAP Jonway may experience increases in the cost or a sustained interruption in the supply or shortage of materials. Any such cost increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. ZAP Jonway uses various materials in our business and the prices for these materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. For instance, ZAP Jonway is exposed to multiple risks relating to price fluctuations for batteries, particularly lithium-ion cells for our electric vehicles. These risks include:

·
the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells required to support the growth of the electric or plug-in hybrid vehicle industry as demand for such cells increases;

·
Disruption in the supply of cells due to quality issues or recalls by the battery cell manufacturers; and

·
An increase in the cost of raw materials, such as cobalt, used in lithium-ion cells.

ZAP Jonway’s business is dependent on the continued supply of battery cells for our vehicles. Battery cell manufacturers may have additional restrictions and constraints placed by local regulatory government agencies that may affect their ability to continue to supply lithium batteries for electric vehicle manufacturers in the event that they determine that the vehicles are not sufficiently safe. Furthermore, current fluctuations or shortages in petroleum and other economic conditions may cause us to experience significant increases in freight charges and material costs. Substantial increases in the prices for our materials would increase our bill of materials and operating costs, and could reduce our margins if we cannot recoup the increased costs through increased electric vehicle prices. There can be no assurance that we will be able to recoup increasing costs of materials by increasing vehicle prices and any attempts to increase the announced or expected prices in response to increased material costs could be viewed negatively by our customers and could materially adversely affect our brand, image, business, prospects and operating results.

The success of our electric vehicle business depends on attracting and retaining large fleet customers. If ZAP Jonway is unable to do so, we will not be able to achieve profitability.

ZAP Jonway’s electric vehicle business’ success depends on attracting large fleet or taxi customers to purchase our electric vehicles. If our existing and prospective customers do not perceive our vehicles and services to be of sufficiently high value and quality, cost competitive and high performing, ZAP Jonway may not be able to retain our current customers or attract new customers, and our business and prospects, operating results and financial condition would suffer as a result. To date, we have limited experience selling ZAP Jonway vehicles and we may not be successful in attracting and retaining large fleet or taxi customers. If for any of these reasons ZAP Jonway is not able to attract and maintain customers, our business, prospects, operating results and financial condition would be materially harmed.

ZAP Jonway’s plan to expand our network of distributors will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our electric vehicles.

ZAP Jonway’s plan to expand our network of distributors will require significant cash investments and management resources and may not meet our expectations with respect to additional sales of our vehicles. This planned global expansion of distributors may not have the desired effect of increasing sales and expanding our brand presence to the degree ZAP Jonway is anticipating. We will also need to ensure ZAP Jonway is in compliance with any regulatory requirements applicable to the sale of our vehicles in our potential markets, which could take considerable time and expense. If ZAP Jonway experiences any delays in expanding our network of distributors, this could lead to a decrease in sales of our vehicles and could negatively impact our business, prospects, financial condition and operating results. We may not be able to expand our network at our expected rate and our planned expansion of our network of distributors will require significant cash investment and management resources.

Furthermore, certain states and foreign jurisdictions may have permit requirements, franchise dealer laws or similar laws or regulations that may preclude or restrict our ability to sell vehicles out of such states and jurisdictions. Any such prohibition or restriction may lead to decreased sales in such jurisdictions, which could harm our business, prospects and operating results.

ZAP Jonway faces risks associated with our international operations, including unfavorable regulatory, political, tax and labor conditions, which could harm our business.

ZAP Jonway faces risks associated with our international operations, including possible unfavorable regulatory, political, tax and labor conditions, which could harm our business. Recently, in China, rising wages in China have increased operating costs and the rising RMB exchange rate is reducing the price competitiveness of our vehicles internationally. All of this is putting pressure on the operating costs of manufacturing plants. Meanwhile, due to numerous labor disputes in large manufacturing plants, local government regulatory authorities and labor union advocates have increased their scrutiny of wages, labor conditions in China. To the extent such developments result in more burdensome labor laws and regulations or require us to increase the wages of employees, ZAP Jonway’s ability to adequately staff our plants and to manufacture and ship products in China could be adversely affected, our margins and net income could be reduced and our reputation as a reliable supplier could be negatively impacted.
 
 
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ZAP currently has international operations and subsidiaries in China, and is evaluating setting up assembly plants in strategic countries where local partners are willing to invest in the production assembly plants in order to improve tax rates. Jonway is developing international distribution activities in Brazil, Turkey, Russia, South Africa, Ghana and Thailand. In the near future, Jonway intends to add other new international distribution to Southeast Asia, the Middle East and South America depending on the opportunities and strengths of the local interested partners.  Additionally, as part of ZAP Jonway’s growth strategy, we intend to expand our sales, maintenance and repair services internationally. However, we have limited experience to date in manufacturing, selling, and servicing our vehicles internationally and such expansion would require us to make significant expenditures, including the hiring of local employees and establishing facilities, in advance of generating any revenue. ZAP Jonway is subject to a number of risks associated with international business activities that may increase our costs, impact our ability to sell our electric vehicles and require significant management attention. These risks include:

·
compliance of ZAP Jonway’s vehicles to various international regulatory requirements where our vehicles are sold, or homologation;

·
labor unrest and difficulty in staffing and managing international operations;

·
excess costs associated with reducing employment or shutting down facilities;

·
constraints on our ability to maintain or increase prices as the RMB rises and still remain competitive;

·
coordinating communications among and managing international operations;

·
difficulties in marketing and attracting customers in new jurisdictions;

·
foreign government taxes, regulations and permit requirements, including foreign taxes that we may not be able to offset against taxes imposed upon  ZAP in the United States, and foreign tax and other laws limiting our ability to repatriate funds to ZAP in the United States;

·
fluctuations in foreign currency exchange rates and interest rates, including risks related to any interest rate swap or other hedging activities we undertake; our ability to enforce our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as do the United States, Japan and European countries, which increases the risk of unauthorized, and uncompensated, use of our technology;

·
difficulties in obtaining or complying with export license requirements;

·
United States and foreign government trade restrictions, tariffs and price or exchange controls;

·
foreign labor laws, regulations and restrictions;

·
preferences of foreign nations for domestically owned companies;

·
changes in diplomatic and trade relationships;

·
political instability, natural disasters, war or events of terrorism; and

·
the strength of international economies.

ZAP Jonway also faces the risk that costs denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. If the value of the United States dollar depreciates significantly against such currencies, our costs as measured in United States dollars will correspondingly increase and our operating results will be adversely affected. In addition, our battery cell purchases from international suppliers are subject to currency risk. Although ZAP present contracts are United States dollar based, if the United States dollar depreciates significantly against the local currency it could cause our international suppliers to significantly raise their prices, which could harm ZAP Jonway’s financial results.
 
 
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To respond to competitive pressures and customer requirements, ZAP Jonway may further expand internationally in lower cost locations. As we pursue continued expansion in these locations, we may incur additional capital expenditures. In addition, the cost structure in certain countries that are now considered to be favorable may increase as economies develop or as such countries join multinational economic communities or organizations, causing local wages to rise. As a result, we may need to continue to seek new locations with lower costs and the employee and infrastructure base to support our international operation.  We cannot assure you that ZAP Jonway will realize the anticipated strategic benefits of our international operations or that our international operations will contribute positively to our operating results.

If ZAP Jonway fails to successfully address these risks, our business, prospects, operating results and financial condition could be materially harmed.

Some of the laws and regulations governing Jonway are vague and subject to risks of interpretation.

Some of the laws and regulations of the People’s Republic of China governing our business operations in China are vague and their official interpretation and enforcement may involve substantial uncertainty. These include, but are not limited to, laws and regulations governing Jonway’s business, required licenses and approvals, and the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We believe that we comply with regulatory requirements in the People’s Republic of China, but there can be no certainty that government will not have a different interpretation. Despite their uncertainty, Jonway will be required to comply. In particular, Jonway’s regulatory authority to manufacture vehicles is through Zhejiang UFO’s listing on the Public Notice. We believe this satisfies regulatory requirements, but if the government decides otherwise, they could enforce penalties and fees and require Jonway to obtain a separate listing on the Public Notice. New laws and regulations that affect existing and proposed businesses may be applied retroactively. Accordingly, the effectiveness of newly enacted laws, regulations or amendments may not be clear. ZAP Jonway cannot predict what effect the interpretation of existing or new laws or regulations may have on our business. If any promulgated regulations contain clauses that cause an adverse impact to ZAP Jonway’s operations in China, then our business, operating results and financial condition could be materially and adversely affected.

