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, 20092010
 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)
 
California94-3210624
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
5014 Fourth 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:
 
 
Common Stock, no par value
 
OTC BB
Title of Each ClassName Exchange on Which Registered
 
Securities registered pursuant to Section 12(g) of the Act:  None.
 
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  o No  o
 
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.  xo
 
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 fileroAccelerated filero
Non-accelerated fileroSmaller reporting companyx
(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, 20092010 was $3,240,000.$24,562,000.
There were a total of 105,223,888218,104,955 shares of the Registrant’s Common Stock outstanding as of March 25, 2010.April 8, 2011.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates information by reference to portions of the Registrant’s proxy statement for its 2011 annual meeting of shareholders.
 
 
2
 
 
 
TABLE OF CONTENTS

Item No. Page
   
PART I  
   
Item 1.Business.5
   
Item 1A.Risk Factors.1017
   
Item 1B.Unresolved Staff Comments.1440
   
Item 2.Property.Properties.1440
   
Item 3.Legal Proceedings.1540
   
Item 4.Submission of Matters to a Vote of Security Holders.Removed and Reserved1641
   
PART II  
   
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.1641
   
Item 6.Selected Financial Data43
   
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.1743
Item 7a.Quantitative and Qualitative Disclosures about Market Risk49
   
Item 8.Financial Statements.Statements and Supplementary Data.2249
   
Item 9.Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.4676
   
Item 9A.Controls and Procedures.4678
   
Item 9B.Other Information.4779
   
PART III  
   
Item 10.Directors, Executive Officers and Corporate Governance.4779
   
Item 11.Executive Compensation.5279
   
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.5479
   
Item 13.Certain Relationships and Related Transactions and Director Independence.5680
Item 14.Principal Accountant Fees and Services.80
   
PART IV  
   
Item 14.Principal Accountant Fees and Services.58
Item 15.Exhibits and Financial Statement Schedules.5880
   
Signatures 6389
 
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Reportannual report on Form 10-K, or Form 10-K, including management’s discussionthe sections entitled “Risk Factors,” “Management’s Discussion and analysis,Analysis of Financial Condition and other reports filed by the registrant from time to time with the SecuritiesResults of Operations,” and  Exchange Commission contain“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 co nditionsconditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
 
·  our ability to establish, maintain and strengthen our brand;
·our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
·  our ability to maintain effective disclosure controls and procedures;
·  our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
·  whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
 
·our ability to attract and retain the personnel qualified to implement our growth strategies;
 
·our ability to obtain approval from government authorities for our products;
 
·our ability to protect the patents on our proprietary technology;
 
·our ability to fund our short-term and long-term financing needs;
 
·our ability to compete against large competitors in a rapidly changing market for electric and gas-efficientconventional fuel  vehicles;
 
·changes in our business plan and corporate strategies; and
 
·other risks and uncertainties discussed in greater detail in various sections of this report, particularly the section captioned “Risk Factors.”
 
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
 
Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
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In this Annual Reportannual report on Form 10-K the termsterm “ZAP” refers to ZAP, the term “Jonway” refers to Zhejiang Jonway Automobile Co. Ltd., of which ZAP owns 51% of the equity shares, “ZAP” “Company,” Jonway” refers to both ZAP and Jonway on a consolidated basis, and “we,” “us” and “our” refer to ZAP and its subsidiaries.or ZAP Jonway, as the context indicates.
 
4
PART I
 
Item 1.  Business
 
Overview
ZAP designs, develops, manufactures and sells fully electric and advanced technology vehicles.  With our new product offerings and our recent acquisition of 51% of the equity shares of Zhejiang Jonway Automobile Co. Ltd., or Jonway, in January 2011, we believe we are positioned to be a leader in the electric vehicle industry.
 
We design, producebelieve our acquisition of a majority interest in Jonway will allow us to expand our distribution network for ZAP electric vehicles internationally and sell fullyprovide access to the rapidly growing market for gasoline and electric vehicles in China and internationally.  We also believe our acquisition will allow us to leverage ZAP’s expertise in advanced automotive technologies to jointly develop electric and other advanced technology vehicles.  Our name, ZAP, stands for Zero Air Pollution®vehicles with Jonway.  We already have jointly developed an electric version of Jonway’s A380 SUV, and we plan to sell this vehicle in China and internationally.    We also believe this acquisition will allow Jonway to expand its distribution network for its conventional fuel A380 SUVs in the United States and internationally.   We plan to leverage the volume manufacturing capability of Jonway to produce both Jonway’s A380 5-door and 3-door SUVs as well as our jointly developed electric A380 and ZAP’s electric Alias car at Jonway’s manufacturing facility in Sanmen, China.
Our strategy is to serve the growing fleet and taxi market, especially for electric and fuel efficient vehicles.  While many electric vehicle companies are committedfocused on passenger cars and sedans for mainstream consumers, ZAP Jonway believes government and corporate fleets can more quickly and more successfully implement electric vehicle technologies as adequate charging infrastructure, service and support can be more easily managed in fleet operations where the vehicles may travel along predictable routes and have a central point of operation.  We also believe that volatile oil prices as well as government regulations and incentives have created opportunities for producers of electric and fuel efficient vehicles to delivering high quality, affordable Electric Vehicles (EV), targetingserve the global fleet markets with opportunities to deploy in volume, thus leveraging volume production to achieve efficiency, and cost effectiveness.taxi markets.

ZAP has sixteen years of experience inventing, designing, manufacturing and selling innovative products. In 1995, we began marketing electric transportation on the internet through our websites www.zapbikes.com and www.zapworld.com.  We werehave 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 manufacturing partner in China 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.
ZAP was incorporated in 1994 under the name “ZAP Power Systems.Systems,” Theand changed its name of the Company was changed to “ZAPWORLD.COM” in 1999 and to ZAP in 2001. OurZAP’s principal executive offices are located at 501 Fourth Street, Santa Rosa, California 95401.  OurZAP’s telephone number is (707) 525-8658.  OurZAP’s main company website is www.zapworld.com. Information contained on ourthe website is not incorporated by reference herein and you should not consider information on the website to be considered part of this Annual Report.annual report on Form 10-K.

OverBusiness
ZAP has more than sixteen years of experience designing, developing, manufacturing and selling innovative electric transportation products Jonway has more than 900,000 square feet of manufacturing space, with the last few months, besides addressing the U.S. governmentability to produce up to 30,000 automobiles per year , and military markets, the company has been focusing on developing partnershipsan extensive distribution network in Asia, specificallyChina.  Leveraging ZAP’s experience in electric and alternative fuel vehicles and Jonway’s volume manufacturing capabilities and distribution network in China and Korea whereinternationally, ZAP Jonway intends to continue its leadership in the governments have announced programselectric vehicle market and  incentivesincrease the volume and speed of its vehicle production.  ZAP Jonway also intends to encourage adoptioncontinue its production of conventional fuel vehicles and to facilitate EV market development.  To this end, the Company has formed a joint ventureexpand its distribution network in Hangzhou,both China with Holley Group, an established power meter manufacturer that has a successful long history and commercial relationship with all of the provincial Chinese Electric Power Grid companies. This joint venture aims to cost effectively manufacture EV by working in partnership with a progressive local auto manufacturer that recently build a modern auto manufacturing facility in Zhejiang Province.

The Company’s strategy is to serve the growing fleet and taxi market that seeks electric and fuel efficient vehicles, leveraging on our 15 years of electric vehicle experience in these segments and developing products to meet this growing demand. There is now clear commitment from U.S. government programs, as well as programs from other countries’ government, offering incentives and grants to develop the EV market for producers of electric and fuel efficient vehicles. ZAP is one of the first to take the lead in developing products aimed at the fleet market with its electric trucks and vans, delivering products to government organizations such as FAA and the U.S. military for on campus use.
Our Recent Business Focus

In recent months, the company has been realigning its resources to substantiate its partnerships in Asia, focusing specifically in China in order to harness the experience base it has accumulated over the years in electric vehicle designs. The partnerships aimed at reinforcing its mass production manufacturing capabilities so that the EV designs can be mass produced cost effectively.  Working with the Chairman, the Company has formalized its China JV with Holley Group and with the local auto manufacturing partner, Jonway UFO; both with established, experienced manufacturing know-how, as well as channel to market in China. Targeting the taxi fleet market, the Company’s technical team has been sharpening the engineering of the integration of all the various components and subsystems of the SUV electric power train to delive r an efficient, cost effective vehicle with endurance in range, as well as robustness and quality. To protect the intellectual property of its engineering know-how, the Company has filed a dozen patents since last August.

In this last quarter of 2009, the Company embarked on four significant engineering and business development projects aimed at expanding our market competitiveness and strengthening our product line to deliver viable, high quality, robust and reliable designs to four targeted opportunities:
1.  Taxi Fleet market in China – The Company worked on the engineering of an efficient electric power train design adapted to the 5 passenger, 5 door SUV from its local Chinese auto manufacturer, with a range of at least 200km, and top speed of 120km/h, and under 2000 kg. The objective is to reach a range of 300km for the targeted taxi market in China and Korea.
2.  Military and Governments markets – The Company qualified as a supplier for GSA (General Service Administration), facilitating the ease at which government organizations can place orders for ZAP products.
internationally.
 
 
5
 
3.  USPS proposal –  The Company worked on the tender from US Postal Service which issued an RFP to provide design for the conversion of USPS trucks.  The Company worked on the engineering design and blue print for the conversion of USPS trucks to all electric vehicle, utilizing the experience base the Company is developing USPS trucks to rural route independent carriers.
China Taxi Market. ZAP Jonway intends to focus on the rapidly growing market for electric vehicles in China through the sale of plug in electric SUVs to large taxi fleets in China.  ZAP Jonway intends to introduce the electric version of the A380 SUV in the second half of 2011.
 
4.  
X Prize Alias – The Company’s engineering spent much of the last quarter of 2010 fine tuning the design and engineering of the Alias for the X Prize competition. A new model of the Alias was built to more effectively showcase its performance and capabilities. “The X PRIZE Foundation is an educational nonprofit organization whose mission is to create radical breakthroughs for the benefit of humanity thereby inspiring the formation of new industries, jobs and the revitalization of markets that are currently stuck. Today, it is widely recognized as the leader in fostering innovation through competition. – www.xprize.orgFleet Market. 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.  In 2010, ZAP delivered trucks to the State of California, Presidio National Park, Federal Aviation Administration, Department of Energy, U.S. Army, United Parcel Service, City of Riverside, City of Monterey.  In addition, in February 2010, ZAP was selected along with four other firms in a competitive bid process held nationwide by the United States Postal Service, or the USPS, to engineer a replacement electric vehicle drive train for its current gasoline powered mail delivery vehicle. The USPS operates a large automotive fleet, with over one hundred and forty thousand vehicles.  ZAP converted a gas powered mail truck to an electric drive train , as specified by the USPS, and this vehicle, along with vehicles from the other selected firms, is currently being tested by the USPS. “ Progressive Insurance is sponsoring the automotive event which started in 2008, aimed at encouraging innovation in alternative transportation vehicles that could do 100 miles per gallon or equivalent.  The contestant vehicles undergo tests for range, speed, braking, and evaluated for its ecological considerations as well as sophistication in design for production readiness. Out of 136 vehicles that entered submitted from 117 teams, Alias has been selected as one of the finalists to complete the competition, and the winner will be announced in September this year.
 
MuchElectric Charge Stations. ZAP Jonway intends to develop electric charge station technology in collaboration with the Holley Group and Better World International Limited.
Conventional Fuel Vehicles.  ZAP Jonway intends to expand the distribution of the Company’s resources recently, have been devoted to the above projects aimed at laying the frameworkJonway A380 SUVs in China and foundation for building a solid EV technology and product base, targeting volume fleet markets. The Alias project has propelled the technology development for this product base by spear heading the engineering of efficient, high performance designs aimed at sharpening the company’s technology know-how and showcasing its engineering savvy by its ability to design and deliver an innovative high performance, quality sports vehicle at a minimally budgeted cost.

The Company’s focus on delivering efficient, cost effective EV products has attracted the interest of Samyang Optics, a Korean company known for its innovation and well established leadership in providing lens to various camera markets.  Encouraged by the Korean government to pursue EV related industries, Samyang invested in ZAP and formed a partnership to address the EV market in Korea.  This partnership establishes ZAP as the exclusive EV product supplier to Samyang, who will collaborate in the adaptation of ZAP’s products to the Korean market, develop the distribution channel to market, and provide the sales and marketing promotion support.  As one of the first to offer a competitive, viable production ready EV SUV to the Korean market, ZAP, through Samyang has an excellent opportunity to be o ne of the leading providers of the fleet EV market in Korea.

The Company with its recent new investors, reinforced by stronger financial support, has been able to invest its resources to build the necessary foundations for growth with more focused products and with formalized business partnerships for manufacturing and sales. With the above intense engineering and business development activities aimed at developing a larger stable market for ZAP’s products, the Company will now be able to deliver to these new markets with relevant competitive product offerings in the foreseeable quarters.
In summary, ZAP is offering a range of products addressing the following specific markets:internationally.
 
·  
Fleet Markets with the following products:
o  Trucks and Vans - We are delivering on-campus trucks and vans to various government organizations including FAA, US military, and state government patrol vehicles;
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o  SUVs – Focusing on the taxi fleet market, the Company has designed and will begin production manufacturing of a 5 passenger SUV EV working with its auto manufacturing partner in China.
·  
United States Postal Service, or USPS. Through a government tender process, we were selected as one of five companies to undergo a trial of our converted postal delivery plug-in-electric van. This van will be delivered to the USPS in July 2010 for field testing. The potential opportunity is to convert an initial estimate of 20,000 or more of the existing USPS gas powered vehicles to all electric plug-in electric vans.
·  
China and Korea Taxi Markets. We have designed an all electric sport utility vehicles (SUVs) for the large taxi markets in China and Korea.  We currently are delivering pre-production vehicles for trial to our Korean and Chinese customers.  To achieve cost efficiencies and localization of our EV products for China and the Asian markets, we recently formed our joint venture in Hangzhou with one of the largest producers of electric power meters, Holley Group, Holley Group, and Better World International Ltd., a Hong Kong company focused on electric charge infrastructure to service the China and Asian markets. This JV will mass produce EV SUV for the taxi fleet market, and develop sales channel for the EV SUVs through its local auto manufacturing partnership’s distributors . To further our objective of addressing countries placing priority on EV market development, we recently entered into a distribution and joint market development agreement in Korea with Samyang Optics Co. Ltd., an established technology company looking to expand its technology pioneering spirit to the EV market.

Other New Product Potentials:
·  
Alias Roadster. We have designed an affordable plug-in-electric roadster named the Alias Roadster to show case our technology and engineering.  This vehicle is an X Prize finalist, and will compete in the Championship X Prize Derby in Michigan April this year.
·  
Electric Charge Stations. We have begun the development of electric charge station technology in collaboration with the Holley Group and Better World International, LTD, with the objective of offering to our fleet client base a complete ecosystem for EV.
On March 17, 2010, ZAP and Batelle Memorial Institute (Batelle) entered into a License Agreement pursuant to which Batelle licensed a smart charging control technology to ZAP in exchange for a license fee of $10,000 and future royalties.  The smart charging control technology enables the customers to optimize electric vehicle charging to avoid system peaks and to minimize the cost of charging the vehicle.  Under the license, ZAP has also been granted the right to sublicense the smart charging control technology to ZAP Hangzhou.
Product Summary
 
Our Vehicles and Products
ZAP Automotive Products
 
OurZAP’s current automotive product line includes the ZAP Truckall electric ZAPTRUCK XL, and ZAPVAN Shuttle two low-speed vehicles for the fleet market, and the Xebra Truck and Sedan.
 
ZAP TruckZAPTRUCK XL.  The ZAP TruckZAPTRUCK XL is a plug-in-electric vehicle principally designed for fleet operations. The XL can hold up to two passengers and has a convertible bed/platform for moving up to 1900625 lbs. of cargo during off-road use.in accordance with U.S. Safety Guidelines for on-road vehicles. The XL is designed for corporate and university campuses, airports, warehouses,  universities, factories, military bases, municipal operations and around the ranchranches or farm. Classifiedfarms. As it is classified as a Neighborhood Electric Vehicle, or NEV, the XL is speed-limitedlimited by its controller to travel at speeds up to 25 mph (the maximum speed for an NEV) and provides a range of up to 3040 miles per charge under ideal driving conditions.
 
ZAPVAN Shuttle.  The ZAPVAN Shuttle is a multi-purpose, plug-in-electric vehicle for municipalities, colleges and universities, airports, hospitals or corporate campuses. The Shuttle is designed to transport large cargo and passenger loads. The Shuttle can hold up to fivefour passengers in its standard configuration and can support a payload of over 900700 lbs. Theof cargo in accordance with U.S. Safety Guidelines for on-road vehicles. Classified as an NEV, the Shuttle is speed-limitedlimited by its controller to travel at speeds up to 25 mph and provides a range of up to 30 miles per charge under ideal driving conditions.
Xebra Truck.  The Xebra Truck can hold up to two passengers and can support a payload of up to 500 lbs.  The Xebra Truck provides a range of up to 40 miles per charge under ideal driving conditions.
 
Xebra Sedan.  The Xebra Sedan can hold up to four passengers.  The Xebra Sedan provides a range of up to 4025 miles per charge under ideal driving conditions.
 
Our Future
6
Jonway Automotive Products
 
WeJonway’s current automotive product line includes the gas fueled A380 Five-Door SUV and the A380 Three-Door SUV.
Jonway A380 Five-Door.  The Jonway A380 Five-Door is a gasoline powered 4-speed sport utility vehicle available in 1.6, 1.8 and 2.0 liter engines and available in automatic and manual transmission.
Jonway A380 Three-Door.  The Jonway A380 Three-Door is a gasoline powered sport utility vehicle available in 1.6, 1.8 and 2.0 liter engines and available in automatic and manual transmission.
Our Vehicle Pipeline
ZAP Jonway Electric A380 SUV. ZAP and Jonway are jointly developing the A380EV, an electric version of the Jonway A380 SUV. This five-door vehicle will use a lithium-ion battery pack and an AC electric motor designed to meet international standards for electrical charging.  ZAP Jonway anticipates launching the A380EV in the second half 2011.
ZAP Alias. ZAP Jonway is currently developing the ZAP Alias Roadster with an estimated range of up to 100 miles per charge under ideal driving conditions. The anticipated launch dateZAP unveiled the prototype for the Alias Roadster isat the National Automotive Dealers Association Conference in New Orleans in January 2009. ZAP Jonway anticipates launching the Alias in the second half of 2011.
 
WeJonway A380 SUV. ZAP and Jonway are alsojointly developing improved three-door and five-door A380 SUVs to meet customer demands for increased economy and comfort. Jonway expects to launch the improved A380 in discussions with international manufacturers and hope to establish additional relationships within the next twelve to thirty-six months for other vehicle platforms.second half of 2011.
 
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Jonway Van.  Jonway is also developing a conventional fuel small van. This new product is currently in the trial stage and is expected to launch in the second half of 2011.
 
Other Products
ZAP DUDE.  The ZAP DUDE is a plug-in-electric All-Terrain Vehicle. The DUDE is designed to be an off-road vehicle for working around ranches, out lots, corporate campuses, or commercial farms.Products
 
ZAPINO.  The ZAPINO is a plug-in-electric scooter with a highly efficient hub wheel motor.scooter. The ZAPINO is able to reach speeds of up to 30 mph. The drive system on the ZAPINO eliminates the need for belts or chains, which results in lower overall maintenance.
 
ZAPPY 3ZAPPY3 Personal Transporters.  The ZAPPY3 Pro is designed to meet the requirements of material handling, warehousing, fabrication and construction industries. For the mobility market, we haveZAP makes the ZAPPYZAPPY3 EZ and ZAPPYZAPPY3 Standard.
 
Licenses, PatentsJonway and Trademarksother Strategic Relationships
Jonway.
 