Jonway’s contracts are based in the Chinese Renminbi, which may fluctuate against the U.S. dollar and must be reconciled into the U.S. dollar for ZAP Jonway’s consolidated financials.

Jonway’s present contracts are based in the Chinese Renminbi (“RMB”), except for international trading contracts in the US dollar. The value of the RMB depends, to a large extent, on China’s domestic and international economic, financial and political developments and government policies, as well as the currency’s supply and demand in the local and international markets. Over the last two years, the value of the RMB largely appreciated against U.S. dollar and will continue to appreciate over time. There can be no assurance that such exchange rate will not fluctuate widely against the U.S. dollar in the future. Fluctuation of the value of the RMB will have adverse effects in reconciling Jonway’s financial statements into the U.S. dollar in consolidated financials and such reconciliation may require significant resources of ZAP Jonway and therefore cause an adverse effect on ZAP Jonway’s business. Additionally, the rising RMB could increasingly reduce the price competitiveness of our products internationally outside of China, and add to the overall manufacturing costs for each vehicle.

The unavailability, reduction or elimination of government and economic incentives could have a material adverse effect on ZAP Jonway’s business, financial condition, operating results and prospects.

Any reduction, elimination or discriminatory application of government subsidies and economic incentives because of policy changes, the reduced need for such subsidies and incentives due to the perceived success of the electric vehicle, fiscal tightening or other reasons may result in the diminished competitiveness of the alternative fuel vehicle industry generally or ZAP Jonway’s electric vehicles in particular. This could materially and adversely affect the growth of the alternative fuel automobile markets and ZAP Jonway’s business, prospects, financial condition and operating results.

ZAP Jonway’s growth depends in part on the availability and amounts of government subsidies and economic incentives for alternative fuel vehicles generally and electric vehicles specifically. If we fail to meet conditions for tax incentives for electric vehicles, we would be unable to take full advantage of these tax incentives and our financial position could be harmed.

In addition, certain regulations that encourage sales of electric cars could be reduced, eliminated or applied in a way that creates an adverse effect for ZAP Jonway’s electric vehicles, either currently or at any time in the future. For example, while the federal and state governments in the United States have from time to time enacted tax credits and other incentives for the purchase of alternative fuel cars, our competitors have more experience and greater resources in working with legislators than we do, and so there is no guarantee that our vehicles would be eligible for tax credits or other incentives provided to alternative fuel vehicles in the future. This would put ZAP Jonway’s electric vehicles at a competitive disadvantage. Furthermore, low volume manufacturers are exempt from certain regulatory requirements in the United States. This provides ZAP Jonway with an advantage over high volume manufacturers that must comply with such regulations. Once we reach a certain threshold number of sales in the United States, we will no longer be able to take advantage of such exemptions in the respective jurisdictions, which could lead us to incur additional design and manufacturing expense.
 
 
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Jonway depends in part on government subsidies and economic incentives to finance Jonway’s independent research and development, production and sale, such as a Chinese surtax exemption, technology innovation incentives and land use rights investment subsidies from local government. If government policies change, or if Jonway otherwise fails to obtain these incentives, it will adversely affect ZAP Jonway’s financial position and operating results. Due to lack of a business license, Jonway cannot obtain certain government grants for the auto manufacturing industry, or other incentives, such as the enterprise income tax preferential treatment, and other incentives for auto manufacturers.

ZAP’s payment in its common stock in the US to compensate for services rendered by service providers and some employees may put downward pressure on stock prices.

ZAP in the US had paid some of its employees and contractors with stock and this continues to put pressure on the share price. ZAP is putting more restrain on the issuance of stock for services, and minimized the issuance of stock options to employees.

ZAP’s efforts to integrate acquired businesses, especially Jonway, into our existing operation may not be successful.

ZAP Jonway may, in the future, continue to acquire businesses in China and in other jurisdictions that we believe would benefit us in terms of product diversification, brand enhancement, technological advances, geographical presence or expansion of sales and distribution networks. Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable targets and to obtain any necessary financing for such acquisitions. In order to complete certain acquisitions, we may require regulatory approvals or other conditions to closing that delay the completing of strategic transactions beyond the time anticipated. Even if we successfully complete an acquisition, we may experience difficulties in integrating the acquired business, its personnel or its products into our existing business, particularly:

·
allocating management resources;

·
scaling up production and coordinating management of operations at new sites;

·
separating operations or support infrastructure for entities divested;

·
managing and integrating operations in geographically dispersed locations;

·
maintaining customer, supplier or other favorable business relationships of acquired operations and terminating unfavorable relationships;

·
integrating the acquired company’s systems into our management information systems;

·
satisfying unforeseen liabilities of acquired businesses, including environmental liabilities, which could require the expenditure of material amounts of cash;

·
operating in the geographic market or industry sector of the business acquired in which we may have little or no experience;

·
improving and expanding our management information systems to accommodate expanded operations; and losing key employees of acquired operations

These difficulties may result in delays or failures in realizing the benefits of the acquired business or its products, diversion of our management’s time and attention from other business concerns and, higher costs of integration than we anticipated. In addition, we may also face cultural and other issues integrating businesses in China and other jurisdictions, including oversight to ensure these businesses comply with applicable U.S. laws and regulations, particularly regarding compliance with the Office of Foreign Assets Control and the Foreign Corrupt Practices Act. ZAP Jonway may be ineffective in fully adopting more efficient systems for timely recording and reporting to provide transparency and accuracy of all operations and finances. Delayed adoption of tracking systems may affect the performance of the Company.

ZAP Jonway may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future.
 
Strategic business relationships will be an important factor in the growth and success of ZAP Jonway’s business. There are no assurances that we will be able to identify or secure suitable business relationship opportunities in the future or our competitors may capitalize on such opportunities before we do. We may not be able to offer competitive benefits to other companies that we would like to establish and maintain strategic relationships with which could impair our ability to establish such relationships. Moreover, identifying such opportunities could demand substantial management time and resources, and negotiating and financing relationships involves significant costs and uncertainties. If ZAP Jonway is unable to successfully source and execute on strategic relationship opportunities in the future, our overall growth could be impaired, and our business, prospects and operating results could be materially adversely affected.
 
 
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ZAP Jonway may not be successful in implementing and integrating strategic transactions or in divesting non-strategic assets, which could cause our financial results to fail to meet our forecasts.

From time to time, ZAP Jonway may undertake strategic transactions that give us the opportunity to access new customers and new end-customer markets, to obtain new manufacturing and service capabilities and technologies, to enter new geographic manufacturing locations, to lower our manufacturing costs and improve the margins on our product mix, and to further develop existing customer relationships. Strategic transactions involve many difficulties and uncertainties, including the following:
 
·
Integrating acquired operations and businesses;
 
·
regulatory approvals or other conditions to closing that delay the completing of strategic transactions beyond the time anticipated;

·
allocating management resources;

·
scaling up production and coordinating management of operations at new sites;

·
separating operations or support infrastructure for entities divested;

·
managing and integrating operations in geographically dispersed locations;

·
maintaining customer, supplier or other favorable business relationships of acquired operations and terminating unfavorable relationships;

·
integrating the acquired company’s systems into our management information systems;

·
satisfying unforeseen liabilities of acquired businesses, including environmental liabilities, which could require the expenditure of material amounts of cash;

·
operating in the geographic market or industry sector of the business acquired in which we may have little or no experience;

·
improving and expanding our management information systems to accommodate expanded operations; and

·
losing key employees of acquired operations.

Any of these factors could prevent ZAP Jonway from realizing the anticipated benefits of a strategic transaction, and our failure to realize these benefits could reduce our sales below and increase our costs above our forecasts. Acquisitions may also be dilutive to our earnings per share if our projections and assumptions about the acquired business’ future operating results prove to be inaccurate. As a result, although our goal is to improve our business and maximize shareholder value, any transactions that we complete may ultimately fail to increase our sales and net income and stock price.

China’s foreign exchange control policy may restrict ZAP Jonway from repatriating profit from Chinese subsidiaries to ZAP and may further restrict ZAP Jonway in the future.
 
 
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The People’s Republic of China regulates the conversion between the RMB and foreign currencies. Over the years, the government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade and service-related foreign exchange transactions, payment of dividends and service of foreign debt. However, foreign exchange transactions by subsidiaries in China under capital accounts continue to be subject to significant foreign controls and require the approval of and or registration with, governmental authorities. There can be no assurance that these laws and regulations on foreign investment will not cast uncertainties on financing and operating plans in China. Under current foreign exchange regulations in China, subject to relevant registration at the State Administration of Foreign Exchange, (“SAFE”), Jonway will be able to pay dividends in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.  However, there can be no assurance that the current foreign exchange policies regarding debt service and payment of dividends in foreign currencies will persist in their current formulation. Changes in foreign exchange policies in the People’s Republic of China might have a negative impact on ZAP Jonway’s ability to repatriate profit from Jonway to ZAP.

If ZAP Jonway fails to manage future growth effectively, we may not be able to market and sell our vehicles successfully.

The majority of ZAP Jonway sales are from Zhejiang Jonway Automobile Co. Ltd. For the year ended December 31, 2015 of the total sales of $29.5 million Jonway Automobile accounted for $29.2 million. Any failure to manage ZAP Jonway’s growth effectively could materially and adversely affect our business, prospects, operating results and financial condition. ZAP Jonway’s future operating results depend to a large extent on our ability to manage this expansion and growth successfully. Risks that we face in undertaking this expansion include:

·
development of sales network and dealerships;

·
financially strong partnerships internationally that can help distribute and expand sales and marketing for the targeted regions;

 
Forecasting production and revenue;

·
controlling expenses and investments in anticipation of expanded operations; establishing or expanding design, manufacturing, sales and service facilities;

·
implementing and enhancing administrative infrastructure, systems and processes;

·
addressing new markets with adequate advertisement, branding and promotion; and

·
expanding international operations with experienced international sales team.

·
controlling expenses and investments in anticipation of expanded operations; establishing or expanding design, manufacturing, sales and service facilities;

·
implementing and enhancing administrative infrastructure, systems and processes;

·
addressing new markets with adequate advertisement, branding and promotion; and

·
Expanding international operations with experienced international sales team.
 
ZAP Jonway has suffered some losses in personnel in 2013, and intends to replace these losses with more experienced and skilled people to do sales and marketing, financial management, design and manufacturing personnel and service technicians for our vehicles. Competition for individuals with experience designing, manufacturing and servicing vehicles, particularly electric vehicles, is intense, and we may not be able to attract, assimilate, train or retain additional highly qualified personnel in the future. The failure to attract, integrate, train, motivate and retain these additional employees could seriously harm ZAP Jonway’s business and prospects.
 
 
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If ZAP Jonway is unable to attract and retain key employees and hire qualified management, technical and vehicle engineering personnel, our ability to compete could be harmed.

The loss of the services of any of ZAP Jonway’s key employees could disrupt our operations, delay the development and introduction of our vehicles and services, and negatively impact our business, prospects and operating results. In particular, ZAP Jonway is highly dependent on the services of Alex Wang, ZAP’s Chief Executive Officers. Only one of ZAP Jonway’s key employees is bound by an employment agreement for any specific term. There can be no assurance that we will be able to successfully attract and retain senior leadership necessary to grow our business. Our future success depends upon our ability to attract and retain our executive officers and other key technology, sales, marketing and support personnel and any failure to do so could adversely impact our business, prospects, financial condition and operating results. We have in the past and may in the future experience difficulty in retaining members of our senior management team. There is increasing competition for talented individuals with the specialized knowledge of electric vehicles and this competition affects both our ability to retain key employees and hire new ones.

ZAP Jonway is subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in building our manufacturing facilities.

As an automobile manufacturer, ZAP Jonway and our operations, both in the United States, in China and abroad, are subject to national, state, provincial and/or local environmental laws and regulations, including laws relating to the use, handling, storage, disposal and human exposure to hazardous materials. Environmental and health and safety laws and regulations can be complex, and we expect that our business and operations will be affected by future amendments to such laws or other new environmental and health and safety laws which may require us to change our operations, potentially resulting in a material adverse effect on our business. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury and fines and penalties. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties, third party damages, suspension of production or a cessation of our operations.

Contamination at properties formerly owned or operated by ZAP Jonway, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations, including, but not limited to the Comprehensive Environmental Response, Compensation and Liability Act, which can impose liability for the full amount of remediation-related costs without regard to fault, for the investigation and cleanup of contaminated soil and ground water, for building contamination and impacts to human health and for damages to natural resources. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future, could have a material adverse effect on ZAP Jonway’s financial condition or operating results. We may face unexpected delays in obtaining the necessary permits and approvals required by environmental laws in connection with our planned manufacturing facilities that could require significant time and financial resources and delay our ability to operate these facilities, which would adversely impact our business prospects and operating results.

ZAP Jonway’s business may be adversely affected by union activities.

Although none of ZAP Jonway’s employees are currently represented by a labor union, it is common throughout the automobile industry generally for many employees at automobile companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. As we expand our business, there can be no assurances that our employees will not join or form a labor union or that we will not be required to become a union signatory. ZAP Jonway is also directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of ZAP Jonway’s vehicles and have a material adverse effect on our business, prospects, operating results or financial condition.

ZAP Jonway is subject to substantial regulation, which is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and operating results.

ZAP Jonway’s electric vehicles, the sale of our motor vehicles in general and the electronic components used in our vehicles are subject to substantial regulation under international, federal, state, and local laws. We have incurred, and expect to incur in the future, significant costs in complying with these regulations. Regulations related to the electric vehicle industry and alternative energy are currently evolving and ZAP Jonway faces risks associated with changes to these regulations such as:
 
·
the imposition of a carbon tax or the introduction of a cap-and-trade system on electric utilities could increase the cost of electricity;
 
·
the increase of subsidies for corn and ethanol production could reduce the operating cost of vehicles that use ethanol or a combination of ethanol and gasoline;

·
changes to the regulations governing the assembly and transportation of lithium-ion batteries, such as the UN Recommendations of the Safe Transport of Dangerous Goods Model Regulations or regulations adopted by the U.S. Pipeline and Hazardous Materials Safety Administration could increase the cost of lithium-ion batteries;
 
 
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·
increased sensitivity by regulators to the needs of established automobile manufacturers with large employment bases, high fixed costs and business models based on the internal combustion engine could lead them to pass regulations that could reduce the compliance costs of such established manufacturers or mitigate the effects of government efforts to promote alternative fuel vehicles; and changes to regulations governing exporting of our products could increase our costs incurred to deliver products outside the United States or force us to charge a higher price for our vehicles in such jurisdictions.

In addition, as the automotive industry moves towards greater use of electronics for vehicle systems, The U.S. National Highway Traffic  Safety Administration and other regulatory bodies may in the future increase regulation for these electronic systems.

To the extent the laws change, some or all of ZAP Jonway’s vehicles may not comply with applicable international, federal, state or local laws, which would have an adverse effect on our business. Compliance with changing regulations could be burdensome, time consuming, and expensive. To the extent compliance with new regulations is cost prohibitive, ZAP Jonway’s business, prospects, financial condition and operating results will be adversely affected.

ZAP Jonway’s electric vehicles make use of lithium-ion battery cells, which on rare occasions have been observed to catch fire or vent smoke and flame.

The battery packs in ZAP Jonway’s electric vehicles make use of lithium-ion cells, which have been used for years in laptops and cell phones. We also currently intend to make use of lithium-ion cells in the battery pack for certain future vehicles we may produce. On rare occasions, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. The events have also raised questions about the suitability of these lithium-ion cells for automotive applications. To address these questions and concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. ZAP Jonway has delivered only a limited number of electric vehicles with lithium-ion battery cells to customers and has limited field experience with these vehicles. Accordingly, there can be no assurance that a field failure of our battery packs will not occur, which could damage the vehicle or lead to personal injury or death and may subject us to lawsuits. There can be no assurance that a safety issue or fire related to the cells would not disrupt ZAP Jonway’s operations. Such damage or injury would likely lead to adverse publicity and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle, especially those that use a high volume of commodity cells similar to ZAP Jonway’s, may cause indirect adverse publicity for us. Such adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.

ZAP Jonway may become subject to product liability claims, which could harm our financial condition and liquidity if ZAP Jonway is not able to successfully defend or insure against such claims.

The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of vehicles. ZAP Jonway may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition. The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles do not perform as expected or malfunction resulting in personal injury or death. ZAP Jonway’s risks in this area are particularly pronounced given the limited number of vehicles delivered to date and limited field experience of those vehicles. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have material adverse effect on our brand, business, prospects and operating results. ZAP maintains product liability insurance for all ZAP vehicles with annual limits of approximately $2 million on a claim made basis, but we cannot assure that our insurance will be sufficient to cover all potential product liability claims and the product liability insurance does not extend to Jonway products. Any lawsuit seeking significant monetary damages either in excess of ZAP Jonway’s coverage, or outside of our coverage, may have a material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are forced to make a claim under our policy. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.