We haveacquired 51% of the following patents covering our electric vehicles: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 to produce whole automobiles.  Zhejiang UFO Automobile Manufacturing Co., Ltd., or Zhejiang UFO, 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.  Pursuant to the Operations Agreement:
United States PatentDate·  Subject
Patent No. 5,491,3902/13/1996Electric motorZhejiang UFO granted Jonway the full power systemto operate and manage the Sanmen Branch and manufacture the SUV products for bicycles, tricycles, and scooters
Patent No. 5,671,8219/30/1997Electric motor system
Patent No. 5,848,66012/15/1998Portable Collapsible Scooter (ZAPPY)
Patent No. 5,634,4236/3/1997Personal Submersible Marine Vehicle
Patent No. 5,423,2786/13/1995Submersible Marine Vessel
Patent No. 5,303,6664/19/1994Submersible Marine Vessel
Patent No. 6,748,8946/15/2004Submersible Marine Vessel (sea scooter)
Patent No. 6,588,5287/8/2003Electric Vehicle Drive System
Patent No. 5,842,53512/1/1998Electric Drive Assemblywhich Zhejiang UFO has manufacturing permits or licenses, except for Bicycles
Patent No. 6,050,3574/18/2000Powered Skateboard
Patent No. 6,059,0625/9/2000Powered Roller Skates
Patent No. 5,735,3614/7/1998Dual-Pole Personal Towing Vehicle
Patent No. 5,913,3736/22/1999Dual-Pole Dual-Wheel Personal Towing Vehicle
Patent No. D433,71811/14/2000Portable Collapsible Scooter (ZAPPY)
Patent No. D347,4185/31/1994Scuba Scooter
Patent No. D359,0226/6/1995Scuba Scooter
Patent No. D453,72602/19/2002Submersible Marine Scooter
Patent No. D540,40004/10/2007Three Wheeled Vehicle (Zappy 3)
Patent No. D550,58809/11/2007Three Wheeled Sedan (Xebra)
Patent No. D550,04309/13/2007Three Wheeled Pickup Truck
The following patent applications have been filed but have not been allowed as of the date of this filing.

Patent No. 1255032308/29/2009Heater for electric car
Patent No. 1255032508/29/2009Air conditioner for electric car
Patent No. 1255032808/26/2009Power line interlock for electric car
Patent No. 2934308209/05/2009Electric Van
Patent No. 2934308309/05/2009Electric Truck
Patent No. 2934359709/16/2009Electric Scooter
Patent No. 6129500101/14/2010Hub Wheel Motor Scooter
Patent No. 6129502501/14/2010Hub Wheel Motor Carcertain professional matters;
Patent No. 6129504001/14/2010·  Systems
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 methods for converting imported vehicles to meet regulatory requirements and to improve safety
·  
Jonway agreed to pay certain contracting fees to Zhejiang UFO.  The Operations Agreement is valid for 10 years and expires on December 15, 2015, subject to renewal, which Jonway intends to obtain prior to its expiration.

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 revokes Zhejiang UFO's license or if Zhejiang UFO refuses to apply for Jonway models under the National Catalog, Jonway may have to cease manufacturing automobiles.   
 
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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 10 years, or until 2014, 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 $30,580,000 of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently, Jonway Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway Grroup and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates.  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 February 28, 2011, ZAP, Jonway Group, Wang Gang and Wang Xiao Ying held 51%, 39%, 8% and 2% of Jonway’s equity shares, respectively.  Pursuant to the Jonway Acquisition Agreement, ZAP had the right to acquire the remaining 49% of Jonway at the same valuation, which expired on March 31, 2011. The parties are in discussions regarding the purchase of the remaining 49% of Jonway’s equity shares. ZAP issued 4 million shares of ZAP common stock to Jonway Group’s designee, Alex Wang, which was attributed towards $1 million of the purchase price under the amendment to the Jonway Acquisition Agreement.  In June 2010, ZAP issued 44 million shares of stock 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 an affiliate of Cathaya in order to pay an additional $19,030,000 under the Jonway Acquisition Agreement.  ZAP believes there is some uncertainty regarding whether this convertible debt will be converted to equity or require cash payment in February 2012.  Currently, the parties are discussing the form of payment of the remaining $550,000 owed to Jonway Group and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. Dollar to Chinese Yuan between ZAP’s payment dates.
Jonway is located at the East China sea coast-port industry zone of Jiangtiao, Sanmen county, Zhejiang Province.  Jonway has more than 900,000 square feet of manufacturing space, with the ability to produce up to 30,000 automobiles per year. Jonway distributes its vehicles through a network of more than three hundred factory and authorized dealers.  Jonway began international distribution activities in Italy, Nepal, Algeria, America, Yemen and Russia. Jonway sold 36 vehicles and 155 vehicles internationally in 2009 and in 2010, respectively.  Jonway vehicles may be serviced at one of 236 service centers in China.
Since September 2007, Jonway has been designing and producing the three-door A380 SUV.  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.  Jonway sold 154 A380 three-door SUVs in 2009 and 173 three-door A380 SUVs in 2010, and Jonway sold 4,259 A380 five-door SUVs in 2009 and 7,247 A380 five-door SUVs in 2010.
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.  ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the world wide distribution rights for Jonway products.  Therefore it was necessary for ZAP to acquire distribution rights for Jonway products.
Jonway’s strategy is to serve the growing SUV market in China and to expand internationally.  In addition to  conventional fuel vehicles, ZAP Jonway intends to develop and market all-electric Jonway vehicles.  In 2009 and 2010, working jointly with ZAP, Jonway successfully researched, developed and produced electric A380 SUV prototypes.  In May 2010, Jonway’s A380 electric SUV was shown at the 2010 World Expo in Shanghai, China.  In November 2010, Jonway and ZAP attended the 25th International Electric Vehicle Symposium and Exposition, or EVS25, held in Shenzhen, China and exhibited six prototypes, including the electric SUV, electric ATV and scooter as well as their component parts.  ZAP Jonway plans to further develop electric SUVs and increase, streamline and economize volume production of electric SUVs, while developing electric SUV sales and marketing channels. ZAP Jonway plans to use Jonway’s 236  after-sales service centers to service electric vehicles sold in China.
Remy. In November 2010, ZAP and Remy Electric Motors, LLC entered into a long term motor supply and development agreement for the use of the Remy High Voltage Hairpin 250 electric motor, or HVH motor, in ZAP Jonway cars and SUVs. Additionally, ZAP is developing a drive train with the HVH motor for use in automotive platforms of ZAP Jonway and other vehicles.
ZAP Hangzhou. As part of ZAP’s plan to deliver quality, cost effective electric vehicles to the fleet vehicle market, in December 2009, ZAP and the Holley Group, the world’s largest volume producer of electric power meters according to the Wenhui-Xinmin United Press Group, established ZAP Hangzhou, a joint venture company in China with financial support from Better World International Limited to target the electric vehicle market in China.  ZAP Hangzhou combines ZAP’s intellectual property, electric vehicle technology and know-how with the Holley Group’s experience in electric metering to provide ZAP Jonway with technological and design advice on its vehicles, parts and suppliers,  and the volume production of ZAP Jonway vehicles in China. ZAP Jonway and ZAP Hangzhou also plan to use their knowledge of the local Chinese market to target opportunities for electric vehicle growth within China’s vehicle fleets. ZAP Hangzhou is located at a facility in Hangzhou provided by the Holley Group.  The facility has conducted engineering and integration of electric drive trains in the Jonway A380 5-door SUV.  These vehicles were provided to the 2010 World Expo in Shanghai for demonstration as transportation for show officials.
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Patent No. 6129504301/14/2010Charging station with Solar Panels
Patent No. 6129504601/14/2010Parking meter with EV recharging capability
Patent No. 6129504801/14/2010Charging station with protective door
Samyang.  In January 2010, ZAP entered into a distribution agreement with Samyang Optics Co. Ltd., or Samyang, granting Samyang exclusive rights to manufacture, assemble and market ZAP’s vehicles in Korea.  Samyang’s primary business is the manufacturing and distribution of optical lenses.  The Korean government  has offered incentives for the manufacture and purchase of plug-in vehicle technologies, and Samyang has invested in this new market opportunity.  On March 30, 2010, Samyang showcased the A380 electric SUV at the Korea Electric Vehicle Challenge, a 200 km freeway course through the outskirts Seoul.  Currently, ZAP Jonway’s vehicles are not compliant with Korean automotive regulations.  ZAP Jonway is planning to make its vehicles compliant with Korean automotive regulations and continue to develop its relationship with Samyang.
 
On March 18,Technology
ZAP has developed expertise in electric drive train integration.  ZAP has done extensive research of lithium battery implementation, including extensive testing of computerized battery management systems.  This technology was exhibited during a 100 mile range test of the ZAP Alias electric car during the Progressive Insurance Automotive X PRIZE in July 2010, we acquired a licenseat which the Alias was one of nine finalists out of 136 vehicles entered and posted an equivalent fuel efficiency of 124 miles per gallon.
In April 2010, ZAP licensed the Smart Charger Controller technology from Battelle, Memorial Institute foran international science and technology organization, which allows electric vehicles to be automatically charged at times of lower demand on the following letter patents and patent applications:

Patent No. 7010363U.S.03/07/2006Electrical Appliance Energy Consumption Control Methods and Electrical Energy Consumption of Systems (12782-E CON)
Patent No. 7420293U.S.09/02/2008Electrical Appliance Energy Consumption Control Methods and Electrical Energy Consumption of Systems (12782-E)
Patent No. 7149605U.S12/12/2006Electrical Power Distribution Control Methods, Electrical Energy Demand Monitoring Methods, and Power Management Devices (13538-B)
Patent No. 11/453465U.S06/24/2006Electrical Power Distribution Control Methods, Electrical Energy Demand Monitoring Methods, and Power Management Devices (13538-B CON)
Patent No. 2520765Canada EP, Japan06/08/2004Frequency Based Power Monitoring and Management (13538-B)
Patent No. 2008-196188 (13538-B DIV)Japan06/08/2004Frequency Based Power Monitoring and Management (13538-B)
Patent No. 12/384766U.S.04/07/2009Method and Apparatus for Smart Battery Charging (16172-E)
Patent No. 12/466312U.S.05/14/2009Battery Charging Control Methods, Electrical Vehicle Charging Methods, Battery Charging Control apparatus, and Electrical Vehicles (16206-E)
Patent No. 12/467192U.S.05/15/2009Battery Charging Control Methods, Electrical Vehicle Charging Methods, Battery Charging Control apparatus, and Electrical Vehicles (16206-E)
power grid, typically resulting in lower costs to the consumer.
 
In May 2010, ZAP began shipping lithium battery systems for various models of ZAP’s vehicles. The new battery systems offer at least four times the life of standard lead-acid batteries and twice the driving range. The lightweight lithium battery system is used in the ZAP Alias, resulting in a 100 mile range on a single charge under ideal driving conditions.  We also intend to use this battery system in the Jonway A380EV. Available as an upgrade for some ZAP vehicles, the new lithium battery systems are designed to improve performance and offer a significantly longer lifespan. ZAP estimates lead-acid batteries have 300-500 cycles of discharging and recharging, compared to 2,000 cycles for lithium. The new lithium battery systems are designed to improve acceleration and handling of their vehicles with the following trademarks coveringlighter-weight, higher-voltage batteries. ZAP designed the lithium battery system to recharge overnight from any 110-volt or 220-volt electrical outlet.
During 2009 and 2010, ZAP expended approximately $551,000 and $996,000, respectively, in research and development activities. No significant portion of such expenses was borne directly by our electric vehicles:customers.

United States TrademarkSubject
Trademark No. 275991309/02/2003Cap’n Billy’s Wiz-Bang and design
Trademark No. 224027004/20/1999Electricruizer
Trademark No. 253419701/29/2002ETC Express
Trademark No. 287821908/21/2004ETC Traveler
Trademark No. 224875306/01/1999Powerbike
Trademark No. 222464002/16/1999Powerski
Trademark No. 232946602/16/1999The Future is Electric
Trademark No. 179486609/28/1993ZAP
Trademark No. 291232912/21/2004ZAP Car
Trademark No. 233509003/2/2000ZAP Electric Vehicle Outlet
Trademark No. 288581609/21/2004ZAP Seascooter
Trademark No. 233089403/21/2000ZAPPY
Trademark No. 237124007/25/2000Zapworld.com
Trademark No. 232034602/22/2000Zero Air Pollution
Trademark No. 268920302/18/2003Swimmy
Trademark No. 364853806/30/2009ZAP Alias
Trademark No. 325437306/26/2007ZAP Battery
Trademark No. 351994110/21/2008ZAP Truck
Jonway has built a technical research center and a research and development team composed of 53 researchers.  Jonway’s research and development expenses were $447,000 and $888,000 in 2009 and 2010, respectively.
Trademark No. 77/42782310/2//2008ZAP X
Trademark No. 77/46622510/28/2008ZAP ZIP
Trademark No. 352050110/21/2008ZAPINA
Sales and Marketing
ZAP currently markets and sells ZAP vehicles to consumers by telephone over the internet, and in person at ZAP’s Santa Rosa location and through approximately 24 dealers in the U.S. ZAP also does direct outreach through the U.S. Government Services Administration and participates in bid applications with government and corporate fleets.  ZAP Jonway intends to leverage Jonway’s existing distribution channels in China and internationally, which include over 300 dealerships, 89 of which are direct factory locations and the rest are affiliate retail locations.  Jonway’s SUVs have been sold to the European Union, Africa and the Middle East.
 
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Trademark No. 329714009/25/2007ZAPINO
Trademark No. 351999410/21/2008iZAP
Trademark No. 331887510/23/2007Empower
Trademark No 331887410/23/2007Empower (design)
Trademark No. 77/1788507/14/2009Pegasus
Trademark No. 352055010/21/2008PLUGGY
Trademark No. 337638501/29/2008Recharge it all
Trademark No. 345202206/24/2008RideZAP markets its vehicles through participation in events that allow it to demonstrate its vehicles.  In 2010, ZAP participated in the Progressive Insurance Automotive X PRIZE, an international competition for 100 MPG and equivalent vehicles, showcasing its engineering capabilities, placing among nine finalists out 136 vehicles and posting an equivalent fuel efficiency of 124 miles per gallon. ZAP demonstrated its electric taxi concept at the U.S. Pavilion for the Future
Trademark No. 329790009/25/2007XEBRA
Trademark No. 352576910/28/2008Obvio!
Trademark No. 352577410/28/2008Obvio! And design
 
Company BackgroundWorld Expo in Shanghai in 2010.  The Alias and A380 electric participated in the 2010 Korea Electric Vehicle Challenge and the Alias was also shown at the 2010 North American International Auto Show in Detroit, the 2010 Beijing Motor Show and the EVS25 in Shenzhen, China.

FoundedZAP Jonway’s principal marketing goals are to:
·  penetrate the China fleet/taxi market;
·  generate demand for our vehicles and drive leads to our sales teams;
·  leverage the existing marketing and distribution channels of our affiliates and partners;
·  build long-term brand awareness and manage corporate reputation;
·  manage our existing customer base to create loyalty and customer referrals; and
·  enable customer input into the product development process.
Jonway’s principal marketing goals are to serve the growing SUV market in 1994, ZAPChina, to expand the international market in SUVs, and to explore the technical development and market development mode of new energy vehicles supported by ZAP.    By advertising on annual auto shows, through Jonway’s website, through media advertisements and other matters, Jonway has invented, designed, patented, manufactured,focused on building a good public image for its SUV products.  In addition, Jonway has driven sales by offering sales rebate incentives to dealers for effective Jonway advertising and marketed numerous innovative products since the Company’s inception. In 1995, we began marketing electric transportation on the Internet through our website, www.zapworld.com. The Company has been a pioneer in developingpromotion activities.
Jonway’s advertising and marketing expenses were $1.9 million and $2.8 million for the years ended December 31, 2009 and 2010, respectively.  ZAP’s advertising and marketing expenses were approximately $113,000 and $185,000 for the years ended December 31, 2009 and 2010, respectively.
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 vehiclesscooters and bicycles, respectively.  ZAP offers factory-training  for dealer and distributor service technicians. Currently, ZAP works with dealers to provide replacement parts and in certain situations may repair the vehicle at its headquarters in Santa Rosa or send a specialist to repair a vehicle.  ZAP is pursuing partnerships with nationwide companies to provide after-sales services at their locations.
Jonway  currently offers a 2-year or 60,000 kilometer warranty for the SUVs, it has built and continues to improve on its after-sales service network.  Jonway’s after-sales service centers have increased from 196 as of December 31, 2009 to 236 as of December 31, 2010.  Jonway had 11 vehicle spare parts centers for logistics and distribution as of December 31, 2010.  Jonway has set up an after-sales services department to follow up and timely deal with quality claims from after-sales service stations or end-customers.  Jonway has also set up a quality department to focus on making claims to vehicle components suppliers for defective products, as well as taking responsibility of Jonway’s overall quality control.
Manufacturing
ZAP currently contracts with third party manufacturing companies, such as a zero-emission ZAP® electric bicycle, the ZAP Power System,Wuling Motors and Wusheng Electric Vehicle in China, to manufacture its vehicles, which adaptsare partially assembled and then shipped to most bicycles,ZAP’s Santa Rosa facilities for final assembly and the ZAPPY® foldinginstallation of sophisticated equipment and optional upgrades.  Our vehicles then go through a quality control process prior to delivery to dealers and customers.
ZAP Jonway intends to manufacture the A380 electric scooter. From 1996 through 2003, we continued to add to our product line. In 2003, we announced our first electric automobiles, including the first-ever production electric automobile imported from our manufacturing partner in China. In 2004, we introduced electric all-terrain vehiclesSUV and the fuel-efficient Smart Car. In 2005, we introduced multi-fuelAlias electric cart at Jonway’s over 900,000 square foot manufacturing facility in Sanmen, China.  This facility has the capacity to produce up to 30,000 vehicles capable of running on ethanol and/or gasoline. From 2006 to 2009, we introducedper year.  Jonway also produces the Xebra Truck, ZAP Truck XLthree-door and ZAPVAN Shuttle.  To date, we have delivered more than 100,000 electric vehiclesfive-door A380 SUVs and consumer products to customers in more than 75 countries, establishingspare parts at this facility. Jonway’s facility is certified under the Company as one of the leaders in the alternative transportation marketplace.
Backlog
As of March 26, 2010, we have over $460,000 in backlog orders from auto-dealer purchase contracts for advanced technology vehicles.  We anticipate shipping these units from on-hand inventory and future production. The backlog for our consumer products on the same date was $47,000.  We anticipate shipping the consumer products throughout 2010.
Competitive Conditions
The competition to develop advanced EV has been intense and is expected to continue to increase. Our principal competitive advantage over our competitors is the experience base of our EV integration engineering know-how. We have accrued over the years good will in our trade name with strong brand recognition.  We have continued to demonstrate our ability to be a low cost manufacturer working through domestic and international contract manufacturing arrangements. We have placed top priority onISO 9000 quality and engineering excellence to ensure reliability and robustness in our product, so that our drive for cost effective manufacturing would in no way compromise quality.  We benefit from a long standing history in EV with strong brand name recognition in the advanced transportation vehicle industry. Our business objectives i s to offer quality cost competitive products adapted to compliancy to local market EV regulations and market needs.  While our manufacturing partner is currently located in China, we continue to seek opportunities to establish manufacturing operations and partnerships where our products could be adapted for the U.S. markets.

In the EV advanced technology vehicle market, we compete with well financed or established manufacturers, including  BYD, Tessler, Ford, Renault and others who have recently been more visible in their commitment to the electric vehicle market.  These companies have more significant financial resources, established market positions, longstanding relationships with customers and dealers. Each of these companies is currently working to develop this new market and sell advanced EV products in the world. The resources available to our competitors to develop new products and introduce them into the market place exceed the resources currently available to the Company. We also face competition from smaller companies with respect to our consumer products, such as our electric bicycle and scooter, especially in China and the As ian markets. This intense competitive environment require us to continue to advance in our product capabilities and technologies, improve our pricing and enhance our services, increase our distribution channels, cost of marketing, in order to maintain and expand our current technology base and strengthen our market position.
Seasonal Variations

Our 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. Our auto distribution network is affectedstandards promulgated by the availability of trucks and vans, ready to sell to dealers due to the need to reestablish business contracts with our original partnership manufacturers in China.
International Organization for Standardization.
 