In connection with the development and sale of ZAP Jonway’s planned vehicles, we will need to comply with various safety regulations and requirements, such as certain frontal impact tests, which are required for sales exceeding certain annual volumes outside the United States. We may experience difficulties in meeting all the criteria for this test or similar tests for our planned electric vehicles, which may delay our ability to sell them in high volumes in certain jurisdictions.

ZAP Jonway’s facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
 
 
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ZAP’s corporate headquarters are located in California, a region known for seismic activity. Jonway’s manufacturing facility is located in Sanmen, China. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, ZAP Jonway’s facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages, which could have a material adverse impact on our business, operating results and financial condition.

If ZAP Jonway’s suppliers fail to use ethical business practices and comply with applicable laws and regulations, our brand image could be harmed due to negative publicity.

ZAP Jonway does not control our independent suppliers or their business practices. Accordingly, we cannot guarantee their compliance with ethical business practices, such as environmental responsibility, fair wage practices, and compliance with child labor laws, among others. A lack of demonstrated compliance could lead us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.

Violation of labor or other laws by ZAP Jonway’s suppliers or the divergence of an independent supplier’s labor or other practices from those generally accepted as ethical in the United States or other markets in which we do business could also attract negative publicity for us and ZAP Jonway’s brand. This could diminish the value of our brand image and reduce demand for our performance electric vehicles if, as a result of such violation, we were to attract negative publicity. If we, or other manufacturers in our industry, encounter similar problems in the future, it could harm our brand image, business, prospects, financial condition and operating results.

Risks related to Intellectual Property

ZAP Jonway may need to defend itself against patent or trademark infringement claims, which may be time-consuming and would cause us to incur substantial costs.

Companies, organizations or individuals, including ZAP Jonway’s competitors, may hold or obtain patents, trademarks or other proprietary rights that would prevent, limit or interfere with our ability to make, use, develop or sell our vehicles or components, which could make it more difficult for us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks inquiring whether we infringe their proprietary rights. Companies holding patents or other intellectual property rights relating to battery packs, electric motors or electronic power management systems may bring suits alleging infringement of such rights or otherwise asserting their rights and seeking licenses. In addition, if ZAP Jonway is determined to have infringed upon a third party’s intellectual property rights, we may be required to do one or more of the following:

·
cease selling, incorporating or using vehicles that incorporate the challenged intellectual property;

·
pay substantial damages;

·
obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms or at all; or

·
redesign our vehicles.

In the event of a successful claim of infringement against us and our failure or inability to obtain a license to the infringed technology, our business, prospects, operating results and financial condition could be materially adversely affected. In addition, any litigation or claims, whether or not valid, could result in substantial costs and diversion of resources and management attention.

ZAP Jonway also licenses intellectual property from third parties, and we may face claims that our use of this in-licensed technology infringes the rights of others. In that case, we may seek indemnification from our licensors under our license contracts with them. However, our rights to indemnification may be unavailable or insufficient to cover our costs and losses, depending on our use of the technology, whether we choose to retain control over conduct of the litigation, and other factors.

ZAP Jonway’s business will be adversely affected if ZAP Jonway is unable to protect our intellectual property rights from unauthorized use or infringement by third parties.

Any failure to protect our proprietary rights adequately could result in ZAP Jonway’s competitors offering similar products, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue which would adversely affect our business, prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of patents, patent applications, trade secrets, including know-how, employee and third party nondisclosure agreements, copyright laws, trademarks, intellectual property licenses and other contractual rights to establish and protect our proprietary rights in our technology. As of December 31, 2015, we had 20 issued patents and approximately 28 pending patent applications with the United States Patent and Trademark Office and our majority-owned subsidiary ZAP Jonway had 16 issued patents.
 
 
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The protection provided by the patent laws is and will be important to our future opportunities. However, such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:

·
our pending patent applications may not result in the issuance of patents;

·
our patents, if issued, may not be broad enough to protect our proprietary rights;

·
the patents we have been granted may be challenged, invalidated or circumvented because of the pre-existence of similar patented or unpatented intellectual property rights or for other reasons;

·
the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may make aggressive enforcement impracticable;

·
current and future competitors may independently develop similar technology, duplicate our vehicles or design new vehicles in a way that circumvents our patents; and

·
our in-licensed patents may be invalidated or the holders of these patents may seek to breach our license arrangements.

Existing trademark and trade secret laws and confidentiality agreements afford only limited protection. In addition, the laws of some foreign countries do not protect ZAP Jonway’s proprietary rights to the same extent as do the laws of the United States, and policing the unauthorized use of our intellectual property is difficult.

ZAP Jonway’s patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.

We cannot be certain that ZAP or Jonway are the first creator of inventions covered by their respective pending patent applications or that they are the first to file patent applications on these inventions, nor can we be certain that any of ZAP or Jonway’s pending patent applications will result in issued patents or that any of our issued patents will afford protection against any competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus ZAP Jonway cannot be certain that foreign patent applications related to issue U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States.

The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. As a result, ZAP Jonway cannot be certain that the patent applications that we file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to ZAP, Jonway or ZAP Jonway may be infringed upon or designed around by others and others may obtain patents that ZAP Jonway need to license or design around, either of which would increase costs and may adversely affect our business, prospects, financial condition and operating results.

Risks Related to Ownership of ZAP Common Stock

Concentration of ownership among ZAP’s existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.

ZAP’s executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 69.0% of our outstanding shares of common stock, including securities convertible into shares of ZAP common stock. As a result, these shareholders will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendment of our amended and restated articles of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these shareholders.

ZAP may face risks associated with past sales of unregistered securities.

In the past, ZAP has sold numerous securities which were not registered under federal or state securities laws. ZAP has strived to comply with all applicable federal and state securities laws in connection with our issuances of unregistered securities. However, to the extent ZAP has not complied, ZAP may face liability for the purchase price of the securities sold, together with interest and the potential of regulatory sanctions.

ZAP’s stock price and trading volume may be volatile which could result in substantial losses for ZAP’s shareholders.
 
 
35

 
 
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of ZAP’s common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in ZAP’s common stock may fluctuate and cause significant price variations to occur. ZAP has experienced significant volatility in the price of our stock over the past few years. We cannot assure you that the market price of ZAP’s common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations.

ZAP does not expect to declare any dividends in the foreseeable future.

ZAP has not paid cash dividends on ZAP’s common stock and do not anticipate paying any cash dividends on ZAP’s common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase ZAP’s common stock.

Item 1B. Unresolved Staff Comments.

Not applicable.


Item 2. Properties.
 
The chart below contains a summary of ZAP’s principal facilities at December 31, 2015:
 
Location
 
Us
 
Square
Feet
 
   
Monthly
Rent
 
 
                     
2 West 3rd Street, Santa Rosa, CA
 
Headquarters and Vehicle Storage
    10,000     $ 900  
Zhejiang Province, China
 
China Office and Plant
    915,386     $ -  
 
The 3rd Street property, in Santa Rosa is rented on a month-by-month basis with 2 West 3rd Street, Santa Rosa, Ca, LLC. We began renting this property in July 2012. This property is rented on a month –by- month basis from 2 W 3rd, Inc.

ZAP believes our insurance policies cover all insurance requirements of the landlords. ZAP owns the basic tools, machinery and equipment necessary for the conduct of our repairs, our research and development and vehicle prototyping activities. ZAP believes that the above facilities are generally adequate for ZAP’s present operations.

Jonway’s principal executive offices and manufacturing facility is located in Da Tang Industry Zone, Jiantiao Village, Sanmen Country, Zhejiang Province, China. The building is 915,386 square feet and building includes offices, a canteen and dorms, plants for assembly, painting, pressing and welding, warehouses for paint and raw materials, and an area to store vehicles.  Jonway occupies the entire space and has no properties pledged except for some land use rights for the grant of bank credit facilities. For such detailed pledges of land use rights, please refer to the below discussion of the liquidity and capital resources.

Jonway has obtained certificates of property for all of its buildings.

 
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Item 3. Legal Proceedings

1.     On January 11, 2013, Cathaya Capital, L.P., a ZAP shareholder (“Cathaya”), and Priscilla Lu, previously Chairman of the ZAP Board of Directors (“Lu”) (collectively “Plaintiffs”), filed a lawsuit in the Superior Court of California, County of Los Angeles, styled Cathaya Capital, L.P. et al. v. ZAP, et al., Case No. BC499106 (the “Cathaya Lawsuit”). By the Cathaya Lawsuit, Plaintiffs, derivatively on behalf of the nominally-named defendant ZAP, asserted claims for breach of fiduciary duty and conversion against the following three members of the ZAP Board of Directors: Mark Abdou (“Abdou”), Steven Schneider (“Schneider”) and Wang Gang a/k/a Alex Wang (the “Minority Board Member Defendants”). In addition, Plaintiffs, derivatively on ZAP’s behalf, sought declaratory and injunctive relief against the Minority Board Member Defendants for their alleged tortious misconduct and breaches of fiduciary duty.  Plaintiffs also asserted causes of action on their own behalf pursuant to California Corporations Code sections 304 and 709, for a judgment as to the rightful composition of the Board and to remove the Minority Board Member Defendants from the Board.  On November 12, 2013, Abdou and Schneider filed their operative Second Amended Cross-Complaint against ZAP, Cathaya and Lu (the “Defendant Cross-Complaint”). Wang Gang a/k/a Alex Wang dismissed his claims in the Cathaya lawsuit.

Lu and ZAP filed a Demurrer to the Second Amended Cross-Complaint’s first, fifth, sixth, seventh and eighth claims. On March 3, 2014, the Court granted the Demurrer in its entirety and dismissed all claims asserted by Abdou and Schneider against Lu, without leave to amend. In addition, the Court dismissed all tort claims against ZAP. However, the Court’s ruling does not dismiss all claims against ZAP regarding unpaid employee compensation. The Abdou/Schneider claims against ZAP for unpaid compensation were not before the Court and therefore were not affected by the Court’s ruling and have not been dismissed. These contract- based claims are against ZAP only and do not allow for punitive damages.

On March 13, 2014, ZAP filed its own operative First Amended Cross-Complaint in the Cathaya Lawsuit (the “ZAP Cross-Complaint”) against Abdou and Schneider, alleging causes of action for (1) breach of fiduciary duty; (2) conversion; (3) imposition of a constructive trust; and (4) an accounting. By the ZAP Cross- Complaint, the Company is, among other things, pursuing Schneider and Abdou for return of inventory and assets that were removed from the Company’s warehouse, as well as cash that was redirected to another account.

On May 15, 2014, Abdou’s and Schneider’s counsel filed a motion to be relieved as counsel in the Cathaya Lawsuit, which was granted on August 4, 2014. Consequently, Abdou and Schneider were unrepresented in the Cathaya Law suit as of August 4, 2014

On June 6, 2014, the Court entered an Order Granting Plaintiff’s Motion for Sanctions due to Violations of Court’s Discovery Order, which imposed certain monetary and evidentiary sanctions against Abdou and Schneider, including, among other things, precluding Abdou and Schneider from calling certain witnesses and offering evidence of or relating to certain issues at trial.

On January 12, 2015, a Settlement Agreement and Mutual Release was entered into between Cathaya, Lu Lu and ZAP, on the one hand, and Schneider, Abdou, and Libertas Law Group, Inc. (“Libertas”) on the other hand (the “Settlement Agreement”). On January 15, 2015, in accordance with the terms of the Settlement Agreement, dismissals were filed with respect to the Cathaya lawsuit and all related actions, including the Defendant Cross-Complaint and the ZAP Cross- Complaint, with prejudice. Further, under the terms of the Settlement Agreement, (i) ZAP agreed to pay a total of $167,000 to Abdou, (ii) Abdou, Schneider and Libertas released ZAP, Cathaya and Lu from any and all claims relating to events occurring prior to January 12, 2015 and (iii) ZAP, Cathaya and Lu released Abdou, Schneider and Libertas from any and all claims relating to events occurring prior to January 12, 2015.
 
 
37

 
  
Item 4. Mine safety disclosures

Not Applicable



PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. Market Information
 
ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP”.
 
 
   
Bid price
 
Period
 
High
   
Low
 
  
           
Fiscal Year 2015
           
December 31, 2015
  $ 0.07     $ 0.06  
September 30, 2015
    0.11       0.10  
June 30, 2015
    0.06       0.06  
March 31, 2015
    0.09       0.08  
Fiscal Year 2014
               
December 31, 2014
  $ 0.10     $ 0.10  
September 30, 2014
    0.11       0.10  
June 30, 2014
    0.12       0.10  
March 31, 2014
    0.32       0.27  

 

Holders

ZAP had approximately 3,456 record holders of its common stock as of April 15, 2016, according to a shareholders’ list provided by our transfer agent as of that date. The number of registered shareholders does not include any estimate by us of the number of beneficial owners of common stock held in street name. The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company.
 
 
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Dividends

ZAP has never declared or paid any cash or stock dividends on our common stock, and ZAP does not anticipate that ZAP will pay any cash dividends on our common stock in the foreseeable future. Any future determination to declare and pay cash or stock dividends will be at the discretion of ZAP’s Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our Board of Directors may deem relevant at that time.

Securities Authorized for Issuance under Equity Compensation Plans

ZAP maintains its 2008 Equity Compensation Plan, 2007 Consultant Stock Plan, 2006 Incentive Stock Plan, 2004 Consultant Stock Plan, and 2002 Incentive Stock Plan, all of which were approved by our shareholders. All of the plans in the following table contain information about equity awards under those plans as of December 31, 2015:

 
               
(c)
 
   
(a)
         
Number of Shares
 
   
Number of Shares to
   
(b)
   
Remaining Available for
 
   
be Issued Upon
   
Weighted Average
   
Equity Compensation Plans
 
   
Exercise of
   
Exercise Price of
   
(Excluding Shares Reflected
 
Plan Category
 
Outstanding Options
   
Outstanding Options
   
in Column (a))
 
     
(000s)
             
(000s)
 
Equity compensation plans
approved by security holders:
                       
2008 Equity Compensation Plan
   
11,400
     
0.39
     
13,050
 
2007 Consultant Stock Plan
           
1.00
     
1,775
 
2006 Incentive Stock Plan
   
27
     
0.86
     
27
 
2004 Consultant Stock Plan
   
--
     
   —
     
53
 
2002 Incentive Stock Plan
   
--
     
--
     
7,942
 
Equity compensation plans not
approved by security holders:
   
     
     
 
                         
Total
   
              11,427
     
0.40
     
22,847
 

 
Sales of Unregistered Securities

The following lists sales of unregistered ZAP securities during the last fiscal year. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions:

In 2015, ZAP issued 123, 063,842 shares of common stock valued at approximately $7.8 million. These shares were issued for the following purpose:

Interest on  note owed to China Electric Vehicle Company (“CEVC")
 
$
1,237,345
 
Payment of service
 
$
350,000
 
Issuance of common stock for funding from Alex  Wang and Cathaya Capital L.P.
 
$
6,166,546
 

These shares were issued pursuant to Section 4(a) (2) of the Securities Act of 1933, as amended, on the basis of each recipient’s pre-existing relationship with ZAP and that no public offering was involved.

Item 6. Selected Financial Data

A registrant that qualifies as a smaller reporting company is not required to provide information required by this Item 6.

 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary of Key Accomplishments during Fiscal Year 2015

Overview and 2015 Highlights

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.
 
 
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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.

 
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Results of Operations

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Net sales increased by $0.8 million, from $28.7 million for the year ended December 31, 2014 to $29.5 million for the year ended December 31, 2015.  This increase primarily related to the increased sales of EV minivan products.  Jonway’s sales contributed $29.2 million and $27.9 million to net sales for the years ended December 31, 2015 and 2014, respectively.

During the fiscal year 2015, Jonway sold 1,272 units of SUVs and 3,067 units of EV minivans. During the fiscal year 2014, Jonway sold 1,709 units of SUVs and 15 units of minivans.  In April of 2014, Jonway commenced the sales of Urbee which is a low-speed electric vehicle. Jonway sold 1,255 unit of Urbee and 4,375 units of Urbee for the years ended December 31, 2015 and 2014, respectively. The management of ZAP expects that the sales of Urbee in the coming year will be sharply increased.

The sales volume of SUVs decreased due to the following reasons: (i) more SUV models were launched into market by China-based auto makers, which intensified the competition, (ii) Although Jonway launched the upgraded A380, the resulting sales volume did not reach the expected volume, (iii) China’s overall economic condition worsened compared to fiscal year 2014. The sales volume of EV minivans increased in 2015 as compared to that of 2014 because the company intended to withdraw from the gasoline market of this segment and focused on the electric vehicle market of commercial vehicle.