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Jonway’s  manufacturing operations include pressing, welding, painting and assembling lines.  Jonway has also obtained the following certifications: the Gulf Cooperation Certification, the Saudi Arabian Standards Organization, and the Standards Organisation of Nigeria Conformity Assessment Programme, certifying Jonway to homologate and distribute in the Gulf, Saudi Arabia and Nigeria, and Jonway’s vehicles have received China Compulsory Certification required for industrial production in China.
Sources and Availability of Parts and Supplies
 
Materials, parts, supplies and services used in ourZAP 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. We striveZAP 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.  Borg Warner has supplied the transmission for the Alias exhibited in the Progressive Insurance Automotive X PRIZE.  ZAP signed a joint development supplier agreement with Remy to supply an advanced AC motor/controller for the A380 and Alias. ZAP Jonway plans to leverage strategic partnerships to help enhance its battery and charger development.
Backlog
As of March 31, 2011 ZAP had over $539,000 in backlog orders from state and local municipalities, consumers and businesses.
As of March 31, 2011, Jonway had over $3 million in backlog orders from auto-dealer purchase contracts for Jonway SUVs.  Jonway anticipates shipping these units from on-hand inventory.
Customers
Since 1994, ZAP has sold more than 117,000 electric vehicles in 75 countries. Most of our sales are to military, government and corporate fleets. ZAP has contracts to provide vehicles to the State of California, Presidio National Park, Federal Aviation Administration, Department of Energy, U.S. Army, United Parcel Service, City of Riverside, the City of Monterey and others.  Leveraging Jonway’s access to the China market, ZAP Jonway intends to focus on business development to create new markets within the Chinese fleet market.  Jonway  sells its vehicles through a network of more than 300 dealerships in China and has started a distribution network in Italy, Nepal and Algeria as of December 31, 2010.
Government Programs

ZAP’s trucks and vans are listed on the General Services Administration, or GSA, Schedule 78, expanding opportunities in the government fleet market. ZAP’s electric trucks and vans are currently available through GSA. Approval by GSA makes ZAP vehicles more readily accessible to U.S. government agencies and their respective purchasing agents around the world. As the federal government’s purchasing agent, GSA connects federal purchasers with the most cost-effective and high-quality commercial products and services, according to its website.  ZAP is currently applying for GSA listing change for these vehicles to Schedule 23v, which would expand the number of purchasing agencies that can purchase ZAP vehicles.

The Internal Revenue Service has determined that the ZAPTRUCK XL and ZAPVAN Shuttle qualify under the American Recovery and Reinvestment Act for a ten percent tax credit up to a maximum of $2,500, if purchased after February 17, 2009 and before January 1, 2012 under Internal Revenue Code Section 30.
Jonway has obtained China surtax exemptions, including foundation for water works and land-use tax of cities and towns in 2009 and 2010.  Except for the surtax exemptions, Jonway has no other tax incentives from the government.
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Regulation
Vehicle Safety and Testing
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 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.
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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.
The Automobile Information and Disclosure Act requires 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
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.
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.
Battery Safety and Testing
Our battery pack conforms with 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
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●
Overcharge—evaluating the ability of a rechargeable battery to withstand overcharging.
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 is obtaining or has 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.
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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.
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 centre 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.
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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.
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. BYD Auto has announced plans to bring an electric vehicle into the United States market in 2011, and Ford has announced that it plans to introduce an electric vehicle in 2011. The electric  Tesla Roadster and other models 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 China.
 
Inflation
 
OurZAP 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.
 
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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 March 31, 2011, 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 March 31, 2011,  Jonway had 19 issued patents (including ten utility model patents and nine exterior design patents) and nine pending patent applications with the China Patent and Trademark Bureau. 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
 
We haveZAP has the following wholly-owned subsidiaries: RAP Group, Inc., a California company, Voltage Vehicles, a Nevada company, ZAP Rental Outlet, a Nevada company, ZAP Stores, Inc., a California company, ZAP Manufacturing, Inc., a Nevada company, and ZAP World Outlet, Inc., a California company and Portable Energy LLC, a California limited liability company. Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles.automobiles; ZAP Stores is engaged primarily in consumer sales of ZAP products at one location andlocation; ZAP Manufacturing is engaged primarily in the distribution of ZAP products; and Portable Energy is engaged in the sale of portable energy products. ZAP World Outlet, ZAP Rental Outlet and RAP Group are not currently operating subsidiaries.
 
We hold 51% of the equity shares of Jonway.  Jonway has no subsidiaries.
Employees
 
As of March 26, 2010, the Company31, 2011, ZAP had a total of 3537 employees, all of which 35 are full-time employees. At present, there are no employment agreements with the officers of the Company,ZAP, except Gary Dodd. On January 15, 2010, three of our officers agreed to terminate theirBenjamin Zhu, who was hired as ZAP’s Chief Financial Officer in March 2011, and whose employment agreements with the Company. We intend to enter new agreements with these officers in the future on terms to be determined.  The officers continue to serve in the same positions with the Company.agreement is attached as an exhibit hereto.
 
As of March 31, 2011, Jonway had a total of over 520 employees, all of whom are full-time employees.
Item 1A.  Risk Factors
 
WeZAP Jonway has determined that there is a material weakness in its disclosure controls and procedures. If  ZAP Jonway continues to fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect our business, operating results, and financial condition.
ZAP Jonway’s failure to implement and maintain effective internal controls in our business could have a material adverse effect on our business, financial condition, results of operations and stock price. During our management’s review of our financial statements and results for the year ended December 31, 2010, our management assessed the effectiveness of our internal control over financial reporting and identified a material weakness in our identification, recording and oversight of certain derivative liabilities and the evaluation of the application of generally accepted accounting principles relating to these complex accounting instruments.  A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of ZAP’s annual or interim financial statements will not be prevented or detected on a timely basis.
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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, additional 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 to allow us to produce accurate financial statements on a timely basis is a costly and time-consuming, and we are required to evaluate these controls frequently.  Further, we anticipate that our  acquisition of 51% of the equity shares of Jonway will result in increased costs and demands on our management  to ensure that both Jonway and ZAP maintain effective disclosure controls and procedures to allow us to produce accurate and timely financial statements.
ZAP has a history of losses and ourZAP Jonway’s future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on ourZAP Jonway’s business and the value of ourZAP’s common stock.
 
WeZAP incurred net losses of $10.7$19.0 million, $9.8 million, $28and $11.3 million for the years ended December 31, 2010 and 2009, 2008respectively and 2007, respectively.  Wehas had net losses in each quarter since its inception.  Jonway incurred net losses of $0.4 million and $5.2 million for the years ended December 31, 2010 and 2009, respectively, and has had net losses annually since inception.
ZAP Jonway believes that it may continue to incur operating and net losses for our electric vehicles until at least the time ZAP Jonway begins significant deliveries of the Alias and the electric Jonway A380 SUVs, which are not expected to occur until late 2011, and may occur later or not at all. Even if we are able to successfully develop the Alias and the electric Jonway A380, there can givebe no assurance that it will be commercially successful.  Our profitability will be dependent upon the successful development and successful commercial introduction and acceptance of automobiles such as the Alias and the electric Jonway A380, which may not occur.
ZAP Jonway expects the rate at which we will be ableincur losses to operate profitablyincrease significantly in the future.future periods from current levels as we:
 
·  expand our business and manufacturing activities in China;
·  begin business and manufacturing activities in Korea;
·  design, develop and manufacture our planned electric vehicles;
·  design, develop and manufacture components of our electric power train;
·  build inventories of parts and components for our electric vehicles;
·  develop and equip manufacturing facilities to produce our electric power train components;
·  expand our design, development, maintenance and repair capabilities;
·  increase our sales and marketing activities; and
·  increase our general and administrative functions to support our growing operations.
 
 
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Because ZAP Jonway will incur the costs and expenses from these efforts before we receive substantial incremental revenues with respect thereto, ZAP Jonway’s losses in future periods will be significantly greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate or that these efforts may not result in increases in our revenues, which would further increase ZAP Jonway’s losses.
Changes
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’s net losses were $11.3 million for the year ended December 31, 2009 and $19.0 million for the year ended December 31, 2010. ZAP acquired 51% of the equity shares of Jonway in January 2011.  ZAP Jonway 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 longer term to derive substantial revenues from the sales of our planned electric and conventional fuel vehicles which are in trial and development and which we intend to being producing in the second half of 2011. ZAP Jonway has no operating history with respect to its newer vehicles, which limits our ability to accurately forecast the cost 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. For example, in the four most recent fiscal quarters ended December 31, 2010, ZAP recorded quarterly revenue of as much as $1.2 million and as little as $848,000 million and quarterly operating losses of as much as $11.7 million and as little as $1.1 million.  ZAP Jonway has not recorded quarterly financials statements on a consolidated basis in the past, which makes it difficult to predict what ZAP Jonway’s consolidated future revenues will be in order to appropriately budget for our expenses.  In the event that actual results differ from ZAP Jonway’s estimates or we adjust our estimates in future periods, our operating results and financial position could be materially affected.
ZAP Jonway’s financial results may vary significantly from period-to-period due to the seasonality of our business and fluctuations in our operating costs.
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 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 both the United States and China, while sales are generally higher as compared to the winter season during the spring and summer months. ZAP Jonway expects sales of our vehicles to fluctuate on a seasonal basis with increased sales during the spring and summer months in our second and third fiscal quarters relative to our fourth and first fiscal quarters. We note that, in general, automotive sales tend to decline over the winter season and we anticipate that our sales of the electric vehicles we introduce may have similar seasonality. However, ZAP Jonway’s limited operating history 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 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, incur costs for 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 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. If this occurs, the trading price of ZAP’s common stock could fall substantially either suddenly or over time.
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The future growth of our electric vehicle business is dependent upon consumers’ willingness to adopt electric vehicles.
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 could causedoes not develop as we expect or develops more slowly than we expect, our products to become obsolete or lose popularity.
business, prospects, financial condition and operating results will be harmed. The electricmarket 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 industry is in its infancyannouncements and has experienced substantial change inchanging consumer demands and behaviors. Factors that may influence the last few years.  To date, demand foradoption of alternative fuel vehicles, and interest inspecifically electric vehicles, has been sporadic.  As a result, growth in the electric vehicle industry depends on many factors, including:include:
 
·  ·continued developmentperceptions 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 product technology;electric vehicles;
 
·  ·perceptions about vehicle safety in general, in particular safety issues that may be attributed to the environmental consciousnessuse of customers;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 ability oflimited range over which electric vehicles to successfully compete with vehicles powered by internal combustion engines;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;
·widespread electricity shortagesconcerns about electric grid capacity and the resultant increase in electricity prices, especially in our primary market, California,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;
·  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
 
·  ·whether future regulation and legislation requiring increased use of nonpolluting vehicles is enacted.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.
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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 cannot assure you that growth inare aware of advocacy groups, such as the U.S. National Federation of the Blind, which are lobbying for regulations to require electric vehicle industry will continue.  Ourmanufacturers 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 if the electric vehicle industry does not grow or grows more slowly than it hasa decline in recent years or if we are unable to maintain the pace of industry demands.our competitive position.
 
WeZAP 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.
Our current products are designed for use 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 are dependent upon, existingadversely 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 productsvehicles and introduce new models in order to continue to provide productsvehicles with the latest technology, in particular battery cell technology. However, our products may become obsolete or our research and development effortsZAP Jonway’s vehicles may not be sufficientcompete effectively with alternative vehicles if ZAP Jonway is not able to adapt to changes in or create necessary technology.  As a result,source and integrate the latest technology into our potential inability to adapt and develop the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
We rely on a small group of suppliers to provide us with components for our products, some of whom are located outside of the United States.  If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them.  Changes in business conditions, wars, governmental changes, and other factors beyond our control or whichvehicles. For example, we do not presently anticipate could affect our ability to receive components from our suppliers.  Further, it could be difficult to find replacement components if our currentmanufacture engines, which makes us dependent upon other suppliers fail to provide the parts needed for these products.  A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
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Product liability or other claims could have a material adverse effect on our business.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles.  Although we have product liability insuranceengine technology for our consumer products for risks of up to an aggregate of $5,000,000, that insurance may be inadequate to cover all potential product claims.  We also carry liability insurance on our automobile products.  Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition.  We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed.  A successful product liability claim a gainst us could require us to pay a substantial monetary award.  Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.  On May and October of 2009, we determined that the Xebra vehicle had possible problems with its braking system, based on notices from NHTSA.   We initiated a product recall in June  and  November of  2009.  The first recall addressed  the fact that braking distances may be longer than the  U. S. Department of Transportation allows.  The second recall addressed the brake reservoir system.  The existing brake reservoir system is similar to an automobile and has a single reservoir.  NHTSA has determined since the Xebra is classified as a motorcycle, it should have two s eparate brake reservoirs. We cannot assure you that such claims and/or other recalls will not be made in the future.
We must devote substantial resources to implementing a product distribution network.
Our dealers are often hesitant to provide their own financing to contribute to our product distribution network.  As a result, we anticipate that we may have to provide financing or other consignment sale arrangements for dealers who would like to participate as our regional distribution centers.
The further expansion of our product distribution network will require a significant capital investment and will require extensive amounts of time from our management.  A capital investment such as this presents many risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable.  Our inability to collect receivables from our dealers could cause us to suffer losses.  Lastly, the amount of time that our management will need to devote to this project may divert them from performing other functions necessary to assure the success of our business.
Failure to manage our growth effectively could adversely affect our business.
We plan to increase sales and expand our operations substantially during the next several years through internally-generated growth and the acquisition of businesses and products.
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Regulatory requirements may have a negative impact upon our business.
While our products are subject to substantial regulation under federal, state, and local laws, we believe that the products we have sold are materially in compliance with all applicable laws.  However, to the extent the laws change, or if we introduce new products in the future, some or all of our products may not comply with applicable federal, state, or local laws.  Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment.  Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future.  Compliance with this regulation could be burdensome, time consuming, and expensive.
Our automobile products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the Environmental Protection Agency, or EPA, the National Highway Traffic Safety Administration, or NHTSA, and the Air Resource Board of the State of California, and a compliance certification is required for each new model year.  The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial.  Although the Company had marketed its Smart Car product in the United States, the car must be certified by the California Air Resources Board before it can be sold in California, New York, and three other states.  In addition, the two models of our OBVIO products will need to satisfy all regulatory requirement s before they can be sold in the United States.  The risks, delays, and expenses incurred in connection with such compliance could be substantial.vehicles.
 
Manufacturing overseasinternationally may cause problems and present risks for us.ZAP Jonway.
 
We haveZAP Jonway has been shifting ourfocusing on manufacturing overseas.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 ourZAP 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.
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.
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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 is significantly dependent upon revenue generated from the sale of electric vehicles in the near term, and ZAP Jonway’s future success will be dependent upon our ability to design and achieve market acceptance of new vehicle models.
ZAP currently generates a substantial amount of its revenue 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 Alias, electric A380 SUV, the improved gas fueled Jonway A380, and the Jonway Small Van are expected to be in production in the second half of 2011.  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.
BYD Auto has also announced plans to bring an electric vehicle into the United States market in 2011, and Ford has announced that it plans to introduce an electric vehicle in 2011 and the Tesla Roadster is on the market, although it targets a more luxury-brand audience. 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 new start-ups 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 U.S. automobile manufacturers Honda and Ford, and from China-based manufacturers Chery, Zongtai and Great Wall Auto.
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, offer customary discounts on our vehicles. The lack of direct financing options and the absence of 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,
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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.
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 automobile industry in particular was severely impacted by the poor economic conditions and several vehicle manufacturing companies, including General Motors and Chrysler, were forced to file for bankruptcy. Sales of new automobiles generally have dropped during this recessionary period. Sales of ethical consumer products, such as ZAP Jonway’s electric vehicles, depend in part on discretionary consumer spending and are even more exposed to adverse changes in general economic conditions. 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 conditions continue or worsen, we may experience a decline in the demand for ZAP Jonway’s vehicles, 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.
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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;
·  unfamiliarity with or uncertainty about our electric 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, 2010,  ZAP incurred net losses of approximately $19.0 million and used approximately $6.1 million of cash in operations while recognizing only approximately $3.8 million in revenue. As of December 31, 2010,  ZAP had $1.5 million in cash and cash equivalents. For the year ended December 31, 2010, Jonway incurred net losses of approximately $0.4 million and used approximately $5.4 million of cash in operations, while recognizing approximately $74 million in revenue. As of December 31, 2010, Jonway had $5.5 million in cash and cash equivalents.  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.
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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. For example, ZAP initiated a product recall in June and November 2009 for the Xebra braking mechanism sending out 788 notices for our 2008 Xebra model and receiving 112 responses, at a cost to ZAP of $14,000 for the year ending December 31, 2010.  We cannot assure you that such claims and/or other recalls will not be made in the future.  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 generally 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 from the one typically used in the industry. 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 by using Jonway’s service facilities in China, which are through third party arrangements.  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 these 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.
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 it is unclear when or even whether 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, without seeking formal regulatory guidance, 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 laws, certain aspects of our service program would need to be restructured to comply with state law, which may harm our business.
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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 choose to refuse to supply electric vehicle manufacturers to the extent 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 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 protectexpand our internet address.network at our expected rate and our planned expansion of our network of distributors will require significant cash investment and management resources.
 
We currently hold
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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. In January 2011, ZAP completed its acquisition of 51% of the internet address, http://www.zapworld.com, a portal throughequity shares of Jonway, which is incorporated and primarily operates in China.  Recently, in China, labor disputes and strikes based partly on wages in China have slowed or stopped production at certain manufacturers. In some cases, employers have responded by significantly increasing the wages of workers at such plants. In addition, regulatory authorities and others have increased their scrutiny of labor conditions in countries in which we operate. 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.
 ZAP currently has international operations and subsidiaries in China and planned operations in Korea that are subject to the legal, political, regulatory and social requirements and economic conditions in these jurisdictions. Jonway has international distribution activities in Italy, Nepal, Algeria, America, Yemen and Russia.  In the near future, Jonway intends to expand international distribution to Southeast Asia and the Middle East.  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 products.electric vehicles and require significant management attention. These risks include:
·  conforming 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;
·  coordinating communications among and managing international operations;
·  difficulties 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;
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·  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.
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 electronics manufacturing. 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 Yuan, which may fluctuate against the U.S. dollar and must be reconciled into the U.S. dollar for ZAP Jonway’s consolidated financials.
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Jonway’s present contracts are based in the Chinese Yuan, except for international trading contracts in the US dollar.  The value of the Chinese Yuan 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.  Since 2008, the value of the Chinese Yuan largely appreciated against U.S. dollar.  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 Chinese Yuan will have an 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.
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.
Jonway depends in part on government subsidies and economic incentives to finance Jonway’s independent research and development, production and sale, such as a PRC surtax exemption, technology innovation incentives and land use rights investment subsidies from local government.  The related government subsidies and incentives amounted to $0.7 million and $0.9 million for Jonway in 2009 and 2010, respectively.  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  efforts to integrate acquired businesses, especially Jonway, into our existing operation may not be successful.

ZAP has recently acquired a majority interest in Jonway and 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:
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·  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. If ZAP Jonway fails to integrate Jonway or any of these acquired business into our existing business or if we encounter serious difficulties in integrating future businesses we acquire with our existing operations and with compliance with applicable laws and regulations, our business, financial condition and results of operations may be materially and adversely affected.
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.

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:
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·  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 third partiesZAP Jonway from acquiring internet addresses that are confusingly similarrealizing 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 address, which could adversely affectearnings per share if our business.  Governmental agenciesprojections and their designees generally regulateassumptions about the acquisitionacquired business’ future operating results prove to be inaccurate. As a result, although our goal is to improve our business and maintenance of internet addresses.  However, the regulation of internet addressesmaximize 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 United Statesfuture.
The People’s Republic of China regulates the conversion between Chinese Yuan 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, 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, or SAFE, Jonway will be able to pay dividends in foreign countries is subjectcurrencies 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 change.  As a result,repatriate profit from Jonway to ZAP.
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If ZAP Jonway fails to manage future growth effectively, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business.market and sell our vehicles successfully.
 
Our successAny failure to manage ZAP Jonway’s growth effectively could materially and adversely affect our business, prospects, operating results and financial condition.  Jonway has experienced rapid growth especially in 2010, increasing sales from $42.2 million as of December 31, 2009 to $74.1 million as of December 31, 2010.  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:
·  training new personnel;
·  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; and
·  expanding international operations.
ZAP Jonway intends to continue to hire a significant number of additional personnel, including design and manufacturing personnel and service technicians for our vehicles. Competition for individuals with experience designing, manufacturing and servicing vehicles, particularly electric vehicles, is heavilyintense, 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.
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 protectingthe services of Priscilla Lu, Chairman of ZAP’s Board, Steven Schneider and Alex Wang, ZAP’s Co-Chief Executive Officers and Benjamin Zhu, ZAP’s Chief Financial Officer. None of ZAP Jonway’s key employees is bound by an employment agreement for any specific term other than Benjamin Zhu. 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.
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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;
·  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.
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In addition, as the automotive industry moves towards greater use of electronics for vehicle systems, NHTSA 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 $5 million on a claims 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 the them in high volumes in certain jurisdictions.