In our Advanced Technology segment, there were no sales transactions for the years ended December 31, 2015 and 2014, respectively.
 
In our Consumer Product (ZAP) segment, sales decreased by $519,000 from $800,000 for the year ended December 31, 2014 to $281,000 for the year ended December 31, 2015.
 
Car Outlet (Voltage Vehicles Car Lot) segment has been effectively closed.  We have discontinued this business segment during the fiscal year 2014.
 
Gross loss decreased by $1.7 million, from gross loss of $3.0 million for the year ended December 31, 2014 to gross loss of $1.3 million for the year ended December 31, 2015.  The decrease in gross loss for the year ended December 31, 2015 related primarily to the increase in sales volume and higher gross margins from the SUVs and minivans sold in China for the Jonway cars.
 
In our Advanced Technology segment, there were no sales transactions for the years ended December 31, 2015 and 2014, respectively.

In our Consumer Products (ZAP) segment, we experienced a decrease of $154,000 in gross profit from a gross profit of $225,000 for the year ended December 31, 2014 to a gross profit of $71,000 for the year ended December 31, 2015 due to slowdown of sales.
 
Sales and marketing expenses decreased by $0.7 million, from $4.0 million for the year ended December 31, 2014 to $3.3 million for the year ended December 31, 2015. The decrease in selling and marketing expense was mainly due to the decrease in advertisement expenditures resulted from the tighten budget during the year 2015.

General and administrative expenses increased by $2.1 million, from $8.7 million for the year ended December 31, 2014 to $10.8 million for the year ended December 31, 2015. The increase was primarily due to the increase of bad debt provision for the year ended December 31, 2015.
 
Research and development expenses increased by $0.9 million from $0.6 million for the year ended December 31, 2014 to $1.5 million for the year ended December 31, 2015. The increase was due to the introduction of Jonway’s LSV line of 2 door and 4 door vehicles and research and development on new EV products.

Impairment loss was approximately $1.1 million for the year ended December 31, 2015.  The impairment loss of $5.6 million for the fiscal year of 2014 was recorded for the CNG distribution right and the Trade name.
     
Interest expense, net decreased by $1.5 million, from $4.0 million for the year ended December 31, 2014 to $2.5 million for the year ended December 31, 2015. The decrease was due to reduced bank borrowing, repayment of convertible notes and decreased bank acceptance notes.
 
 Other income decreased by $1.8 million, from $1.9 million for the year ended December 31, 2014 to $0.3 million for the year ended December 31, 2015.  In 2014, ZAP US reversed the over-provision of recall expenses accrued in 2012 since the claims for the refund were expired as of December 31, 2014.
  
Net loss decreased by $4.3 million, from $24.4 million for the year ended December 31, 2014 to $20.1 million for the year ended December 31, 2015. The decrease was mainly a result of a decrease in gross loss and less impairment charge for fiscal year 2015.

 
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Liquidity and Capital Resources

               The automobile production business is capital intensive and as a normal industry practice in PRC, our Company is highly leveraged. Debt financing in the form of short term bank loans, loans from related parties, and bank acceptance notes, have utilized to finance the working capital requirements and the capital expenditures of our Company.

               As a result, our debt to equity ratio as of December 31, 2015 and 2014 were (6.39) and (49.37) respectively. Our equity deficiency as of December 31, 2015 was $14.8 million. As of December 31, 2015, our current liabilities exceeded the current assets by approximately $70.9 million, which raise substantial doubt about our ability to continue as a going concern. 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 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, our operating and capital expenditure commitments and our financing abilities. Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. At December 31, 2015, we believe that we will have sufficient liquidity required to conduct operations through December 31, 2016.
  
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 December 31, 2015, $7.1 million was drawn down as notes payable. The amount of restricted cash deposited with the bank was $3.5 million.  In July 2014, the Company entered into an 11 months short-term loan of $1.2 million at an interest rate of 7.2%. The loan was repaid when due in June 2015. As of December 31, 2015, $3.5 million was still available for future use.
 
In March 2014, the Company has obtained up to an aggregate of $15.4 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. In March 2014, Jonway Auto borrowed a one year short-term loan of $1.0 million. The annual interest rate was 7.08% and the loan was due in March 2015. The company then early settled the loan in December 2014. As of December 31, 2015, Jonway Auto borrowed a half year short-term loan of $3.0 million at annual interest rate of 5.9%. The loan is due on April 28, 2016.  We have also drawn down $6.4 million in the form of notes payable as of December 31, 2015. For certain notes payables utilizing the credit exposure of $2.6 million, we deposited 50% to 100% cash as restricted cash as collateral for these notes payable. These notes are due from March 2016 to April, 2016.  As of December 31, 2015, the credit exposure of $5.7 million has been used. The credit line expires in March 2016.

 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 December 31, 2015, the total outstanding loan under this credit line was $4.6 million with $0.8 million of restricted cash deposited with the bank. The annual interest rates are from 5.0% to 6.9%.  The loans are due in various dates from April 2015 to November 2016. As of December 31, 2015, a credit exposure of $4.6 million has been used, and $0.5 million was still available for use. The credit line expires in March 2017.
   
We intend to utilize the above credit lines to expand the 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 September 30, 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.
 
 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.

We will require additional capital to expand our current operations.  In particular, we require additional capital to expand our presence across the world, to continue development of our electric vehicle business, to continue strengthening our dealer network and after-sale service centers and expanding our market initiatives.  We also require financing the investment for the continued roll-out of new products and to add qualified sales and professional staff to execute on our business plan and pursue our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias, the electric and other fuel efficient vehicles.
 
 
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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.  

We used cash in operations activities of $2.6 million for the year ended December 31, 2015. Cash used in operations in 2015 was the result of the net loss of $20.1 million, offset by non-cash expenses of $11.7 million.  In 2015, non-cash expenses mainly included $0.07 million for stock-based compensation to employees and service providers, $8.2 million of depreciation and amortization, $1.1 million impairment loss on assets and $2.4 million of provision for doubtful accounts. Cash provided by operations activities was $0.15 million for the years ended December 31, 2014. Cash provided by operations activities in 2014 was the result of the net loss of $24.4 million, offset by non-cash expenses of $15.1 million.  In 2014, non-cash expenses mainly included $0.2 million for stock-based compensation to employees, $5.6 million of impairment loss of long-lived assets, $8.3 million of depreciation and amortization, $0.5 million of amortization of debt discount.

In 2015, the net change in operating assets and liabilities resulted in a cash increase of $5.8 million. The change was primarily due to increase in accounts receivable of $0.7 million, increase in accounts payable of $0.6 million, increase in accrued liabilities of $1.6 million, increase in advances from customers of $0.7 million and increase in due to related parties of $1.9 million and offset by decrease in other payables if $0.8 million.

In 2014, the net change in operating assets and liabilities resulted in a cash increase of $9.5 million. The change was primarily due to increase in accounts receivable of $2.7 million, increase in due from related parties of $3.5 million, increase in due to related parties of $5.5 million and offset by decrease in accrued liabilities and accounts payable of $1.2 and $2.1 million respectively .

         We used cash of $1.0 million and $1.1 million in the investing activities for the acquisition of property and equipment for the years ended December 31, 2015 and 2014, respectively.

 We provided cash of $3.5 million from the financing activities, and used cash of $1.5 million in financing activities for the years ended December 31, 2015 and 2014, respectively. In 2015, we received $2.2 million and $14.1 million, respectively, from short term borrowings and notes payable. The issuance of common stock generated $6.2 million, and restricted cash was reduced by $1.2 million.  These were offset by the repayments of notes payable and short term borrowings of $14.3 million and $6.2 million, respectively.

In 2014, we received $13.2 million and $34.0 million, respectively, from short term borrowings and notes payable. The issuance of common stock generated $1.9 million. These were offset by an increase in restricted cash of $26,000 and repayments of notes payable and short term borrowings of $31.8 million and $18.3 million, respectively.
 
 We had cash and cash equivalents balance of $0.06 million as of December 31, 2015 as compared to the balance of $0.24 million as of December 31, 2014. We had a working capital deficit of $70.8 million as of December 31, 2015 as compared to a deficit of $69.5 million as of December 31, 2014.  We had a recurring loss of $20.1 million and $24.4 million for fiscal 2015 and 2014, respectively.  Even though we had the above negative factors, we still believe that there is sufficient liquidity for our operations through December 31, 2016.