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ZAP Jonway’s facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events.
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.
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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.rights from unauthorized use or infringement by third parties.
 
WeAny 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 trademark,laws, trademarks, intellectual property licenses and trade secret protectionsother contractual rights to establish and protect our proprietary rights in our technology. Our success will, in part, depend on our ability to obtain trademarksAs of December 31, 2010, we had 20 issued patents and patents.  We hold several patents registeredapproximately 28 pending patent applications with the United States Patent and Trademark Office or USPTO.  These registrations include both designand our majority-owned subsidiary Jonway had 19 issued patents and utility patents.9 pending patent applications with the China Patent and Trademark Bureau.
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, we have recently submitted provisionalthe 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 or may not be afforded the limited protection associated with provisional patents.  We have also registered numerous trademarks with the USPTO and have several pending at this time.  a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot assure yoube certain that ZAP or Jonway  are the trademarks and patents issued to us will not be challenged, invalidated, or circumvented,first creator of inventions covered by their respective pending patent applications or that they are the rights granted under thos e registrationsfirst 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 issued U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide competitive advantages to us.significantly less effective patent enforcement than in the United States.
 
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We also rely on trade secretsThe status of patents involves complex legal and new technologies to maintain our competitive position.  Although we have entered into confidentiality agreements with our employeesfactual questions and consultants, wethe 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 will not gain accessand others may obtain patents that ZAP Jonway need to these trade secrets.  Otherslicense or design around, either of which would increase costs and may independently develop substantially equivalent proprietary informationadversely affect our business, prospects, financial condition and techniques or otherwise gain accessoperating results.

Risks Related to our trade secrets.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.
 
We mayZAP’s executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 65% of our outstanding shares of common stock, including securities convertible into shares of ZAP common stock. In particular, Priscilla Lu, the Chairman of our Board of Directors, is a general partner at Cathaya. Cathaya and its affiliated entities beneficially own approximately 52% of our outstanding shares of common stock, including securities convertible into shares of ZAP common stock. As a result, these shareholders will be exposedable to liability for infringing intellectual property rightsexercise a significant level of other companies.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.
 
Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others.  Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur.  We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.
WeZAP may face risks associated with past sales of unregistered securities.
 
In the past, we have hadZAP has sold numerous sales of our securities which were not registered under federal or state securities laws.  We haveZAP has strived to comply with all applicable federal and state securities laws in connection with our issuances of unregistered securities.  However, to the extent we haveZAP has not complied, thereZAP may beface liability for the purchase price of the securities sold, together with interest and the potential of regulatory sanctions.
 
OurZAP’s stock price and trading volume may be volatile which could result in substantial losses for our stockholders.ZAP’s shareholders.
 
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 ourZAP’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 ourZAP’s common stock may fluctuate and cause significant price variations to occur.  We haveZAP has experienced significant volatility in the price of our stock over the past few years.  We cannot assure you that the market price of ourZAP’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.
 
We haveZAP has not paid cash dividends on ourZAP’s common stock and do not anticipate paying any cash dividends on ourZAP’s common stock in the foreseeable future.
ZAP does not expect to declare any dividends in the foreseeable future.
ZAP does not anticipate declaring any cash dividends to holders of 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.
 
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Item 1B.  Unresolved Staff Comments.
 
Not applicable.
 
Item 2.  Property.Properties.
 
The chart below contains a summary of ourZAP’s principal facilities:

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Location
Use
Square Feet
Rent
501 Fourth Street, Santa Rosa, CACorporate Headquarters20,000
$       29,000
9th Street, Santa Rosa, CAWarehousing36,764
$       10,030
806 Donahue Street, Santa Rosa, CAVehicle Storage21,954
$         9,659
3362 &3405 Fulton Road, Santa Rosa, CAOffice, Automobile Lot21,780
$         9,018

Location
Use
Square Feet
Rent
501 Fourth Street, Santa Rosa, CACorporate Headquarters (1)20,000
$                –
9 th Street, Santa Rosa, CAWarehousing36,764
$       10,030
806 Donahue Street, Santa Rosa, CAVehicle Storage21,954
$         9,659
3362 &3405 Fulton Road, Santa Rosa, CAOffice, Automobile Lot21,780
$         7,000
44720 Main Street, Mendocino, CAPotential Retail Outlet5,500
$                –
(1)The building debt is due to Al Yousuf LLC with a scheduled maturity on February 28, 2010.
We purchased the Fourth Street building in March 2003 to use as our principal executive offices. The building was built originally in 1906 and is located in downtown Santa Rosa, California. We believe the building and contents are adequately insured. We occupy more than 90%All of the building. We purchased the Mendocino, California property in May 2005 as a potential site for a retail outlet for our products.
The rest of ourZAP’s facilities are rented or leased. ZAP’s principal executive offices are located at 501 Fourth Street, Santa Rosa, California. The property is rented on a month-by-month basis from Al Yousuf, LLC.
We have currently signed a  lease with Railroad Square Villiage, LLC for the 806 Donahue Street  and 9th Street properties, in Santa Rosa.  The monthly lease is for 12 months, expiring December 31, 2011.
The properties located at 3362 and 3405 Fulton Road are rented on a month-by-month basis from ourZAP’s Chief Executive Officer. We planZAP plans to continue to rent properties based on our needs. We believeZAP believes these properties are adequate for our foreseeable needs.
 
We believeZAP believes our insurance policies cover all insurance requirements of the landlords. We ownZAP owns the basic tools, machinery and equipment necessary for the conduct of our repairs, our minimal research and development and vehicle prototyping activities. We believeZAP believes that the above facilities are generally adequate for ZAP’s present operations. At present, our products

Jonway’s principal executive offices and manufacturing facility is located in Datang Village, Jiangtiao Lingang industrial park, Sanmen County, Taizhou City, Zheijiang Province, China. The building is 915,836 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. Approximately 118,000 square feet of the facility are manufactured by third parties on a contract basis.leased to Zhejiang UFO for the term of the Operations Agreement, along with use of the assembly line, testing line and certain equipment, for RMB 1 million per month, otherwise, Jonway occupies the entire space and has no properties pledged.
 
 Jonway is in the process of obtaining certificates of property for all of its buildings, but has not yet obtained them.
Item 3.  Legal Proceedings.
 
In the normal course of business, weZAP Jonway may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows. The CompanyZAP Jonway estimates the amount of potential exposure it may have with respect to litigation claims and assessments. The previous litigation matters at December 31, 2008 were all resolved during 2009 with no material affect on the Company’s financial statements.
On September 25, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SW 245950) was filed in the Superior Court for the County of Sonoma.  The complaint alleges causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The President of Al Yousuf LLC, Eqbal Al Yousuf, is a member of ZAP’s Board of Directors.  In its complaint, Al Yousuf LLC claims that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Al Yousuf LLC seeks to foreclose on the property that secures the loan agreement and recover their attorneys fees, and obt ain such other and further relief as the court may deem just and proper.  ZAP has responded to the complaint and the parties are engaged in settlement discussions.
 
On March 2, 2010 a complaint was filed by Integrity Automotive LLC; Randall Waldman (a former director of ZAP) v. ZAP, et al, case no. 10CI01383 in the Jefferson Circuit Ct. Division 10, State of Kentucky. The complaint alleges the following causes of action against ZAP: (1) Breach of Contract; (2) Civil Conspiracy; (3) Breach of Fiduciary Duty; and (4) Conversion. These causes of action stem from a purported joint venture intended to manufacture automobiles in the State of Kentucky and seeks unspecified actual and punitive damages. The matter has been tendered
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to our attorney. We   intend to vigorously defendAlthough no specific monetary demand is included, the plaintiff’s claims. We alsoComplaint seeks punitive damages, actual damages, and interest.   All of the defendants answered and cross-complained on March 29, 2010 and the parties are engaged in discovery.  ZAP does not believe that the ultimate resolution of this claim will not have a material adverse effect on our consolidated financial position orstatements.
40
On September 25, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SW 245950) was filed in the Superior Court for the County of Sonoma.  The complaint alleged causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The President of Al Yousuf LLC, Eqbal Al Yousuf, is a member of ZAP’s Board of Directors.  In its complaint, Al Yousuf LLC claimed that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Al Yousuf LLC sought to foreclose on the resultsproperty that secures the loan agreement and recover their attorney’s fees, and obtain such other and further relief as the court may deem just and proper.  On March 1, 2010, ZAP filed an offer to settle the complaint with Al Yousuf LLC pursuant to Section 998 of operations.the California Code of Civil Procedure, or the Settlement Offer, which was accepted by Al Yousuf LLC on April 5, 2010.  The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation.  The cash sum was scheduled to be paid in three equal payments of $250,000 on March 31, 2010, June 30, 2010 and September 30, 2010, one payment of $500,000 on December 31, 2010 and the final payment of $550,000 on March 31, 2011, which was paid on time.

Rainbow Cycle & Marine & Siloam Springs Cycle, v. Voltage Vehicles, Arkansas Motor Vehicle Commission, Case No. 10-008. On April 1, 2010, Rainbow Cycle & Marine & Siloam Spring Cycle (the "Dealer"), an automobile dealer in the State of Arkansas, submitted a complaint to the Arkansas Motor Vehicle Commission (the "Commission") regarding 6 Xebra vehicles purchased from ZAP in 2008, each at the price of $8,750.00. The Dealer requested that the Commission order ZAP to refund all monies paid by the Dealer to ZAP for the vehicles, to pay all transportation costs, and in addition to assess penalties and interest charges against the Company in an unspecified amount. The Commission issued a Notice of Hearing on August 11, 2010, setting a hearing for September 15, 2010 on the Dealer's Complaint. ZAP responded with a Motion to Dismiss, which the Commission set for hearing on December 15, 2010 and at the same time continued the hearing on the Dealer's Complaint to the same date. After the hearing, the Commission ruled that ZAP was required to refund the Dealer's purchase price for the vehicles and to pay for transportation of the vehicles off of the Dealer's premises. In response, ZAP's local counsel filed a Petition for Judicial Review on March 1,2011 in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. Service on the Commission and counsel for the dealer was completed shortly thereafter, and the dealer's responsive pleading is due in April.
 
All other material litigation matters of ZAP at December 31, 2010 were resolved during 2010 with no material effect on ZAP’s financial statements.
 
Item 4.  Submission of Matters to a Vote of Security Holders during the Fourth Quarter.Reserved.
 
None

PART II
 
Item 5.  Market for Registrant’s Common Equity, Related StockholderShareholder Matters and Issuer Purchasers of Equity Securities.
 
Market Information
 
ZAP’s common stock is quoted on the OTC Bulletin Board under the symbol “ZAAP.OB”“ZAAP”.
 
 
Bid price
  
Bid price
 
Period
 
High
  
Low
  
High
  
Low
 
Fiscal Year 2010:      
December 31, 2010
 $1.28  $0.47 
September 30, 2010
  0.52   0.38 
June 30, 2010
  0.40   0.26 
March 31, 2010
  0.38   0.26 
Fiscal Year 2009:              
December 31, 2009
 $0.41  $0.17  $0.41  $0.17 
September 30, 2009
  0.45   0.33   0.45   0.33 
June 30, 2009
  0.46   0.12   0.46   0.12 
March 31, 2009
  0.28   0.10   0.28   0.10 
Fiscal year 2008:        
December 31, 2008
 $0.59  $0.23 
September 30, 2008
  0.85   0.51 
June 30, 2008
  1.18   0.41 
March 31, 2008
  0.89   0.45 
41
Holders
 
Holders
We haveZAP had approximately 3,4776,225 record holders of our common stock as of March 25, 2010,31, 2011, 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 TrustStock Transfer & TransferTrust Company.
 
Dividends
 
We haveZAP has never declared noror paid any cash dividends on our common stock, and we doZAP does not anticipate that weZAP will pay any cash dividends on our common stock in the foreseeable future. Any future determination to declare and pay cash dividends will be at the discretion of ourZAP’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.
 
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Recent Sales of Unregistered Securities
 
The following lists sales of unregistered ZAP securities during the last fiscal year that were not previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.year. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions.transactions:
 
Employee Compensation — On various dates throughout the last fiscal year, the CompanyZAP issued 390,308 shares of restricted common stock valued at $98,000 to its employees as compensation.
Consulting — On various dates throughout the last fiscal year, the Company issued 195,874 shares of restricted common stock valued at $85,527 for outside consulting services
On December 16, 2009, we issued 451.5 million shares of restricted common stock valued at $1for $13.2 million to a principal shareholder of ain cash through private companyplacements. These shares were issued in connection with a potential strategic transaction.  We relied on the exemption from registration afforded byprivate transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended,amended.
ZAP issued 30 million shares for the issuanceworldwide distribution rights of these securities.Jonway products. In addition, another 6 million shares were issued in exchange for the distribution rights to charging stations.  These shares were issued in a private transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended.
 
ZAP issued 8,030,369 shares of stock to Samyang upon conversion of the outstanding principal and accrued interest of approximately $5,259,000 of outstanding convertible debt into shares of common stock.  These shares were issued in a private transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ZAP issued 5 million shares in exchange for the provision of financial and management consulting and transaction advisory services to ZAP, pursuant to a management agreement with Cathaya, whose general partner is Priscilla Lu, the Chairman of ZAP’s Board of Directors. These shares were issued in a private transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ZAP issued 479,000 shares of stock as consideration for the acquisition of computer equipment and patent legal work.  These shares were issued in private transactions pursuant to Section 4(2) of the Securities Act of 1933, as amended.
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Securities Authorized for Issuance Under Equity Compensation Plans
ZAP maintained 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, 2010:

             
        (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  19,294   $0.37     566 
2007 Consultant Stock Plan   1,500   $0.51   4,500 
2006 Incentive Stock Plan   3,290   $0.72      817 
2004 Consultant Stock Plan  —   
$   —
    1,000 
2002 Incentive Stock Plan  2,694   $0.92    6,204 
Equity compensation plans not approved by security holders:  
—
   
—
   
—
 
             
Total  26,778   $0.47    13,087 
             
Item 6.  Selected Financial Data.Data

Not required for Smaller Reporting Companies.

applicable.
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary of Key Accomplishments During Fiscal Year 20092010
 
Recent DevelopmentsOverview and 2010 Highlights
 
A number of significant eventsZAP designs, develops, manufactures and developments have occurred during fiscal year 2009sells fully electric and advanced technology vehicles. We market and sell our vehicles directly to consumers by phone over the internet, in-person at our Santa Rosa location, and by direct outreach through the date of this report including the following:GSA, participating in bid applications with government and corporate fleets.
 
·We have developed an efficient methodology for the conversion of conventional gasoline engine vehicles into electric vehicles.  At present we are targeting China and Korea to convert conventional gasoline powered internal combustion SUVs to plug-in-electric vehicles to serve taxi markets in these Countries.  We have completed and are currently testing prototypes.
 On January 21, 2011, we completed our acquisition of 51% of the capital stock of Zhejiang Jonway Automobile Co. Ltd. of Sanmen, Zhejiang, China for a total purchase price of $30,580,000 of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently, Jonway Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway Grroup and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates. The parties are discussing the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. Dollar to Chinese Yuan between ZAP’s payment dates. With ZAP’s electric vehicle technology expertise and international experience, ZAP Jonway intends to build the necessary production platform to serve the Chinese electric vehicle market. ZAP Jonway, intends to leverage Jonway’s A380 SUV, as well as its established distribution channels to the Chinese market. ZAP Jonway intends to  manufacture and sell SUVs powered by ZAP’s electric drive train as well as Jonway’s gas fueled vehicles.  The results presented in this 10-K do not reflect Jonway’s financial results, but ZAP intends to report consolidated financials in subsequent filings.
 
·We have been selected as one of five companies to convert a prototype USPS van from conventional gasoline powered internal combustion to plug-in-electric for delivery in July 2010 for field testing by the USPS.
·We formed ZAP Hangzhou Electric Vehicle Company, a joint venture with Holley Group, the parent company of a global supplier of electric power meters, and Better World International, LTD, a company focused on infrastructure technology and services for electric vehicles, to design and manufacture electric vehicle and infrastructure technology.
We operate our business in three reportable segments: Advanced Technology, Consumer Product and Car Outlet. These segments are strategic business units that offer different services.  They are managed separately because each business requires different resources and strategies.  The Advanced Technology segment represents the sales activity of advanced technology vehicles to ZAP dealers throughout the U.S.  The Consumer Product segment represents sales of our ZAPPY 3, a three wheeled electric scooter, and the overall corporate expenses of ZAP. Many of these expenses relate to the overall development of our core business, electric consumer products.  The Car Outlet segment represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles.
 
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·We received $5 million in financing through the issuance of convertible debt and invested $2 million in exchange for stock of a publicly traded Korean company.
·We secured new financing with Cathaya Capital, L.P. which has the potential to result in up to an aggregate of $25 million in additional funding.  The financing includes a private placement of twenty million shares of common stock for aggregate proceeds of $5 million and a secured loan facility of up to $10 million that will be advanced to ZAP provided certain conditions are met. In connection with the financing, the investor also was issued warrants exercisable for up to 20 million shares of common stock at $0.50 per share. With offices in Silicon Valley, Cathaya, L.P. is backed by financier Jacques de Chateauvieux’s Paris-based Jaccar Holdings.
·To help automotive fleets reduce emissions and operating expenses, we have begun distributing a five-passenger van and a new XL Truck both of which are 4-wheel, 100% plug-in-electric vehicles. The new Shuttle was designed for passenger transport or cargo. The seats are removable so it can be converted into a cargo vehicle. Our new XL Truck was designed to hold up to two passengers and has a bed platform capable of transporting up to 800 lbs. for on-road use and up to 1,600 lbs. capacity for private roads and facilities.

Results of Operations

YEAR ENDED DECEMBERYear Ended December 31, 2010 Compared to Year Ended December 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
 
Net Sales. Net sales for the year ended December 31, 2010 were $3.8 million compared to $4.1 million for the year ended December 31, 2009, were $4.1 million compared to $7.6 million for the year ended December 31 in the prior year which is a decrease of $3.5$0.3 million, or 46%6%.
 
Sales in theour Advanced Technology segment decreased from $4.9 million in 2008 to $2.1 million in 2009.2009 to $1.6 million in 2010. The tight U.S. credit market and general economic conditions negatively impacted our dealer sales in 2009.2010. In addition, we also decreased our production of three wheel electric vehicles to transition to 4four wheel electric vehicles.
 
We experienced a decrease of $492,000$81,000 in sales of consumer productsin our Consumer Product segment from $876,000 in 2008 to $430,000 in 2009.2009 to $349,000 in 2010. The decrease was due in part to the discontinuance of our Latin AmericaAmerican operation during 20092010 and also no sales of portable energy products during 2009.2010. In June of 2008,2009, we transferred ourthis product line to a new 50%Portable Energy, LLC, which is wholly owned entity, portable energy.by ZAP at December 31, 2010
 
Our retail car lotCar Outlet segment experienced a slight decreaseincrease in sales from $1.7 million in 2008 to $1.6 million in 2009. The2009 to $1.9 million in 2010.  While customer demand remained consistent for both years.  Dueyears, due to the current recession many consumers chosepurchased lower priced pre- ownedpre-owned vehicles that are distributed through our retail car outletoutlet.
 
Gross Profit. Gross profit was $429,000 for the year ended December 31, 2010 compared to $728,000 for the year ended December 31, 2009, compared to $799,000 for the year ended December 31, 2008 resulting inwhich is a decrease of $71,000.  However, as$299,000 and a percentage of sales, it increasedgross profit decreased from 18% in 2009 to 11% in 20082010. The discounting of ZAP’s aging Zappy and Xebra models to 18% in 2009.encourage sales was the most significant reason for this change
 
In our Advanced Technology segment, our gross profit decreased from a gross profit of $718,000 in 2008 to $464,000 in 2009. The2009 to $11,000 in 2010. This decrease was primarily due to lower sales volumes, discounting our aging inventory, and the establishment of an allowance to repair Xebras for thein connection with safety recall.recalls in 2009.
 
In our Consumer ProductsProduct segment, we experienced a decreasean increase of $154,000$126,000 in gross lossprofits from $218,000 in 2008 to a gross loss of  $64,000 in 2009.2009 to a gross profit of $62,000 in 2010. The gross lossprofit was lesshigher due to higher sales volumes and better margins on the new ZAPPY 3 Pro Scooter.
 
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Gross profits in our retail car lotCar Outlet segment increased $29,000 from $299,000 for the year ended December 31, 2008 to $328,000 for the year ended December 31, 2009.2009 to $357,000 for the year ended December 31, 2010. The increase in gross profits was due to higher sales volumes and better mix of vehicle models with higher margins.
 
Sales and Marketing. Sales and marketing expenses for the year ended December 31, 2009 decreased2010 increased by $621,000$0.8 million from $1.8 million in 2008 to $1.2 million in 2009. The decrease was2009 to $2.0 million in 2010 primarily due eliminationto an increase of certain$960,000 of amortization of distribution fees for Jonway and Better World in sales and marketing positions during 2009. expenses for 2010.
 
General and Administrative Expenses. General and administrative expenses increased by $3.0 million from $8.5 million for the year ended December 31, 2009 increased by $630,000 from $7.9to $11.5 million in 2008 to $8.5 million in 2009.for the year ended December 31, 2010.  The primary reason for the increase was duean expense of $2.5 million to theCathaya for management fees for 2010 and an increase in legal fees to settle prior year’s legal matters and to respond to the Al Yousuf lawsuit seeas described in Notes 58 and 12.   The expensing of  employee stock options in the 3rd and 4th quarter of 2009 was also higher . These options were issued as a result of amending prior officer employment agreements and in connection with the Cathaya Capital financing arrangement in third quarter of 2009.15 to our Consolidated Financial Statements.
 
44
Impairment of Assets. Impairment of Assets represents decreased from $687,000 in the impairmentyear ended December 31, 2009 to $0 in the year ended December 31, 2010 due to the 2009 allowance for the phase out of our Latin American dealer and adjustments to certain of our building improvement projects.
 
Research and Development. Research and development expenses increased by $135,000$445,000 from $416,000 in 2008$551,000 for the year ended December 31, 2009 to $551,000 in 2009.
$996,000 for the year ended December 31, 2010. In 20092010, we incurred additional costs to build working prototypes of the Alias vehicle.Alias. We also spent additional funds in 20092010 to develop methods to convert gas vehicles to electric.electric vehicles for the USPS.
 
Interest Expense, Net. Interest expense, net increased by $109,000$818,000 from an interest expense of  $395,000 for the year ended December 31, 2008 to interest expense of $504,000 for the year ended December 31, 2009.2009 to interest expense of $1.3 million for the year ended December 31, 2010. The increase was due to the higher loan balance on the promissory note with Al Yousuf, see also note 5.as described in Note 8 to our Consolidated Financial Statements.
 
Other Income (Expense). Other income (expense) decreasedchanged from an expenseincome of $56,000 in 2008$8,000 for the year ended December 31, 2009 to an expense of $8$319,000 for the year ended 2009.
The expense was less in 2009, since we did not incur the one time donationDecember 31, 2010, due to the Red Cross or offering costs on the convertible debt as we experienced in 2008.recognized loss from our joint venture ZAP Hangzhou.
 
Net Loss on financial instruments.   was $10.7Loss on financial instruments increased $3.5 million from a loss of $587,000 for the year ended  December  31, 2009 to a loss of $4.1 million for the year ended December 31, 20092010, due to loss recognized on outstanding warrants.
Gain on extinguishment of debt: The gain on extinguishment of debt of  $818,000 is due to the settlement with Al Yousuf, LLC regarding a loan made to ZAP.  Pursuant to the settlement, ZAP paid $1.8 million over a period of two years and transferred the properties located in Santa Rosa and Mendocino, California to Al Yousuf, LLC.
Net Loss. Net Loss was $19.0 million for the year ended December 31, 2010 as compared to a net loss of $9.8$11.3 million for periodthe year ended December 31, 2008.2009.
 
ZAP’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.
 
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Liquidity and Capital Resources
 
In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in related party securities, and our operating and capital expenditure commitments.  Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.  At December 31, 2010, we believe that we will have sufficient liquidity required to conduct operations through December 31, 2011.

Our principal sources of liquidity consist of our existing cash on hand, our investment in related party securities and our $5 million private placement subscription agreement with Alex Wang, the Co-CEO of ZAP.  On March 31, 2011 ZAP received a total of $2 million under this agreement and the remaining $3 million is due by April 15, 2011.

In January 2011, ZAP issued $19 million of convertible debt for the partial payment of the Jonway acquisition.  The Company believes there is some uncertainty regarding whether this $19 million note will be converted to equity or require cash payment in February 2012.

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

We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both.  Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.  However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
We used cash in operations of $ 2.1$6.2 million and $6.4$3.5 million during the years ended December 31, 2010 and 2009, respectively. Cash used in operations in 2010 was the result of the net loss incurred for the year of $19.0 million, offset by non-cash expenses of $12.9 million. In 2010, non-cash expenses included $1.0 million for stock–based compensation for consulting, other services and 2008, respectively.$2.7 million for stock-based compensation to employees and $2.5 million for stock-based compensation for management fees.  Cash used in operations in 2009 was the result of the net loss incurred for the year of $10.7$11.3 million, offset by non-cash expenses of $7.6$8.6 million. In 2009, non-cash expenses included $1.6 million for stock –basedrelated to stock-based compensation for consulting and other services, $4.9 million for stock-based compensation to employees.  Cash used in operations in 2008 was the result of
In 2010, the net loss incurred for the yearchange in operating assets and liabilities resulted in a cash increase of $9.8 million,$360,000. The change was primarily due to an increases in accrued liabilities of $575,000 and prepaid expenses of $220,000 offset by non-cash expensesdecreases in inventory of $5.6 million. In 2008, non-cash included $2.8 million related to stock-based compensation  for consulting$183,000 and other services, $2.5 million for stock-based compensation to employees.accounts payable of $130,000 and in accounts receivable of $122,000.

In 2009, the net change in operating assets and liabilities resulted in a cash increase of $1$1.0 million. The change was primarily due to a decreases for  inventory.in inventory of $623,000, in prepaid of $301,000, and in accounts receivable of $211,000.  These decreases were offset by increases of $471,000 in accrued liabilities and deferred revenue of $587,000.

In 2008, the net change in operating assets and liabilities resulted in a cash decrease of $2.1 million. The change was primarily due to increases for inventory.

Investing activities used cash of $1.2$12.1 million and $110,000$1.2 million during the year ended December 31, 2010 and 2009, respectively. In 2010, $10.0 million was used for the acquisition of Jonway Auto and 2008, respectively.$2.0 million was used to purchase marketable securities. In 2009, $1.2 million was used for an investment in an unconsolidated joint venture. In 2008, cash was used to acquire property and equipment.

45
Financing activities provided cash of $7.8$14.9 million and $2.5$9.2 million during the year ended December 31, 2010 and 2009, respectively. In 2010, we received $13.0 million from  investors and 2008, respectively.$3.0 million from the issuance of convertible debt; this was offset by payments of $1.3 million of short term debt. In 2009, we received $6.1 million from four investors,  from issuance of common stock and $2 million from the issuance of convertible debt. In 2008, the Company borrowed funds on a $10debt and $1.1 million financing facility established by Al Yousuf.in proceeds from debt, net of issuance costs.
 
The CompanyWe had cash and cash equivalents of $1.5 million at December 31, 2010 as compared to $4.8 million at December 31, 2009 as compared to $341,0002009. We had working capital of $2.6 at December 31, 2008. The Company had2010 and a working capital deficitsdeficit of $2.8 million$898,000 at December 31, 2009 and $990,000 at December 31, 2008.
On December 31, 2009, ZAP issued to an investor  a subordinated convertible promissory note in the principal amount of $2 million dollars  pursuant to a note purchase agreement entered into with the investor on even date therewith.  The unpaid principal balance of the Note accrues interest at a rate of six percent (6%) per annum and all unpaid principal, together with any then unpaid and accrued interest and other amounts payable there under, become due and payable on December 31, 2011.
In the event the Company consummates, prior to the Maturity Date, a public offering pursuant to a registration statement, then all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company simultaneously with the closing of the Offering at a price per share equal to 95% of the price at which shares are sold in the Offering.  In the event the Company has not consummated an Offering on or prior to May 30, 2010, all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company at a price per share equal to 90% of the closing price per share.  The shares of Common Stock that the Note shall be converted into shall be restricted securities. We have a total le nding facility from this investor of $10 million under the Convertible note and have drawn a total of $2 million as of December 31, 2009 and $3 million through March 25, 2010. See Subsequent Event Note 15.
The Company also entered into a Secured Loan Facility with Cathaya Capital L.P. pursuant to a Secured Convertible Promissory Note. Dr. Priscilla Lu, ZAP’s Chairman of the Board is also the general partner of Cathaya Capital L.P
The Note provides for an aggregate principal amount of up to $10 million in advances to be made to the Company by the Investor prior to October 1, 2012. The aggregate principal amount of the advances made under the Note
- 20 -
accrues interest at a rate per annum equal to the greater of (i) five percent (5%) and (ii) three percent (3%) plus prime. The aggregate principal amount of each advance made under the Note plus interest becomes due and payable to the Investor on the earlier of (i) the two year anniversary of the date such advance was made and (ii) December 31, 2012. The Note is convertible into shares of the Company’s Common Stock at a conversion rate, subject to any adjustments called for by the terms of the Note, of 2,000 shares of Common Stock for each $1,000 principal amount of the Note being converted. The Note is secured by the terms and conditions of a security agreement covering all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.  Additional warrants were also issued to the holder which grants the right to purchase up to six million shares of the Registrant’s Common Stock at a price of $0.50 per share.  The warrants expire on August 16, 2014. As of December 31, 2009 no advances were made to the Company from this Secured Loan Facility.2009.
 
We do not have a bank operating line of credit, and there can be no assurance that any required or desired financing will be available through bank borrowings, debt or equity offerings, or otherwise, on acceptable terms, ,ifif at all. If future financing requirements are satisfied through the issuance of equity securities, which might result in significant dilution in the net book value per share of common stock for our shareholders, and there is no guarantee that a market will exist for the sale of the our shares.
On January 11, 2011, Alex Wang the Co-CEO of ZAP entered into a private placement subscription agreement to provide ZAP with $5 million in exchange for 5 million shares of ZAP stock by April 15, 2011. ZAP has received a total of $2 million per the agreement at March 31, 2011. The remaining $3 million is due by April 15, 2011.
ZAP completed the acquisition of 51% of Jonway pursuant to that certain Equity Transfer Agreement entered into between ZAP and Jonway Group Co., Ltd., dated July 2, 2010, for a total purchase price of $30,580,000 of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently, Jonway Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway Grroup and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates.ZAP funded a portion of the purchase price of the acquisition through a Senior Secured Convertible Note and Warrant Purchase Agreement dated as of January 12, 2011, with China Electric Vehicle Corporation, or CEVC, a British Virgin Island company whose sole shareholder is Cathaya.
Pursuant to the agreement, (i) CEVC purchased from ZAP a Senior Secured Convertible Note in the principal amount of $19 million, (ii) ZAP issued to CEVC a warrant  exercisable for two years for the purchase up to 20,000,000 shares of ZAP’s Common Stock at $0.50 per share, subject to adjustments as set forth therein, (iii) ZAP, certain investors of ZAP and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009, (iv) ZAP, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certain Registration Rights Agreement, dated as of August 6, 2009, as amended, to grant certain registration rights relating to the note and the warrant, and (v) ZAP and CEVC entered into a Security Agreement securing the note with all of ZAP’s assets and property. The company believes there is some uncertainty regarding whether this $19 million note will be converted to equity or require cash payment in February 2012.
On March 31, 2011 ZAP made the final payment of $550,000 to Al Yousuf, LLC pursuant to the settlement agreement entered into between ZAP and Al Yousuf on December 27, 2010.
 
At present, we require additional capital to continue expanding our current operations.  The Company’s primaryIn particular, we require additional capital needs are: (i) to expand our presence into Asia, by partnering with an automobile manufacturer in China (ii) to continue development of our methodology for converting gasoline vehicles to electric (iii)and to continue building our dealer network and expanding ZAP’sour market initiatives. ZAPWe also requiresrequire financing to purchase consumer product inventory for the continued roll-out of new products (iv)  to add qualified sales and professional staff to execute on our business plan and (v) to expand our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias Roadster and other fuel efficient vehicles.
 
We do not believe that the commitments in Note 8 to our financial statement will result in a material impact on our liquidity and capital reserves through December 31, 2011.  ZAP believes that it has sufficient liquidity for the next 12 months of operations.

Critical Accounting Policies and Use of Estimates
 
Estimates

The discussion and analysispreparation of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S.United States generally accepted accounting principles which requires our managementthe Company to make estimates and assumptions affectingthat affect the reported amounts of assets, liabilities, revenue and liabilitiesexpenses, 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, atderivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates

Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), 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 in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company determines 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.
Derivative Financial Instruments
The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
The Company accounts for derivative instruments and debt instruments in accordance with the interpretative guidance of ASC 815 which codified SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 98-5”), and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”), and associated pronouncements related to the classification and measurement of warrants and instruments with conversion features. It is necessary for the Company to make certain assumptions and estimates to value derivatives and debt instruments.
46
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when management estimates collectibility 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. The allowance for doubtful accounts was $27,000 and $43,000 at December 31, 2010 and 2009, respectively.
Inventories
Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out basis) or market (net realizable value or replacement cost). The Company maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company’s products and corresponding demand were to decline, then additional reserves may be deemed necessary. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.
Off-Balance Sheet Arrangements
None.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.
Zap foreign currency exchange risks are as follows:
Zap benefits from a weaker dollar and is adversely affected by a stronger dollar relative to major currencies worldwide.  Accordingly, changes in exchange rates, and in particular a strengthening of the US dollar, may negatively affect the company’s consolidated revenues or operating costs and expenses as expressed in U.S. Dollars.  Adjustments resulting from the process of translating foreign functional currency financial statements into US dollars are included in accumulated other comprehensive income (loss) in common shareholders equity.  Foreign currency transaction gains and losses are included in current earnings.  China uses their currency as well as revenuesthe functional currency.

Item 8.  Financial Statements and expenses duringSupplementary Data.
The information required by Item 8 and the reporting period. The amounts estimated could differ from actual results.index thereto commences on the next page.


 
- 21 -47
 
Item 8.  Financial Statements.
Index to Consolidated Financial Statements
The following Financial Statements of ZAP and Reports of Independent Registered Public Accounting Firm have been filed as part of this Form 10-K:

Reports of Independent Registered Public Accounting Firm
23
Consolidated Balance Sheet as of December 31, 2009 and 2008
25
Consolidated Statement of Operations for the years ended December 31, 2009 and 200826
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2009 and 200827
Consolidated Statement of Cash Flows for the years ended December 31, 2009 and 200828
Notes to Consolidated Financial Statements
29



- 22 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
and Shareholders of ZAPZap


We have audited the accompanying consolidated balance sheetsheets of ZAP and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in shareholders’shareholders equity and cash flows for yeareach of the two years in the period ended December 31, 2009.2010.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.audits.

We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  WeThe Company is not required to have, nor were notwe engaged to perform, an audit of the Company’s internal control over financial reporting. Our audit 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial sta tements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides 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 ZAP as of December 31, 2009, and the consolidated results of its operations and its cash flows for  the year  ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ Friedman LLP                              
Marlton, New Jersey
March 31, 2010

- 23 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of ZAP
We have audited the accompanying consolidated balance sheets of ZAP as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits include 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 nonot such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial st atements,statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, ZAP has restated previously issued financial statements as of December 31, 2009 and for the year then ended.

In our opinion, the financial statements audited by usreferred to above present fairly, in all material respects, the consolidated financial position of ZAP as of December 31, 20082010 and 2009 and the consolidated results of its operations and its cash flowflows for each of the two years in the two-year period ended December 31, 2008,2010, in conformity with accounting principlesU.S. generally accepted in the United States.accounting principles.



/s/ Friedman LLP
East Hanover, NJ
 
April 14, 2011

/s/ Bagell, Josephs, Levine Company, LLC         
Marlton, New Jersey
March 31, 2009
This report is a copy of the previously issued report. The predecessor auditor has not reissued the report.

 
 
- 24 -48
 
ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 DECEMBER 31, 20092010 and 20082009
(In thousands, except share data)
 
ASSETS
Current assets: 12/31/09  12/31/08 
Cash and cash equivalents $4,800  $341 
Accounts receivable, net of allowance of $43 in 2009 and $33 in 2008  156   377 
Inventories, net of reserve of $259 and $526  1,999   3,043 
Prepaid non-cash professional fees  75   105 
Other prepaid expenses and other current assets  465   765 
         
Total current assets  7,495   4,631 
ASSETSASSETS 
 12/31/10  12/31/09 
    (Restated) 
Current assets:      
Cash and cash equivalents $1,503  $4,800 
Investment In Related Party  1,888   — 
Accounts receivable, net of allowance of $27 in 2010 and $43 in 2009  294   156 
Inventories- net of reserve of $619 in 2010 and $259 in 2009  1,822   1,999 
Prepaid non-cash professional fees  —   75 
Other prepaid expenses and other current assets  266   465 
        
Total current assets  5,773   7,495 
        
Property and equipment, net  3,802   4,335   173   3,802 
        
Other assets:                
Investment in non-consolidated joint venture  1,225   —   808   1,225 
Deposits and other  1,257   260 
Distribution fees for Jonway Products and Better Worlds        
Products - net of Amortization of $961 for 2010  15,599   — 
Deposit on Zhejiang Jonway Auto  11,000   — 
Deposits and other assets – net  159   1,257 
                
 $13,779  $9,226 
Total assets $33,512  $13,779 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES AND SHAREHOLDERS’ EQUITY 
        
Current liabilities:                
Current portion of long-term debt and short term notes $5,889  $2,976  $668  $5,889 
Accounts payable  458   474   328   458 
Accrued liabilities  2,046   1,575   2,197   2,046 
Deferred revenue  —   587 
6% Senior convertible debt, net of discount of $133  1,867   — 
        
6% Senior convertible debt, net of discount  —   1,867 
                
Total current liabilities  10,260   5,612   3,193   10,260 
                
Secured convertible note, less current portion  —   1,772 
Long term liabilities:        
Derivative liability  5,539   1,445 
                
Total long term liabilities  5,539   1,445 
                
Total Liabilities  10,260   7,384 
        
Total liabilities  8,732   11,705 
Commitments and contingencies                
Shareholders’ equity:                
                
Common stock;400 million shares authorized; no par        
value;104,029,107 and 64,630,608 shares issued        
and outstanding at December 31 2009 and 2008,respectively  138,712   126,347 
        
Common stock;400 million shares authorized; no par value; 207,254,789 and 104,029,107 shares issued and outstanding at December 31 2010 and 2009, respectively
  179,691   137,855 
Accumulated other comprehensive loss  ( 112)  — 
Accumulated deficit  (135,193)  (124,505)  (154,799)  (135,781)
                
Total shareholders’ equity  3,519   1,842   24,780   2,074 
                
 $13,779  $9,226 
        
Total liabilities and shareholders’ equity $33,512  $13,779 
 
See accompanying notes to consolidated financial statements.
 