 
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Critical Accounting Policies and Use of Estimates

Estimates

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

Stock Based Compensation

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

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

Allowance for Doubtful Accounts

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

Inventories

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

Goodwill and Intangibles
 
Intangible assets consist of trade names, developed technology, in process research and development and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for developed technology and eight years for the customer relationships. Costs incurred by the Company in connection with trademark applications and approvals from governmental agencies, including legal fees and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over an estimated economic life of the asset commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred. In Process Technology and tradename are determined to have an indefinite useful life and not amortized, but instead are tested for impairment at least annually. As of December 31, 2015 and 2014, the Company recognized an impairment loss of $0.1 million and $0.6 million for the Trade name, respectively.

  As a result of our acquisition of Jonway, we have recorded goodwill and various amortizable intangible assets. Businesses acquired are recorded at their fair value on the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recognized as goodwill. Our goodwill at December 31, 2015 and 2014 was approximately $0.3 million.

 
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Revenue Recognition

The Company records revenues for non-Jonway sales when all of the following criteria have been met:

 
· 
Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.

 
· 
Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.

 
· 
Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.

 
· 
Collectability is reasonably assured. The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.

  The Company records revenues for Jonway sales only upon the occurrence of all of the following conditions:

 
· 
The Company has received a binding purchase order from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale);

 
· 
The purchase price has been fixed, based on the terms of the purchase order;

 
· 
The Company has delivered the product from its factory to a common carrier acceptable to the customer; and

 
· 
The Company deems the collection of the amount invoiced probable.

The Company provides no price protection. Sales are recognized net of sale discounts, rebates and return allowances.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles which requires our management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.

Foreign Currency

The functional currencies of our foreign subsidiary/investments are their respective local currencies. The financial statements are maintained in local currencies and are translated to U.S. dollars using period-end rates of exchange for assets and liabilities and average rates during the period for revenues, cost of revenues and expenses. Translation gains and losses resulting from the translation of assets and liabilities of our foreign subsidiaries are recorded in the accumulated other comprehensive gain or loss as a separate component of stockholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions related to our interest rate swap. Gains and losses from foreign currency transactions are included in the consolidated statements of income.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

A registrant that qualifies as a smaller reporting company is not required to provide information required by this Item 7A.

Item 8. Financial Statements and Supplementary Data.

The information required by Item 8 and the index thereto commences on the next page.

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
ZAP and Subsidiaries


We have audited the accompanying consolidated balance sheets of ZAP and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive loss, equity (deficiency) and cash flows for each of the two years in the period ended December 31, 2015.  The Company’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had a working capital deficiency and negative shareholders’ equity at December 31, 2015, as well as recurring net losses, which raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding this matter are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.




/s/ Friedman LLP

New York, New York
April 14, 2016

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PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
 
ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

   
             
   
December 31,
   
December 31,
 
ASSETS
 
2015
   
2014
 
             
Current assets:
           
Cash and cash equivalents
  $ 60     $ 238  
Restricted cash
    8,988       10,673  
Notes receivable
    -       81  
Accounts receivable, net
    5,915       2,724  
Inventories, net
    7,743       8,380  
Prepaid taxes
    147       110  
Prepaid expenses and other current assets
    574       377  
Total current assets
    23,427       22,583  
                 
Property, plant and equipment, net
    35,893       42,595  
Land use rights, net
    8,930       9,711  
                 
Other assets:
               
Distribution fees, net
    6,959       9,399  
Intangible assets, net
    2,513       3,195  
Goodwill
    314       332  
Due from related party
    1,614       2,791  
Deposits and other assets
    -       390  
Total other assets
    11,400       16,107  
Total assets
  $ 79,650     $ 90,996  

See accompanying notes to the consolidated financial statements.

 
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ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

   
December 31,
   
December 31,
 
   
2015
   
2014
 
             
LIABILITIES AND  DEFICIENCY
           
Current liabilities:
           
Short term loans
  $ 7,702     $ 9,849  
Accounts payable
    21,486       21,389  
Senior convertible debt
    21,465       20,679  
Accrued liabilities
    4,000       3,848  
Notes payable
    14,366       17,747  
Advances from customers
    7,391       7,139  
Taxes payable
    1,638       1,266  
Due to related party
    13,978       7,121  
Other payables
    2,256       3,094  
Total current liabilities
    94,282       92,132  
                 
Long term liabilities:
               
Accrued liabilities and others
    152       745  
Total long term liabilities
    152       745  
Total liabilities
    94,434       92,877  
                 
Commitments and contingencies
               
                 
Deficiency
               
Common stock, no par value; 800 million shares authorized;
               
578,465,159 and 461,395,508 shares issued and outstanding
               
at December 31, 2015 and 2014, respectively
    251,689       244,368  
Accumulated other comprehensive income
    1,359       1,655  
Accumulated deficit
    (264,144 )     (250,000 )
Total ZAP shareholders' deficiency
    (11,096 )     (3,977 )
Non-controlling interest
    (3,688 )     2,096  
Total deficiency
    (14,784 )     (1,881 )
Total liabilities and deficiency
  $ 79,650     $ 90,996  
                 

See accompanying notes to the consolidated financial statements.
 
 
49

 
 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 (In thousands; except share and per share data)

   
For the Years Ended December 31,
 
   
2015
   
2014
 
             
Net sales
  $ 29,460     $ 28,689  
Cost of goods sold
    (30,722 )     (31,703 )
Gross loss
    (1,262 )     (3,014 )
                 
Operating expenses:
               
Sales and marketing
    3,323       3,982  
General and administrative
    10,775       8,711  
Research and development
    1,479       634  
Impairment loss on assets
    1,082       5,596  
Total operating expenses
    16,659       18,923  
                 
Loss from operations
    (17,921 )     (21,937 )
                 
Other income (expense):
               
Interest expense, net
    (2,464 )     (4,023 )
Other income
    330       1,888  
Total income (expense)
    (2,134 )     (2,135 )
Loss before income taxes
    (20,055 )     (24,072 )
Income tax benefit (expense)
    -       (301 )
Net loss
  $ (20,055 )   $ (24,373 )
Less: loss attributable to non-controlling interest
    5,911       6,790  
Net loss attributable to ZAP’s common shareholders
  $ (14,144 )   $ (17,583 )
                 
Net loss
  $ (20,055 )   $ (24,373 )
Other comprehensive loss
               
Foreign currency translation adjustments
    (169 )     (102 )
Total comprehensive loss
    (20,224 )     (24,475 )
Less: Comprehensive loss attributable to non-controlling interest
    5,784       6,840  
Comprehensive loss attributable to ZAP
  $ (14,440 )   $ (17,635 )
                 
Net loss per share attributable to common shareholders:
               
Basic and diluted
  $ (0.03 )   $ (0.05 )
Weighted average number of common shares outstanding:
               
Basic and diluted
    502,660       377,547  

See accompanying notes to the consolidated financial statements.
 
 
50

 
 
ZAP AND SUBSIDAIRIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIENCY)
 (In thousands, except share and per share data)

                     
Accumulated Other
         
Non-
       
   
Common Stock
   
Accumulated
   
Comprehensive
   
Shareholders'
   
controlling
   
Total ZAP
 
   
Shares
   
Amount
   
deficit
   
Income
   
Equity (Deficiency)
   
interest
   
Equity (Deficiency)
 
Balance at January 1, 2014
    302,518     $ 231,125     $ (232,417 )   $ 1,707     $ 415     $ 8,936     $ 9,351  
                                                         
Stock based compensation
            219       -       -       219       -       219  
Note discount for convertible senior debt
            (120 )     -       -       (120 )     -       (120 )
Issuance of common stock
    31,667       1,900       -       -       1,900       -       1,900  
Common stock issued for services
    63       5       -       -       5       -       5  
Common stock issued for acquisition of distribution rights
    61,000       5,969       -       -       5,969       -       5,969  
Common stock issued to settle interest payable
    15,167       1,876       -       -       1,876       -       1,876  
Common stock issued to redeem convertible bond
    15,066       1,200       -       -       1,200       -       1,200  
Common stock issued to settle outstanding balance due to related parties and third parties
    35,915       2,194       -       -       2,194       -       2,194  
Foreign currency translation loss
                            (52 )     (52 )     (50 )     (102 )
Net loss
                    (17,583 )             (17,583 )     (6,790 )     (24,373 )
Balance at December 31, 2015
    461,396     $ 244,368     $ (250,000 )   $ 1,655     $ (3,977 )   $ 2,096     $ (1,881 )
                                                         
Stock based compensation
            74       -       -       74               74  
Issuance of common stock
    102,776       6,167       -       -       6,167       -       6,167  
Common stock issued for service
    5,833       350       -       -       350               350  
Common stock issued to settle interest payable
    14,455       1,237       -       -       1,237               1,237  
Cancellation of common stock
    (5,995 )     (507 )     -       -       (507 )             (507 )
Foreign currency translation gain (loss)
    -               -       (296 )     (296 )     127       (169 )
Net loss
    -       -       (14,144 )     -       (14,144 )     (5,911 )     (20,055 )
Balance at December 31, 2015
    578,465     $ 251,689     $ (264,144 )   $ 1,359     $ (11,096 )   $ (3,688 )   $ (14,784 )
 
 
See accompanying notes to the consolidated financial statements.
 