 
- 25 -49
 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
 (In thousands; except per share data)
 
  Year ended December 31 
       
  2010  2009 
     (Restated) 
       
       
Net sales $3,816  $4,068 
Cost of goods sold  3,387   3,340 
         
Gross profit  429   728 
         
Operating expenses:        
Sales and marketing (non cash of $961 in 2010 and $0 in 2009)  2,123   1,187 
General and administrative (non-cash of $7,758 in 2010 and $6,152 in 2009,respectively)
  11,406   8,492 
Research and development  996   551 
Impairment loss on assets and goodwill  —   687 
         
Total operating expenses  14,525   10,917 
         
Loss from operations  (14,096)  (10,189)
         
Other income (expense):        
Interest expense, net  (1,322)  (504)
Other income (expense), net  (319)  8 
Change in fair value of derivative liabilities  (4,094)  (587)
Gain on extinguishment of debt  817   — 
         
Total Other expense  (4,918)  (1,083)
         
Loss before income taxes  (19,014)  (11,272)
Provision for income taxes  (4)  (4)
         
Net loss $(19,018) $(11,276)
         
Net loss per share attributable to common shareholders:        
Basic and diluted $(0.16) $(0.14)
Weighted average number of common shares outstanding:        
Basic and diluted  119,075   82,808 
   Year ended December 31 
   2009  2008 
   (in thousands) 
          
Net sales  $4,068  $7,588 
Cost of goods sold   3,340   6,789 
          
Gross profit         
    728   799 
          
Operating expenses:         
Sales and marketing   1,187   1,808 
General and administrative (non-cash share based expense of         
$5,132 in 2009 and $4,326 in 2008,respectively)   8,490   7,860 
Research and development   551   416 
Impairment loss on assets and goodwill   687   67 
          
Total operating expenses   10,915   10,151 
          
Loss from operations   (10,187)  ( 9,352)
          
Other income (expense):         
Interest expense, net   (504)  (395)
Other income (expense), net   8   (56)
          
          
    (496)  (451)
          
Loss before income taxes   (10,683)  (9,803)
Provision for income taxes   (4)  (4)
          
Net loss  $(10,687) $(9,807)
          
Net loss per share attributable to common shareholders:         
Basic and diluted  $(0.13) $(0.16)
Weighted average number of common shares outstanding:         
Basic and diluted   82,808   59,567 

See accompanying notes to consolidated financial statements.
 
 
- 26 -50
 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
 (In thousands)

  Common stock     Accumulated    
        
Accumulated
  Comprehensive    
  Shares  $  Deficit  Loss  Total 
                 
                 
                 
Balance at December 31, 2008  64,630  $126,347  $(124,505) $—  $1,842 
                     
Cumulative effect of adoption of new accounting guidance      (857)          (857)
                     
Issuance of common stock for:                    
                     
Consulting and other services  5,768   1,419           1,419 
Cash  24,400   6,100           6,100 
Deposit Acquisition  4,000   1,000           1,000 
Employee Compensation  5,231   1,053           1,053 
                     
Fair value of warrants and options issued for:                    
Consulting and other services      51           51 
Employee compensation      2,609           2,609 
Beneficial conversion feature                    
Associated with senior                    
Convertible debt      133           133 
                     
Net loss (Restated)          (11,276)      (11,276)
                     
Balance at December 31, 2009 (Restated)  104,029  $137,855  $(135,781) $—  $2,074 
                     
Issuance of common stock for:                    
                     
Consulting and other services  1,807   957           957 
Cash  51,498   13,042           13,042 
Employee Compensation  352   197           197 
Purchase of fixed assets and intangibles  479   189           189 
Conversion of Samyang debt  8,090   5,259           5,259 
Distribution fees for Jonway Products and                    
Better Worlds Products  36,000   16,560           16,560 
Management agreement Cathaya Capital  5,000   2,500           2,500 
                     
Fair value of warrants and options issued for:                    
Consulting and other services      407           407 
Employee compensation      2,058           2,058 
Beneficial conversion feature                    
Associated with senior                    
Convertible debt      667           667 
Change in unrealized gains on available for sale securities              (112)  (112)
Net loss          (19,018)      (19,018)
                     
Balance at December 31, 2010  207,255  $179,691  $(154,799) $( 112) $24,780 
 
  Common stock     
Common
stock
issued
    
  Shares     
Accumulated
Deficit
  
as loan
collateral
  Total 
                     
Balance at December 31, 2007  57,478  $122,672   (114,698) $(1,549) $6,425 
                     
                     
                     
Issuance of common stock for:                    
  Inventory and other assets  238   155           155 
  Cancellation of collateral  (1,291)  (1,549)      1,549   — 
  Consulting and other services  3,607   1,639           1,639 
  Employee compensation  870   585           585 
  Settlement of obligations  1,012   764           764 
  Exercise of warrants and options  173   72           72 
  Principle payments and conversion of convertible debt  2,543   743           743 
                        
Fair value of warrants and options issued for:                    
  Consulting and other services      200           200 
  Settlement of obligations      108           108 
  Employee compensation      958           958 
 Net loss          (9,807)      (9,807)
                     
                     
Balance at December 31, 2008  64,630  $126,347  $(124,505) $—  $1,842 
                     
                     
                     
Issuance of common stock for:                    
                     
  Consulting and other services  5,768   1,419           1,419 
  Cash  24,400   6,100           6,100 
  Deposit Acquisition  4,000   1,000           1,000 
  Employee Compensation  5,231   1,053           1,053 
                     
Fair value of warrants and options issued for:                    
  Consulting and other services      51           51 
  Employee compensation      2,609           2,609 
Beneficial conversion feature associated with senior convertible debt      133           133 
 Net loss          (10,687)      (10,687)
                     
Balance at December 31, 2009  104,029  $138,712  $(135,193) $—  $3,519 
See accompanying notes to consolidated financial statements.
 
 
- 27 -51
 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 (In thousands)
 
 Year ended December 31,  Year ended December 31, 
            
 2009  2008  2010  2009 
 (in thousands)     (Restated) 
Cash from Operating activities:        
      
      
Operating activities:      
Net loss $(10,687) $( 9,807) $(19,018) $(11,276)
Items not requiring the current use of cash:        
Amortization of note discount and deferred offering        
Costs  —   156 
Adjustments to reconcile net loss to cash (used in) operating activities:        
Stock-based employee compensation  3,662   1,852   2,660   3,662 
Stock-based compensation for consulting and other        
services  1,470   2,753 
Stock-based compensation for interest and other        
penalties  —   17 
Stock-based compensation for consulting and other services  1,032   1,470 
Stock-based compensation for management fees  2,500   — 
Gain on Debt extinguishment  (818)  — 
Amortization of Distribution agreements  961   — 
Depreciation and amortization  322   215   117   322 
Impairment of fixed assets and goodwill  687   67 
Amortization of beneficial conversion feature  799   — 
Allowance for inventory obsolescence  360     
Impairment of fixed assets  —   687 
Allowance for doubtful accounts  10   (139)  30   11 
Changes in other items affecting operations:        
Impairment of other investments  90   — 
Investment in Joint Venture and other investments  417   — 
Interest expense  260   — 
Change in fair value of derivative liability  4,094   587 
        
Changes in assets and liabilities:        
Accounts receivable  211   135   (122)  211 
Inventories  623   (1,606)  (183)  623 
Prepaid expenses  301   (20)
Other assets  —   (150)
Prepaid expenses and other assets
  220   301 
Accounts payable  (16)  345   (130)  (16)
Accrued liabilities  471   (677)  575   472 
Deferred revenue  (587)  (165)  —   (587)
                
Cash used for operating activities  (3,533)  (7,024)  (6,156)  (3,533)
                
Cash from Investing activities:        
Investing activities:        
Deposit on of Jonway Auto  (10,000)  — 
Purchase of marketable securities  (2,000)  — 
Investment in unconsolidated joint venture  (1,225)  —   —   (1,225)
Acquisition of property and equipment  (22)  (286)  (70)  (22)
Proceeds from sale of equipment  —   176   18   — 
                
Cash used for investing activities  (1,247)  (110)  (12,052)  (1,247)
                
Cash from Financing activities:        
Financing activities:        
Issuance of common stock  6,100   —   13,043   6,100 
Exercise of warrants and options  —   72 
Pay-off of convertible debt  —   (431)
Proceeds from issuance of convertible debt  2,000   475   3,000   — 
Re-issuance of convertible debt, net of offering costs      2,000 
Proceeds from debt, net of issuance costs  1,139   2,976   149   1,139 
Borrowings (repayments) on long-term debt  —   44 
Payment of short term debt  (1,281)  — 
        
Cash provided by financing activities  9,239   3,136   14,911   9,239 
                
Increase (decrease) in cash and cash equivalents  4,459   (3,998)  (3,297)  4,459 
Cash and cash equivalents at beginning of year  341   4,339   4,800   341 
                
Cash and cash equivalents at end of year $4,800  $341  $1,503  $4,800 
 
See accompanying notes to consolidated financial statements.
 
 
- 28 -52
 
ZAP AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - ORGANIZATION AND OPERATIONS:
 
ZAP (“The Company” or “ZAP”), was incorporated in California in September 1994.1994 (together with its subsidiaries, “the Company,” or “ZAP”). ZAP markets many forms of advanced transportation, including alternative energy and fuel efficient automobiles, motorcycles, bicycles, scooters, personal watercraft, hovercraft, neighborhood electric vehicles, commercial vehicles and more. The Company also operates a retail car lot for sales of conventional and electric vehicles. The Company’sCompany's business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produ cedproduced commercially on an economically competitive basis. The Company intends to further expand its technological expertise through an aggressive plan of acquisitions of companies with exciting new products in the advanced transportation industry and strategic alliances with certain manufacturers, distributors and sales organizations. A summary of significant accounting policies is as follows:
 
PrinciplesZhejiang Jonway Automobile Co., Ltd. is a limited liability company incorporated in Sanmen County, Zhejiang Province of consolidationthe People’s Republic of China (“the PRC”) on April 28, 2004 by Jonway Group Co., Ltd. (“Jonway Group”) and three individuals. Jonway Group is under the control of three individuals, Wang Huaiyi, Wang Gang (son of Wang Huaiyi) and Wang Xiao Ying (daughter of Wang Huaiyi) (collectively referred to as “Wang Family”).   On January 21, 2011, ZAP completed its acquisition of 51% of the equity shares of the Company.
The Company’s approved scope of business operations includes the production and sale of vehicle spare parts, and sale of vehicles of UFO brand vehicles.  The principal activities of the Company are the production and sale of automobile spare parts, and the consignment production and distribution of SUVs.
On January 21, 2011, the Company completed the acquisition of 51% of the the equity shares of Zhejiang Jonway Automobile Co., Ltd.. (“Jonway”) for a total purchase price of $30,580,000 of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently, Jonway Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway Grroup and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates. The Company believes that the acquisition will allow it to expand its distribution network and give it access to the rapidly growing Chinese market for electric vehicles.
Liquidity and Capital Resources

In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in related party securities, and our operating and capital expenditure commitments.  Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.  At December 31, 2010, we believe that we will have sufficient liquidity required to conduct operations through December 31, 2011.

Our principal sources of liquidity consist of our existing cash on hand, our investment in related party securities and our $5 million private placement subscription agreement with Alex Wang, the Co-CEO of ZAP.  On March 31, 2011 ZAP received a total of $2 million under this agreement and the remaining $3 million is due by April 15, 2011.

In January 2011, ZAP issued $19 million of convertible debt in order to make a payment on the Jonway acquisition.  The Company believes there is some uncertainty regarding whether this $19 million will be converted to equity or require cash payment in February 2012.

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

We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both.  Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.  However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
NOTE 2-RESTATEMENT OF 2009 FINANCIAL STATEMENTS
On January 1, 2009, the Company adopted new accounting guidance (ASC 815-40) formerly EITF 07-5 “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”) that required additional analysis as to whether or not stock purchase warrants are indexed to the Company’s stock, a condition that is required to attain equity accounting.  Upon adoption of this guidance, the company concluded that its previously issued stock purchase warrants should be classified as equity and therefore, the adoption of the new guidance did not have any impact on the historical financial statements or on the 2009 financial statements.
In connection with the review of certain equity transactions in 2010, the company determined that certain stock purchase warrants issued in prior years should have been classified as derivative liabilities due to the presence of “price protection” provisions in those warrant agreements.  These provisions require that the Company modify existing warrants (as to the actual number of warrants and their exercise price) in the event that the company issues subsequent equity (or equity linked instruments) at a price below the exercise price of the existing warrants.  As a result, the Company has restated its 2009 annual financial information to correct the misapplication of the new accounting guidance related to the accounting and classification of stock purchase warrants.  This correction resulted in the following adjustments:
Restatement of prior quarters as reported and restated to give effect to proper recording of derivative liabilites:
53

  (unaudited)  (unaudited)  (unaudited)    
Amounts in (000's) 
Qtr 1
3/31/09
  
Qtr 2
6/30/09
  
Qtr 3
9/30/09
  
Year End
12/31/09
 
Total liabilities as reported $8,876  $9,122  $12,505  $13,779 
Adjustments  477   1,607   1,192   1,445 
Restated total liabilites& stockholders’ equity $9,353  $10,729  $13,697  $15,224 
Net loss as reported $(2,008) $(2,555) $(2,922) $(10,687)
Adjustments  381   (1,130)  415   (589)
Restated loss $(1,627) $(3,685) $(2,507) $(11,276)

  (unaudited)  (unaudited)  (unaudited) 
Amounts in (000s) 
Qtr 1
3/31/10
  
Qtr 2
6/30/10
  
Qtr 3
9/30/10
 
Total liabilities as reported $14,503  $8,594  $22,422 
Adjustments  1,053   1,329   1,703 
Restated total liabilites & stockholders’ equity $15,556  $9,923  $24,125 
Net loss as reported $(3,248) $(2,206) $(1,888)
Adjustments  392   (276)  (373)
Restated loss $(2,856) $(2,482) $(2,261)





54
NOTE-3 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
 
The accompanying consolidated financial statements include the accountsfinancial statements of ZAP and its wholly owned subsidiaries: Voltage Vehicles (“VV”) and ZAP Stores for the years ended December 31, 20092010 and 2008. All subsidiaries are 100% owned by ZAP.2009. All significant inter-company transactions and balances have been eliminated.

Revenue Recognition

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

-The Company has received a binding purchase order or similar commitment 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 distribution center to a common carrier acceptable to the purchaser. The Company’s customary shipping terms are FOB shipping point; and

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

The Company provides no price protection. Product sales are net of promotional discounts, rebates and return allowances.
The Company does not recognize sales taxes collected from customers as revenue.

Deferred Revenue

Voltage Vehicles sells licenses to auto dealerships under  We account for our 37.5% interest in the ZAP name. The termHangzhou Joint Venture using the equity method of the license agreements range from four to five years and among other things, call for the licensee to purchase a minimum number of vehicles from ZAP each year. The initial value of these agreements were classified them as current deferred revenue.  The Company’s policy is to begin recognizing revenue when we began delivering a substantial number of vehicles to these dealerships on a regular basis.accounting.  During the first quarter of 2007, the Company began recognizing revenue on various license agreements on a straight-line basis over the term of the agr eements.  The Company has recognized $587,000 and $165,000 of revenue for the year ended December 31, 2009 and 2008 resulting in2010, ZAP Hangzhou incurred an ending balance in deferred revenueoperating loss of $848,000 of which $318,000 is zero- and $587,000 at December 31, 2009 and 2008.our share.
 
Use of Estimates
 
The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
 
Concentration of Credit Risk
- 29 -
 
Allowance for doubtfulFinancial instruments which subject the Company to potential credit risk consist of its cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with one high credit quality financial institution. Deposits may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal. The Company has not experienced any losses to date on its deposits.
 
The Company performs ongoing credit evaluations of its customers’customers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.
The Company currently relies on various outside contract manufacturers in China to supply electric vehicles and products for its customers. Although management believes that other contract manufactures could provide similar services and intends to transition its manufacturing to Jonway’s facilities in Sanmen, China, but, if these Chinese companies are unable to supply electric vehicles and the Company is unable to transition manufacturing to Jonway’s facilities or find alternative sources for these product and services, the Company might not be able to fill existing backorders and/or sell more electric vehicles. Any significant manufacturing interruption could have a material adverse effect on the Company’s business, financial condition and generally, requires no collateral from its customers. results of operations.
Revenue Recognition
The Company records revenues 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 receivableand estimated customer returns.
Shipping and handling costs
Shipping and handling costs have been included in cost of goods sold.
55
Research and development
Research and product development costs are expensed as incurred.
Stock-based compensation
The Company accounts for stock-based compensation under the provisions of FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), 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 adopted ASC 718 (previously Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123R) on January 1, 2006 using the modified prospective method. 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 endtime of each period based on an analysisgrant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates. See Note 13 “Stockholders’ Equity” for a complete discussion of individual agedour equity compensation programs and the fair value assumptions used to determine our stock-based compensation expense.
The Company accounts receivable balances. As a result of this analysis,for stock-based compensation awards and warrants granted to non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees (“ASC 505-50”). Under ASC 505-50, the Company believes that its allowancedetermines 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 doubtful accountsperformance by the counterparty to earn the equity instruments is adequatereached, or (2) the date at which the counterparty’s performance is complete.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established. At December 31, 2010 and 2009, all deferred tax assets, without offsetting liabilities in the same jurisdiction, were fully reserved.
Net Loss Per Share attributable to common stockholders
Basic and diluted net loss per share is computed by dividing consolidated net loss by the weighted-average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding common stock options convertible debt and warrants, have not been included in the computation of diluted net loss per share for all periods presented as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. Outstanding common stock options and warrants totaled 84.1 million shares and 95.1 million shares at December 31, 2010 and 2009, and 2008. If the financial condition of the Company’s customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.respectively.
 
Cash and cash equivalents
 
The Company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the company and are comprised of investments having maturities of three months or less when purchased.  The Company considers all highly liquid debt instrumentsinvestments with an original maturity of three months or less to be cash equivalents. equivalents
Marketable equity securities
The Investment in a Related Party is comprised of marketable equity securities, restricted until March 2011, which are classified as available-for-sale and recorded at fair value. The securities are shares of stock in Samyang Optics Ltd., which are traded on the Korean stock exchange.  ZAP’s ownership in not material to Samyang Optics Ltd. Net unrealized holding gains and losses, net of tax, are reported as a separate component of shareholders’ deficit, except where holding losses are determined to be “other-than-temporary”, whereby the losses are reported in gains and losses on investments in the consolidated statement of operations. Gains and losses on disposals of marketable equity securities are determined using the specific identification method.
56
Fair value of financial instruments
The Company maintainsmeasures its financial assets and liabilities in accordance with U.S. generally accepted accounting principles. The fair value of a financial instrument is the majorityamount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company's financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. The fair value of debt is not determinable due to the terms of the debt and the lack of a comparable market for such debt.  These tiers include:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs other than quoted prices in active markets that are directly or indirectly observable;
Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its cash balances with one financial institution. At timesown assumptions and methodologies that result in management’s best estimate of fair value.
 The change in fair value of derivative liabilities is classified in other income (expense) in the balances may exceed federally insured limits. Company’s Statement of Operations.  The fair value of the Company’s derivative liabilities related to stock purchase warrants was determined using the Black-Scholes option pricing model – a Level 3 input.
Derivative Financial Instruments
The Company hasgenerally does not experienced any losses inuse derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such accounts and believes itas warrants, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not exposedwithin the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
The Company accounts for derivative instruments and debt instruments in accordance with the interpretative guidance of ASC 815 which codified SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 98-5”), and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”), and associated pronouncements related to the classification and measurement of warrants and instruments with conversion features. It is necessary for the Company to make certain assumptions and estimates to value derivatives and debt instruments.
The following table set forth a summary of changes in the fair value of Level 3 liabilities for the years ended December 31, 2010 and 2009 (in thousands):
  Balance  Cumulative  Change in  Balance 
  12/31/2008  Effect  fair value  12/31/2009 
Derivative Liabilities $—  $858  $587  $1,445 
  Balance  Cumulative  
Change in
  Balance 
  
12/31/2009
  Effect  fair value  
12/31/2010
 
Derivative Liabilities $1,445  $—  $4,094  $5,539 
The company does not have any non financial assets or liabilities that it measures at fair value.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts when management estimates collectibility 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 credit risk on cashcustomer, overall customer credit-worthiness and cash equivalents.historical experience. The allowance for doubtful accounts was $27,000 and $43,000 at December 31, 2010 and 2009, respectively.
 
Inventories
 
Inventories consist primarily of vehicles, (gasboth gas and electric),electric, parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out method)basis) or market.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.
 
Inventory reserve policy
 
The Company records inventory at the lower of cost or market and establishes reserves for slow moving or excess inventory, product obsolescence and valuation impairment. In determining the adequacy of its reserves, at each reporting period the Company analyzes the following, among other things:
57
 
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecasted sales;
o Product obsolescence; and
o Technological innovations.
Property and equipment
 
Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements. Property and equipment is stated at cost, net of accumulated depreciation and amortization, and is depreciated or amortized using straight-line and accelerated methods over the asset’sasset's estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:
 
Machinery and equipment5 years
Computer equipment and software3-5 years
Office furniture and equipment5 years
Vehicles5 years
Leasehold improvements10 years or life of lease,
whichever is shorter
Building and improvements39.530 years

 
- 30 -
Long-lived assets
 
Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimate destimated net realizable value.
 