 
51

 
 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

             
   
For the Years Ended December 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (20,055 )   $ (24,373 )
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
         
Stock-based employee compensation
    74       224  
Depreciation and amortization
    6,769       6,844  
Amortization of distribution agreement
    1,440       1,440  
Provision for doubtful accounts
    2,416       236  
Changes in inventory reserve
    (84 )     (170 )
Impairment loss of long-lived assets
    1,082       5,596  
(Gain) loss from disposal of equipment
    (23 )     87  
Deferred tax provision
    0       301  
Amortization of debt discount
    0       513  
Changes in assets and liabilities:
               
Accounts receivable
    756       2,709  
Notes receivable
    80       102  
Inventories
    288       (603 )
Due from related parties
    21       3,466  
Prepaid expenses and other assets
    164       333  
Accounts payable
    635       (2,116 )
Accrued liabilities
    1,583       (1,205 )
Taxes payable
    545       (425 )
Advances from customers
    659       1,935  
Due to related parties
    1,934       5,542  
Other payables
    (871 )     (287 )
Net cash (used in) provided by operating activities
    (2,587 )     149  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Acquisition of property and equipment
    (1,020 )     (1,114 )
Proceeds from disposal of equipment
    23       56  
Net cash flows used in investing activities
    (997 )     (1,058 )
 
See accompanying notes to the consolidated financial statements.
 
 
52

 

ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
For the Years Ended December 31,
 
   
2015
   
2014
 
             
CASH FLOWS FROM FINANCING ACTIVITIES
           
Change in restricted cash
  $ 1,164     $ 26  
Repayment of convertible bonds
    (100 )     -  
Repurchase of common stock
    (407 )     -  
Proceeds from issuance of common stock
    6,167       1,900  
Proceeds from notes payable
    14,112       33,964  
Proceeds from short term loans
    2,248       13,267  
Proceeds of convertible bonds
    786       (500 )
Repayments of notes payable
    (14,349 )     (31,826 )
Payments on short term loans
    (6,157 )     (18,297 )
Net cash  provided by (used in) financing activities
    3,464       (1,466 )
Effect of exchange rate changes on cash and cash equivalents
    (58 )     (16 )
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (178 )     (2,391 )
CASH AND CASH EQUIVALENTS, beginning of year
    238       2,629  
CASH AND CASH EQUIVALENTS, end of year
  $ 60     $ 238  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during year for interest
  $ 810     $ 1,778  
Cash paid during year for income taxes
  $ -     $ 2  
                 
Non-cash transaction:
               
Issuance of stocks for service or settlements
  $ 1,687     $ 11,244  

  See accompanying notes to the consolidated financial statements.
 
 
53

 
ZAP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

ZAP was incorporated in California in September, 1994 (together with its subsidiaries, the “Company” or “ZAP 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.
 
 BASIS OF PRESENTATION AND CONSOLIDATION

 The accompanying consolidated financial statements include the financial statements of ZAP, and its subsidiaries: Jonway Automobile, Voltage Vehicles, Advanced Technology Vehicles, ZAP and ZAP Hong Kong as of and for the years ended December 31, 2015 and 2014 and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).

Management considers subsidiaries to be companies that are over 50% controlled. Significant intercompany transactions and balances are eliminated in consolidation; profits from intercompany sales, are also eliminated; non –controlling interests are included in equity.  We account for our 37.5% interest in the ZAP Hangzhou and our 50% interest in Shanghai Zapple using the equity method of accounting because we have significant influence but not control.

              ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.OB.”
.
Liquidity and Capital Resources

As of December 31, 2015, our current liabilities exceeded the current assets by approximately $70.9 million and our equity deficiency was $14.8 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 
 
 
54

 
ZAP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Liquidity and Capital Resources (Continued)

In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in securities, and our operating and capital expenditure commitments.  Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. 

In 2015, we were approved to renew for up to an aggregate of $7.1 million of a credit line from Everbright Bank. This credit line can only been used in the form of notes payable with 50% restricted cash deposited. Thus, we were approved for a credit exposure of $3.5 million. As of December 31, 2015, the credit exposure of $3.5 million has been used. The credit line expires in June 2016.

In 2014, we were approved up to an aggregate of $15.4 million of a credit line, with the credit exposure of $5.7 million from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. As of December 31, 2015, the credit exposure of $5.7 million has been used. The credit line expires in March 26, 2016.

In 2014, we were approved up to an aggregate of $5.1 million of a credit line from Industrial and Commercial Bank of China (ICBC). As of December 31, 2015, a credit exposure of $4.6 million has been used, and $0.5 million was still available for use. The credit line expires in 2017.
 
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-2 SIGNIFICANT ACCOUNTING POLICIES
  
Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, warranty costs, stock based compensation, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
 
 
55

 
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE-2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentration of Credit Risk
 
The Company’s operations are substantially carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations maybe substantially influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Financial instruments which subject the Company to potential credit risk consist of its cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with one high credit quality financial institution. As of December 31, 2015, deposits exceeded the amount of insurance provided by $58,000; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal. The Company has not experienced any losses to date on its deposits.
 
The Company performs ongoing credit evaluations of its customers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.

The Company currently relies on various outside contract manufacturers in China to supply vehicles parts and products for its customers. Although management believes that other contract manufactures could provide similar services and intends to transition its manufacturing to Jonway’s facilities in Sanmen, China, but, if these Chinese companies are unable to supply electric vehicles and the Company is unable to transition manufacturing to Jonway’s facilities or find alternative sources for these product and services, the Company might not be able to fill existing backorders and/or sell more electric vehicles. Any significant manufacturing interruption could have a material adverse effect on the Company’s business, financial condition and results of operations.

Revenue Recognition
 
The Company records revenues for non-Jonway sales when all of the following criteria have been met:
 
-
  Persuasive evidence of an arrangement exists. The Company generally relies upon sales contracts or agreements, and customer purchase orders to determine the existence of an arrangement.
 
-
  Sales price is fixed or determinable. The Company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.
 
-
  Delivery has occurred. The Company uses shipping terms and related documents, or written evidence of customer acceptance, when applicable, to verify delivery or performance. The Company’s customary shipping terms are FOB shipping point.
 
-
  Collectability is reasonably assured.  The Company assesses collectability based on creditworthiness of customers as determined by our credit checks and their payment histories. The Company records accounts receivable net of allowance for doubtful accounts and estimated customer returns.
 
 
The Company records revenues for Jonway sales only upon the occurrence of all of the following conditions:
 
-
  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);
 
-
  purchase price has been fixed, based on the terms of the purchase order;
 
-
  Company has delivered the product from its factory to a common carrier acceptable to the customer; and
 
-
  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.
 
 
56

 
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE-2 SIGNIFICANT ACCOUNTING POLICIES (continued)

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

The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the Company to use the assets and liability method of accounting for income taxes. Under the assets and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between financial statement carrying amounts and the tax bases of existing assets and liabilities and operating loss and tax credit carry forward. Under this accounting standard, the effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.
 
ASC 740-10, Accounting for Uncertainty in Income Taxes defines uncertainty in income taxes and the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.

United States federal, state and local income tax returns prior to 2010 are not subject to examination by tax authority.
.
Foreign Currency Translation

The Company and its wholly owned subsidiary/investments, maintain their accounting records in United States Dollars (“US$”) whereas Jonway Auto maintains its accounting records in the currency of Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.

Jonway Auto’s principal country of operations is the PRC.  The financial position and results of our operations are determined using RMB, the local currency, as the functional currency.  The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period.  Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date.  The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution.  Due to the fact that cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.  Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholder’s equity as “Accumulated Other Comprehensive Income.”

The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect our financial condition in terms of US$ reporting.  The following table outlines the currency exchange rates that were used in creating the consolidated financial statements in this report:
 
 
57

 
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE-2 SIGNIFICANT ACCOUNTING POLICIES (continued)

 Foreign Currency Translation (continued)

 
December 31, 2015
 
December 31, 2014