Intangible Assets
Intangible assets consist of patents, trademarks, government approvals and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for the EPA license and 5 years for the customer relationships. Costs incurred by the Company in connection with patent, trademark applications and approvals from governmental agencies such as the Environmental Protection Agency, including legal fees, patent and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over an estimated economic life of the asset, generally seven years, commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred.
Advertising costs
 
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to $113,000$185,000 and $218,000$113,000 for the years ended December 31, 20092010 and 2008,2009, respectively.
 
Product warranty costs
Warranty

The Company provides 30 to 90 day warranties on its personal electric products and provides six month warranties for the Xebra® and its safety recall, for the ZAP Truck and ZAP Shuttle Van vehicles and other varying warranties. The Company records the estimated cost of the product warranties at the datetime of sale.sale using the estimated costs of products warranties based on historical results. The estimated cost of warranties has not been significant to date. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required.

The Company has provided a 6 month warranty for the Xebra® and its safety recall, for the ZAP Truck and ZAP Shuttle Van  vehicles and other varying warranties. Changes in the Company’s warranty liability during the years ended December 31, 2009 and 2008 are as follows (in thousands):
 
  2010  2009 
          Balance as of  January 1, $296  $253 
          Warranties expired  (203)  — 
          Provision for warranties  120   309 
          Charges against warranties  (61)  (266)
          Balance December 31, $152  $296 
  2009  2008 
Balance as of  January 1, $253  $293 
Provision for warranties  309   113 
Charges against warranties  (266)  ( 153)
Balance December 31, $296  $253 
Shipping and handling costs
Shipping and handling costs have been included in cost of goods sold.
Research and development
Research and product development costs are expensed as incurred.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires 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.
Risks and uncertainties
The Company relies on various outside contract manufacturers located in  China to supply  electric vehicles and products for our customers.  If these Chinese companies are unable to supply electric vehicles and the Company is unable to obtain alternative sources for these products and services, the Company might not be able to fill existing backorders and/or to sell more electric vehicles.
 
 
- 31 -58
 
Fair value of  financial instruments
 
The Company measures its financial assets and liabilities in accordance with U.S. generally accepted accounting principles. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities and short term debt, the carrying amount approximates fair value because of the short maturities.Comprehensive loss
 
Comprehensive Loss
The Company has no components of other comprehensive loss other than its net loss, and, accordingly, its comprehensive loss is equivalent to itsrepresents the net loss for the periods presented.period plus the results of certain changes to shareholders’ equity that are not reflected in the consolidated statements of operations. The Company’s comprehensive loss consists of net losses and unrealized net losses on investments.
investments.

  2010  2009 
Net loss  (19,018)  (11,276)
Decrease in net unrealized gains on available-for-sale securities  (112)  — 
         
Comprehensive loss  (19,130)  (11,276)
 
Stock-based compensationRecent Accounting Pronouncements
 
WeIn January 2010, FASB issued ASU 2010-2, “Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification”. ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB ASC, originally issued as SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements”. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have stock compensation plans for employeesa controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and directors, which are describedmeasures any retained investment in Note 7 to our consolidated financial statements.

Share-based compensation is measured asthe subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the awardretained investment in the subsidiary and its carrying amount at its grantthe date basedthe subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The adoption of ASU 2010-2 will not have a material impact on the estimated numberCompany's results of awardsoperations or financial position.
In January 2010, FASB issued ASU 2010-6, “Improving Disclosures about Fair Measurements". ASU 2010-6 provides amendments to subtopic 820-10 that are expected to vest,require separate disclosure of significant transfers into and recorded over the applicable service period. In the absenceout of an observable market price for a share-based award, theLevel 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-6 is based uponeffective for financial statements issued for annual reporting periods after beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning December 15, 2010. The adoption of ASU 2010-06 will not have a valuation methodology that takes into consideration various factors, including the exercise price of the award, the expected term of the award, the current price of the underlying shares, the expected volatility of the underlying share price, the expected dividendsmaterial impact on the underlying sharesCompany’s results of operations or financial position.
In February 2010, FASB issued ASU 2010-9 “Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements”. ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the risk-free interest rate. Compensation expense has been recognized basedSEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The adoption of ASU 2010-06 will not have a material impact on the estimated grant date fair value method using the Black-Scholes valuation model.
The dividend yieldCompany’s results of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based upon historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is derived from the average U.S. Treasury Constant Maturity Rate during the period, which approximates the rate in effect at the time of the grant. Our unvested options vest over the next three years. Our options generally have a 10-year term. The expected term is calculated using the simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based on the above assumptions, the weighted-average fair values of the options granted under the stock option pla ns for the years ended December 31, 2009 and 2008 was $0.37 and $0.80, respectively.  As required by GAAP, we now estimate forfeitures of employee stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined based on historical experience.  Estimated forfeitures are now adjusted to actual forfeiture experience as needed.operations or financial position.
 
In March 2010, FASB issued ASU 2010-11 “Derivatives and Hedging (Topic 815) Scope Exception Related to Embedded Credit Derivatives”. ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements. Only one form of embedded credit derivative qualifies for the exemption—one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The estimatesamendments in this Update are effective for each reporting entity at the beginning of share-based compensation expenses are significant to ourits first fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each entity’s first fiscal quarter beginning after issuance of this Update. The adoption of ASU 2010-11 will not have a material impact on the Company’s results of operations or financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as related to our operational performance, we exclude estimated share-based compensation expense when evaluating the business performance of our operations.

position.
 
 
- 32 -59
 
Theoretical valuation modelsIn April 2010, FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 addresses the classification of a share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this Update should be effective for fiscal years, and market-based methodsinterim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are evolving and mayinitially applied. The Company expects the adoption of ASU 2010-13 will not have a material impact on the Company’s results of operations or financial position.
April 2010, FASB issued ASU 2010-18 “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (A consensus of the FASB Emerging Issues Task)”. ASU 2010-18 clarifies that modifications of loans that are accounted for within a pool under Subtopic 310-30, which provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition, do not result in lowerthe removal of those loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40. The amendments in this Update are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or higher fair value estimatesannual period ending on or after July 15, 2010. The Company expects the adoption of ASU 2010-18 will not have a material impact on the Company’s results of operations or financial position.
In July 2010, FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for share-based compensation. The timing, readiness, adoption, general acceptance, reliabilityCredit Losses”. ASU 2010-20 improves the disclosures that an entity provides about the credit quality of its financing receivables and testingthe related allowance for credit losses. As a result of these methodsamendments, an entity is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise,required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting period ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company expects the adoption of ASU 2010-20 will not have a material impact on the Company’s results of operations or financial analyses, correlation analyses, integrated softwarestatements.
In August 2010, FASB issued ASU 2010-21 “Accounting for Technical Amendments to Various SEC Rules and databases, consulting fees, customizationSchedules. Amendments to SEC Paragraphs Pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and testingCodification of Financial Reporting Policies”. ASU 2010-21 amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies. The Company expects the adoption of ASU 2010-21 will not have a material impact on the Company’s results of operations or financial statements.
In August 2010, FASB issued ASU 2010-22 “Accounting for adequacyVarious Topics-Technical Corrections to SEC paragraphs (SEC Update)”. ASU 2010-22 amends various SEC paragraphs based on external comments received and the issuance of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses.SAB 112, which amends or rescinds portions of certain SAB topics. The uncertainties and costsCompany expects the adoption of these extensive valuation efforts may outweighASU 2010-22 will not have a material impact on the benefits to investors. Company’s results of operations or financial statements.
60
 
Net loss per share attributable to common shareholders
Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per common share is similar to the computation of basic net loss per share attributable to common shareholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants to the extent they are dilutive using the treasury stock method. The weighted average shares used in computing basic and diluted net loss per share attributable to common shareholders were the same for the two years ended December 31, 2009 and 2008. Options, and warrants for 95,141,712 shares and 59,140,633 shares were excluded from the computation of loss per share at December 31, 2009 and 2008, respectively, as their effect is anti-dilutive. In addition, $2 million of convertible debt for 2009 was excluded from the calculation.

NOTE 2 -4 – INVENTORIES
 
Inventories at December 31, 20092010 and 20082009 are summarized as follows (thousands)(in thousands):

  
2010
  
2009
 
       
Advanced technology vehicles $1,163  $1,138 
Vehicles-conventional  345   389 
Parts and supplies  656   528 
Finished goods  277   206 
         
   2,441   2,258 
Less - inventory reserve  (619)  (259)
         
  $1,822  $1,999 
 
  2009  2008 
         
Advanced technology vehicles $1,138  $1,977 
Vehicles-conventional  389   518 
Parts and supplies  528   721 
Finished goods  203   353 
         
   2,258   3,569 
Less - inventory reserve  (259)  (526)
         
  $1,999  $3,043 
         
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Any modifications 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 modifications are determined by management. Changes in the Company’s inventory reserve during the years ended December 31, 20092010 and 20082009 are as follows (in thousands):
 
 2009  2008  2010  2009 
Balance as of January 1, $526  $302  $259  $525 
Provision for slow moving inventory  336   307   360   336 
Write-off of slow moving inventory  (603)  ( 83)  (—)  (602)
                
Balance as of December 31, $259  $526  $619  $259 
        
 
NOTE 35 - PROPERTY AND EQUIPMENT
 
Property and equipment at December 31, 20092010 and 20082009 are summarized as follows (thousands)(in thousands):
 
  2009  2008 
Land $1,078  $1,078 
Buildings and improvements  3,224   3,184 
Machinery and equipment  106   126 
Computer equipment and software  167   258 
Office furniture and equipment  73   73 
Leasehold improvements  36   53 
Vehicles  379   630 
         
   5,063   5,402 
Less - accumulated depreciation        
    and amortization  (1,261)  (1,067)
         
  $3,802  $4,335 
         
  2010  2009 
Land $—  $1,078 
Buildings and improvements  —   3,224 
Machinery and equipment  106   106 
Computer equipment and software  187   167 
Office furniture and equipment  73   73 
Leasehold improvements  36   36 
Vehicles  379   379 
         
   781   5,063 
Less - accumulated depreciation        
    and amortization  (608)  (1,261)
         
  $173  $3,802 
 
 
61
The land and buildings, building improvements and certain equipment, with a net book value of $3.7 million and $3.9$3.6 million at December 31, 2009 and 2008 respectively, arewas pledged as security for certain indebtedness due Al Yousuf  (see Note:5)Note 8).  ).  On April 5, 2010,  ZAP transfered the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and  transfered the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in partial settlement of amounts due Al Yousuf, LLC.
Depreciation expense was approximately $100,000 and amortization expense$289,000 for the years ended December 31, 20092010 and 2008 was approximately $322,000 and $215,000, respectively.
2009.
 
NOTE 46 - OTHER ACCRUED LIABILITIESDISTRIBUTION AGREEMENTS
 
Accrued liabilities atDistribution agreements as of December 31, 2010 and 2009 and 2008 consisted of the followingare presented below (in thousands):
 
  2009  2008 
Accrued professional fees $450  $443 
Accrued payables  76   128 
Customer deposits  264   292 
Warranty liabilities  296   253 
Interest payable  567   89 
Other accrued expenses  393   370 
         
  $2,046  $1,575 
         
  2010  2009 
       
Better World Products $2,160   — 
Jonway Products  14,400   — 
         
   16,560   — 
         
Less amortization  (961)  — 
         
  $15,599   — 
 

Amortization expense related to these distribution agreements for the years ended December 2010 and 2009 was $961,000 and zero, respectively.  The estimated future amortization expense, as follows (in millions):
Year ended December 31,   
2011 $2.1 
2012  2.1 
2013  1.4 
2014  1.4 
2015  1.4 
Thereafter  7.2 
Total $15.6 

 
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NOTE 5 –  SHORT-TERM DEBTPROMISSORY NOTE
On July 30, 2008, ZAP (the “Company”) executed a Promissory Note for a $10 million credit line (the “Note”) and a Deed of Trust, Assignment of Leases and Rents and SecurityDistribution Agreement and Fixture Filing (the “Security Agreement”), both in favor of Al Yousuf LLC (the “Lender”). The Al Yousuf Group is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf, who is also a Director of ZAP.  The line of credit is not being used after May 2009 due to a legal dispute.  See Note 12.
The following description is a summary of the material terms and conditions of both the Note and the Security Agreement.
The maximum principal loan under the Note is $10,000,000. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building which was held by an outside party. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. Other advances shall be for (i) the purposes of inventory from June 1, 2008 consistent with the currently applicable budget of the Company, as approved by its board of directors (an “Inventory Advance”) or (ii) general working capital to be used consistently with the Company’s budget (a “Working Capital Advance”). The interest rate shall accrue daily at a rate per annum equal to the greater of (i) one month LIBOR plus 3% per annum and ( ii) eight percent (8.00%) per annum, commencing on the date of the Note.
The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. Repayment of an Inventory Advance is due four (4) months after the date of such Advance. Repayment of a Working Capital Advance is due six (6) months after the date of such Advance. The repayment term may be extended upon written request of the Company and at the Lender’s sole discretion. The Note is pre-payable in whole or in part without penalty and upon 30 days’ written notice to Lender. All principal and interest due under the Note is secured by the corporate headquarters building in Santa Rosa, California.

The Note contains customary Events of Default, including but not limited to the following: (i) failure by the Company to make any scheduled payment of principal, interest or other amounts due under the Note, (ii) failure to pay-off the Note upon the Maturity Date, (iii) any representation or warranty made in the Loan Documents by the Company being found false in any material respect, (iv) consent by the Company to appoint a conservator or liquidator in a bankruptcy proceeding relating to the Company or all or substantially all of its assets and (v) failure of the Company to maintain insurance required pursuant to the Loan Documents. Upon the occurrence of an Event of Default, the Note shall become due and payable and the interest rate shall increase by 3.00% per annum. All principal and interest due under the Note is secured by th e Company’s corporate headquarters building.
On May 14, 2009 we received a Notice of Delinquent Payments from Mr. Hossein Haghighi, the Chief Financial Officer of Al Yousuf LLC, notifying us that an outstanding principle for inventory advances of $3.4 million plus monthly interest payments has not been paid as required by a $10 million Promissory Note. Mr. Haghighi further indicated that AL Yousuf LLC intended to enforce the collection of the total amounts due under the terms of the note against the Company. The collateral for the note is our corporate headquarters building and land located in Santa Rosa California. The total due on the note is approximately $5.8 million at December 31, 2009 with inventory advances totaling $3.4 million and a building loan of $1.8 million and interest of approximately $600K.

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On September 25, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SW 245950) was filed in the Superior Court for the County of   Sonoma.  The complaint alleges causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The President of Al Yousuf LLC, Eqbal Al Yousuf, is a member of ZAP’s board of directors.  In its Complaint, Al Yousuf LLC claims that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Plaintiff seeks to foreclose on the property that secures the loan agreement and recover attorney’s fees and obtain such other and further relief as the Court may deem just and prop er.  ZAP has responded to the Complaint.  The parties are engaged in settlement discussions.
In addition the Company borrowed $760,000 from Portable Energy LLC, a private equity company equally owned 50% by ZAP and Al Yousuf. These borrowings are due on demand.

CONVERTIBLE DEBT

6% Senior Convertible Notes

On December 31, 2009, ZAP issued to Samyang Optics a subordinated convertible promissory note in the principal amount of $2 million dollars  pursuant to a note purchase agreement entered into with the investor on even date therewith. 
In the event the Company consummates, prior to the Maturity Date, a public offering pursuant to a registration statement , then all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company simultaneously with the closing of the Offering at a price per share equal to 95% of the price at which shares are sold in the Offering.  In the event the Company has not consummated an Offering on or prior to May 30, 2010, all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company at a price per share equal to 90% of the closing price per share.  The shares of Common Stock that the Note shall be converted into shall be restricted securities. We have a total lending facility from this investor of $10 million under the Convertible note and have drawn a total of $2 million as of December 31, 2009 and $3 million through March 25, 2010. See Subsequent Event Note 15.
Secured Convertible Loan Facility
The Company also entered into a Secured Loan Facility with Cathaya Capital L.P. pursuant to a Secured Convertible Promissory Note. Dr. Priscilla Lu ZAP’s Chairman of the Board is also the general partner of Cathaya Capital L.P. The Note provides for an aggregate principal amount of up to $10 million in advances to be made to the Company by the Investor prior to October 1, 2012. The aggregate principal amount of the advances made under the Note accrues interest at a rate per annum equal to the greater of (i) five percent (5%) and (ii) three percent (3%) plus prime. The aggregate principal amount of each advance made under the Note plus interest becomes due and payable to the Investor on the earlier of (i) the two year anniversary of the date such advance was made and (ii) December 31, 2012. The Note is convertible into shares of t he Company’s Common Stock at a conversion rate, subject to any adjustments called for by the terms of the Note, of 2,000 shares of Common Stock for each $1,000 principal amount of the Note being converted. The Note is secured by the terms and conditions of a security agreement covering all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.  Additional warrants were also issued to the holder which grants the right to purchase up to six million shares of the Registrant’s Common Stock at a price of $0.50 per share.  The warrants expire on August 16, 2014. As of December 31, 2009 no advances were made to the Company from this Secured Loan Facility.
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NOTE 6 - INCOME TAXES
The provision for income taxes for all periods presented in the consolidated statements of operations represents minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following:
  2009  2008 
         
Computed expected tax expense $(3,633) $(3,334)
Change in valuation allowance  3,624   3,324 
Meals and entertainment expenses, and officers life insurance not deductible for income tax purposes  9   11 
State tax expense, net of federal income tax benefit  4   3 
         
  $4  $4 

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2009 and 2008 is presented below:
  2009  2008 
Deferred tax assets:        
Net operating loss carryovers $31,705  $32,641 
Fixed assets, due to differences in depreciation  —   288 
Inventory  88   179 
Accrued liabilities  508   453 
Stock based compensation  —   4,595 
Notes receivable reserves  14   340 
Intangible assets due to impairment  100   150 
Tax credits  138   147 
Other      853 
         
Total gross deferred tax assets  32,553   39.646 
Valuation allowance  (32,553)  (39,646)
         
Net deferred tax assets $—  $— 

The net change in the valuation allowance for the year ended December 2009 was a decrease of $7 million. Because there is uncertainty regarding the Company’s ability to realize its deferred tax assets, a 100% valuation allowance has been established.
As of December 31, 2009, the Company had federal tax net operating loss carry-forwards of approximately $84.6 million, which will expire in the years 2012 through 2026. The Company also has federal research and development credit carry forwards as of December 31, 2009 of approximately $147,000 which will expire in the years 2012 through 2026. State tax net operating loss carry forwards were approximately $70 million as of December 31, 2009. The state net operating loss carry forwards will expire in the years 2012 through 2018.
The Company’s ability to utilize its net operating loss and research and development tax credit carry forwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code. Federal and State tax laws impose substantial restrictions on the utilization of net operating loss and credit carry forwards in the event of an “ownership charge” for tax purposes as defined in the Internal Revenue Code Section 382.
The Company accounts for income taxes using an asset and liability method for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, operating loss and tax credit carry-forwards and are measured using the currently enacted tax rates and laws. The Company has made no provision for income taxes except for the minimum state tax due in any period presented in the accompanying consolidated financial statements because it incurred operating losses in each of these periods.
The Company analyzes its deferred tax assets with regard to potential realization.  The Company has established a valuation allowance on its deferred tax assets to the extent that management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization.  The Company has considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.
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NOTE 7 - STOCK OPTIONS
The Company has four Equity Compensation Plans: The 2008 Equity Compensation Plan, the 2007 Equity Compensation Plan, the 2006 Incentive Stock Plan, and the 2002 Incentive Stock Plan. These Plans provide for the grant of incentive stock options and non-statutory options to employees, directors and consultants to the Company. The Company granted incentive stock options and non-statutory options at exercise price per share equal to the fair market value per of the common stock on the date of grant. The vesting generally, three years, and exercise provisions were determined by the Board of Directors, with a maximum life from five to ten years.
Option activity under the 2008, 2007, 2006 and 2002 plans is as follows (thousands):

  2008 Plan  2007 Plan  2006 Plan  2002 Plan 
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Number of
Shares
  
Weighted
Average
Exercise
Price
 
                                 
Outstanding at January 1, 2008  —   —   1,000  $1.03   4,374  $0.99   5,681  $1.15 
Granted  —   —   —   —   904   0.88   —   — 
Exercised  —   —   —   —   —   —   (137)  0.41 
Canceled  —   —   —   —   —   —   (156)  0.80 
                                 
Outstanding at December 31, 2008  —   —   1,000  $1.03   5,278  $0.93   5,388   0.97 
Granted  18,974   0.37   1,560   0.40   —   —   —     
Exercised  —   —   —   —   —   —   —   — 
Canceled  —   —   (1,160)  1.03   (2,996)  0.93   (2,592)  0.97 
                                 
Outstanding number of shares exercisable and intrinsic value at December 31, 2009  18,974  $0.37   1,400  $0.37   2,282  $0.86   2,796  $1.08 
                         

The weighted average fair value of options granted during the years ended December 31, 2009 and 2008 was $.0.37 and $.80
The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
  2009 2008
     
Dividends None None
Expected volatility 113.5 to 158.2 109.68 – 153.98
Risk free interest rate 2.93% to 3.31% 1.99 – 3.31%
Expected life 5.0 to 5.75 years 2.5 –6 years

At December 31, 2009, the Company has outstanding stock options for employees to purchase 25.4 million shares at exercise prices ranging from $0.25 to $1.20.
NOTE 8 - MAJOR CUSTOMERS
During 2009, Voltage Vehicles, our wholly owned subsidiary, had established relationships with approximately 40 dealers nationwide, where no single customer accounted for more than 10% of our net sales. In 2008, Voltage Vehicles has established relationships with 61 dealers nationwide. Where 7 of our dealers have purchased over $200,000 of Xebras or 30 % of advanced technology vehicle sales.
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NOTE 9 – COMMITMENT
Joint Venture ZAP Hangzhou
On December 11, 2009, the Company entered into a Joint Venture Agreement to establish a new US-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Holley Group, the parent company of a global supplier of electric power meters and Better World, International, LTD , a company focused on infrastructure technology and services for electric vehicles.  Priscilla Lu, PhD who is the current Chairman of the Board of ZAP is also the Founder and General Partner of Better World International LTD.   Both ZAP and Better World International LTD will each have a 37.5% interest with Holley Group International owning a 25% interest . The joint venture partners have also funded the initial capital requirements under the agreement for a total of $3 million of whic h ZAP’s portion is $1.2 million.
ZAP Hangzhou will combine ZAP’s intellectual property, electric vehicle technology and know how with Holley’s experience in electric metering to develop electric vehicles and related technologies targeting the Chinese market. The companies plan to use their knowledge of the local Chinese market to target opportunities for electric vehicle growth within China’s vehicle fleets. As part of this relationship, ZAP Hangzhou plans to begin the installation of manufacturing facilities at Holley’s Hangzhou facilities in the near future.
ZAP will account for the earning or losses using the equity method. There was no activity during 2009. Future funding requirements by ZAP will be determined by the Joint Ventures activity.
Distribution Agreement Jonway AutomobileLtd
 
On January 15, 2010, ZAP entered into a Stock Purchase Agreement with Better World, Ltd., a British Virgin Islands company, whereby the Company (ZAP) entered into distribution agreement with China auto manufacturer Zhejiang Jonway Automobile Co. Ltd. to produce electric SUVs, cars and other vehicles in China for domestic and global distribution. ZAP and Jonway are cooperating on the integration of AC propulsion systems and lithium batteries into a pilot production 5-door Jonway A380 SUV that would offer freeway speeds and a targeted range of over 100 miles per charge.
The exclusive agreement between ZAP and Jonway calls for manufacturing vehicles provided by Jonway with research and development by ZAP in Santa Rosa, California. Jonway manufactures China’s popular A380 compact SUV in 3- and 5-door models and are developing a line of sedans and other automobiles. ZAP and Jonway intend to jointly distribute electric vehicles in China, North America and Europe, to complement existing distribution channels while expanding into new markets.
The Company also issued 46 million shares of it common stock valued at $1$2.16 million in exhange for an agreement on terms relating to rights to the distribution of Better Worlds products,  such as a refundable deposit on a future acquisition.charging stations for electric vehicles both in the U.S. and internationally.  Priscilla Lu, Chairman of the Board of Directors of ZAP, is also General Partner of Better World International, Ltd.
 
Distribution Agreement with Goldenstone Worldwide Limited for Jonway Products
On October 10, 2010, ZAP entered into an International Distribution with Goldenstone Worldwide Limited as the distributor of Jonway products such as gas SUV’s and gas and electric motor scooters,  both in the U. S. and internationally. In connection with the distribution agreement the  Company also issued 30 million shares of ZAP common stock valued at $14.4 million.  The Jonway Group had previously granted exclusive worldwide distribution of Jonway products to Goldenstone Worldwide Limited.   ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the world wide distribution rights for Jonway Products.  Therefore it was necessary for ZAP to acquire distribution rights for Jonway Products.
Distribution Agreement with Samyang Optics
 
On January 27, 2010, ZAP entered into an International Distribution Agreement (the “Distribution Agreement”) with Samyang Optics Co. Ltd. (“Samyang”) pursuant to which ZAP appointed Samyang as the exclusive distributor of certain ZAP electric vehicles including the Jonway A380 5-door electric sports utility vehicle equipped with  ZAP’s electric power train, in the Republic of Korea.  In addition, the Distribution Agreement provides that ZAP and Samyang will negotiate to enter into additional agreements related to the manufacture and assembly of ZAP vehicles by Samyang in Korea.  The Distribution Agreement shall be in effect for one year and may be extended annually by Samyang provided that Samyang has satisfied sales quotas determined by ZAP and Samyang is otherwise in complia ncecompliance with the Distribution Agreement.
 
In addition, on January 27, 2010, ZAP and Samyang entered into an initial purchase order pursuant to the Distribution Agreement for the purchase of one hundred ZAP Jonway UFO electric sports utility vehicles.  Selling prices have yet to be determined and no purchases have been made as of December 31, 2010.

Further,NOTE 7 - OTHER ACCRUED LIABILITIES
Accrued liabilities at December 31, 2010 and 2009 consisted of the following (in thousands):
  2010  2009 
Accrued professional fees $392  $450 
Accrued expenses  —   — 
Customer deposits  149   264 
Warranty liabilities  152   296 
Interest payable  —   567 
Liability for stock issuances  1,245   — 
Other accrued expenses  259   469 
         
  $2,197  $2,046 
NOTE 8 –  LONG-TERM AND SHORT-TERM NOTES
On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5,
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2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation. The cash sum is scheduled to be paid as follows: three equal payments of $250,000 on March 31, 2010, June 30, 2010 and September 30, 2010, one payment of $500,000 on December31, 2010 and the final payment of $550,000 on March 31, 2011.  As a result of the aforementioned settlement approximately $5.1 million of short term debt due to Al Yousuf was cancelled and a gain of $817,000 was recorded.  As of December 31, 2010 $550,000 was due to Al Yousuf under this settlement.  This balance was paid on March 31, 2011.
In addition, as of December 31, 2010 ZAP had $110,000 in short term notes due to Premium Financing Specialist resulting from financing ZAP’s liability insurance premium.
6% Senior Convertible Notes
The Company issued subordinated convertible promissory notes to Samyang Optics, Ltd. (“Samyang”) in the principal amount of $5 million out of a total lending facility of $10 million under the note purchase agreement, dated December 31, 2010.  On December 14, 2010, Samyang, converted the outstanding principal balance of $5 million plus approximately $259,000 in interest into 8,090,369 shares of ZAP common stock.
On January 27, 2010, ZAP and Samyang entered into an Investment Agreement pursuant to which Samyang agreed to invest $3 million in convertible notes of ZAP (the “Samyang Investment”) and ZAP agreed to invest $2 million in convertible bonds of Samyang (the “ZAP Investment”).  Pursuant to the Investment Agreement, the Samyang Investment was completed on February 20,24, 2010. In connection with the completion of the Samyang Investment, on February 24, 2010 andZAP purchased shares of stock of Samyang for an aggregate purchase price of $2 million in satisfaction of the ZAP Investment shall be completed within one month following the Samyang Investment. Both parties have agreed not to prepay or redeem their securities for a period of one year following the issuance of the securities and not to exercise conversion rights to the other party’s securities for a period of one year followingyear.
Beneficial Conversion Feature
The difference between the issuanceproceeds allocated to our convertible debt to Samyang and the estimated fair value of the securities.common stock issuable upon conversion resulted in a beneficial conversion feature on the convertible debt which was recorded as a reduction to the convertible debt and an increase to additional paid-in-capital. The total beneficial conversion feature was $799,000, of which $133,000 was recorded as of December 31, 2009.  Prior to the completion of the conversion, the beneficial conversion feature was being amortized as a reduction of net income available to common stockholders over the period of redemption of the convertible debt. Upon completion of the conversion, we recorded a non-cash charge of $799,000 for the beneficial conversion feature on our convertible debt to Samyang in the fourth quarter of  2010.
NOTE 9 - INCOME TAXES
The provision for income taxes for all periods presented in the consolidated statements of operations represents minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following:
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  2009  2008 
         
Computed expected tax expense $(6,466) $(3,862)
Losses and credits for which no benefits have been recognized  3,517   2,549 
Stock grants and warrants not deductible for income tax purposes  2,092   1,103 
         
Other amortization and impairments  843   201 
Meals and entertainment expenses, and officers life insurance not deductible for income tax purposes  14   9 
         
R&D credit        
State tax expense, net of federal income tax benefit  4   4 
         
  $4  $4 

The tax effect of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2010 and 2009 is presented below:
  2010  2009 
       
Net operating loss carryovers $44,415  $37,948 
Permanent differences, including stock        
based compensation, amortization and bad debts  ( 3,983)  ( 2,922)
Fixed assets, due to differences in depreciation  ( 288)  ( 288)
Non qualified options and warrants  ( 6,186)  ( 4,794)
Reserves on investments  ( 1,376)  ( 1,306)
Intangible assets , due to impairment  ( 99)  ( 99)
R&D credit  138   138 
Other differences  ( 849)  ( 425)
         
 Total gross deferred tax assets $31,772  $28,252 
Valuation allowance  (31,772)  (28,252)
Net deferred tax assets  --   -- 
The net change in the valuation allowance for the year ended December 31, 2010 was an increase of $3.5 million.  Because there is uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established.

As of December 31, 2010, the Company had federal tax net operating loss carryforwards of approximately $118.9 million, which will begin to expire in the years 2012 through 2027.  The Company also has federal research and development carryforwards as of December 31, 2009 of approximately $138,000, which will begin to expire in the years 2012 through 2026.

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The State net operating loss carryforwards were approximately $ 87 million as of December 31, 2010.  The State net operating loss carryforwards will begin to expire in the years 2012 through 2018.

The Company's ability to utilize its net operating loss and research and development tax credit carryforwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code.  Federal and State tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an "ownership change" for tax purposes as defined in the Internal Revenue Code section 382.

The company adopted the provisions of FIN 48 on January 1, 2007.  The Company did not have any unrecognizable tax benefits as a component of income tax expense.  As of the date of adoption of FIN 48, the Company did not have any unrecognized tax benefits at December 31, 2010 and, as a result, there was no effect on the Company's financial condition or results of operations as a result of implementing FIN 48.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax  benefits as a component of income tax expense.  As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized for the year ended December 31, 2010.
NOTE 10 - STOCK OPTIONS

The Company has five Equity Compensation Plans: The 2008 Equity Compensation Plan (the “2008 Plan”),, the 2007 Consultant Stock Plan (the “2007 Plan”), the 2006 Incentive Stock Plan (the “2006 Plan”), the 2004 Consultant Stock Plan, and the 2002 Incentive Stock Plan (the “2002 Plan”). These plans provide for the grant of incentive stock options and non-statutory options to employees, directors and consultants to the Company. The 2004 Consultant Stock Plan covers 1 million shares, none of which have been granted. The Company granted incentive stock options and non-statutory options at exercise price per share equal to the fair market value per of the common stock on the date of grant. The vesting generally, three years, and exercise provisions were determined by the Board of Directors, with a maximum life from five to ten years.
Option activity under the 2008 Plan, 2007 Plan, 2006 Plan and 2002 Plan are as follows (in thousands):

  2008 Plan  2007 Plan  2006 Plan  2002 Plan 
  Number of Shares  Weighted Average Exercise Price  Number of Shares  Weighted Average Exercise Price  Number of Shares  Weighted Average Exercise Price  Number of Shares  Weighted Average Exercise Price 
                         
Outstanding at January 1, 2009  —  $—   1,000  $1.03   5,278  $0.93   5,388  $0.97 
Granted  18,974   0.37   1,560   0.40   —   —   —   — 
Exercised  —   —   —   —   —   —   —   — 
Forfeited  —   —   (1,160)  1.03   (2,996)  0.93   (2,592)  0.97 
Outstanding at December 31, 2009  18,974  $0.37   1,400  $0.37   2,282  $0.86   2,796  $1.08 
Plan transfers and adjustments  40   —   (1,000)  0.40   1,074   0.40   1   — 
Granted  1,260  $0.34   1,100   0.48   —   —   —   — 
Exercised  (140) $0.25   —   —   —   —   —   — 
Forfeited  (840) $0.27   —   —   —   —   —   — 
Outstanding at December 31, 2010  19,294  $0.37   1,500  $0.51   3,290  $0.72   2,694  $0.92 
 
 
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The weighted average fair value of options granted during the years ended December 31, 2010 and 2010 was $0.37 and $0.80.
The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 20102009
DividendsNoneNone
Expected volatility107.5% to 122.6%113.5% – 158.2%
Risk free interest rate1.20% to 2.98%2.93% - 3.31%
Expected life5.0 – 5.75 years5.0 – 5.75 years
The following table provides information about options under the 2008 Plan, 2007 Plan, 2006 Plan and 2002 Plan that are outstanding and exercisable at December 31, 2010. (in thousands):

Plan Exercise Price Range Options Outstanding 
Options exercisable at
December 31, 2010
2008 $0.25 - $0.39 19,354 17,338
2007 $0.25 - $1.15   1,500  1,340
2006 $0.40 - $1.00   3,290  3,290
2002 $0.25 - $1.15   2,694  2,694
    26,838 24,662
At December 31, 2010, the Company has outstanding stock options for employees to purchase 26.8 million shares at exercise prices ranging from $0.25 to $1.20.
NOTE 1011 – ACQUISITION
Acquisition of 51% of the equity shares of  Jonway
On July 2, 2010, Zap (the "Company") entered into an Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd. (the "Equity Transfer Agreement") with Jonway Group Co., Ltd. to acquire a 51% interest in Zhejiang Jonway Automobile Co., Ltd., a limited liability company of the People's Republic of China ("Jonway"), for $30,580,000 (the "Acquisition Transaction"), of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently, Jonway Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway Group and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates. Jonway is engaged in the business of, among other things, manufacturing and sales of automobile spare parts and automobiles. Following the completion of the Acquisition Transaction, Jonway converted into a Chinese foreign limited liability joint venture company.
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According to the terms of the definitive agreements, ZAP has to right to acquire the remaining 49% of Jonway Auto at the same valuation by March 31, 2011 or at a then current valuation after that date. At present, both parties are still discussing ZAP’s acquiring the remaining 49%.  ZAP intends this transaction to be phase one of a two-phase acquisition, whereby the two companies will combine their complementary expertise, leveraging ZAP's EV technology and Jonway Auto's quality ISO 9000 certified mass production capabilities to address the new alternative energy vehicle market. ZAP intends to acquire the remaining 49 percent of Jonway Automobile following completion of the first phase and following final regulatory approval.
During 2010 ZAP issued 44 million shares of stock to Cathaya in order to make a $10 million payment on the 51% acquisition of Jonway Automobile Co.  In January 2011, ZAP issued $19 million of convertible debt to an affiliate of Cathaya in order to make a $19 million payment of the Jonway acquisition.  The company believes there is some uncertainty regarding whether this $19 million note will be converted to equity or require cash payment in February 2012.
NOTE 12 – SEGMENT REPORTING
Operating Segments
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
 In accordance with ASC 280, the Company has identified three reportable segments consisting of sales and marketing of electronic consumer products, the Zappy 3 scooters and Advanced Technology Vehicles (“ATV’s”), Rechargeable portable energy products, operation of a retail car outlet and sales to and sales of advanced technology vehicles for the Xebra (™) electric vehicles.  These segments are strategic business units that offer different services.  They are managed separately because each business requires different resources and strategies.  The Company’s chief operating decision making group, which is comprised of the Chief Executive Officer and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to allocate resources and in assessing performance.  The performance of each segment is measured based on its profit or loss from operations before income taxes.
Electric Consumer products and corporate expenses represent sales of our ZAPPY 3 which is a three wheeled electric scooter and the overall corporate expenses for the company. Many of these expenses relate to the overall development of our core business, Electric Consumer Products. The Portable energy Segment was sold in June of 2008 and we have therefore included all activity for 2008 with the Electric Consumer Products.
Car outlet represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles.
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ATVs represents the sales activity of advanced technology vehicles, now the Xebra a three-wheeled plug in electric vehicle to ZAP Dealers through-out the U.S.
The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands):
  
Electric
Consumer
Products
  
 
Car
outlet
  
Advanced
Technology
Vehicles
  
 
Total
 
                 
Year ended December 31 2010:                
    Net sales  349   1,872   1,595   3,816 
    Gross profit (loss)  62   357   10   429 
    Depreciation, amortization and impairment  1,034   8   36   1,078 
    Net loss  (17,474)  (130)  (1,414)  (19,018)
    Total assets  31,516   436   1,560   33,512 
Year ended December 31 2009:                
    Net sales  430   1,588   2,050   4,068 
    Gross profit (loss)  (64)  328   464   728 
Depreciation, amortization and impairment  502   15   493   1,010 
    Net loss  (9,971)  (67)  (1,237)  (11,275)
    Total assets  11,705   450   1,624   13,779 
Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.
Customer information
For the years December 31, 2010 and 2009,  no customers accounted for more than 10% of our revenue.
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NOTE- 13 SHAREHOLDERS’ EQUITY
 
Common stock
2010 ISSUANCES
STOCK ISSUED FOR CASH. During 2010, the Company received $13.3 million in cash through the issuance of  51.5 million shares of common stock through private placements.
STOCK ISSUED FOR ACQUISITION. Included in the issuances for cash was 44 million shares valued at $11 million. From the proceeds, the Company received $1 million in working capital and $10 million was used for partial payment of the purchase price for the acquisition of 51% of the equity shares of Jonway.
STOCK ISSUED FOR SERVICES. In 2010, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the intrinsic value of the stock on the date of grant. During 2010, the Company issued grants for 1.8 million shares as consideration under agreements for consulting and related services, and 507,000 shares were issued for employee compensation.
STOCK ISSUED EMPLOYEE BENEFITS. During December 2010, the Company issued 119,000 shares of stock valued at $106,000 for employee 401K matching contribution.
STOCK ISSUED FOR DISTRIBUTION AGREEMENTS. In 2010, the Company issued 30 million shares valued at $14.4 million for the worldwide distribution rights of Jonway products. In addition, another 6 million shares valued at $2.2 million were issued for the distribution rights of charging stations.
STOCK ISSUED FOR CONVERSION OF SENIOR CONVERTIBLE DEBT. In December of 2010, the Company issued 8.1 million shares of  stock valued at $5.3 million due to the conversion of  the 6%  Senior Convertible Debt into shares of common stock.
STOCK ISSUED FOR THE MANAGEMENT AGREEMENT. In November of 2010, The Company issued 5 million shares valued at $2.5 million for the management agreement with Cathaya. Priscilla Lu, the Chairman of ZAP, is a general partner of Cathaya.
STOCK ISSUED FOR PURCHASE OF ASSETS. During 2010, the Company issued 479,000 shares of stock valued at  $189,000 for the acquisition of computer equipment and patents legal work.
 
2009 ISSUANCES
 
STOCK ISSUED FOR CASH. During 2009, the Company raised $6.1 million in cash through the issuances of  24.4 million shares of common stock through private placements.
 
STOCK ISSUED FOR SERVICES. In 2009, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the intrinsic value of the stock on the date of grant. During 2009, the Company issued grants for 5.7 million shares as consideration under agreements for consulting and related services, and 5.2 million shares were issued for employee compensation.
 
STOCK ISSUED FOR FUTURE ACQUISTION. In December of 2009, the Company issued and was holding 4 million shares valued at $1 million as a deposit for athe future acquisition of a Chinese Automobile Manufacturing Company.
2008 ISSUANCES

STOCK ISSUED FOR ASSETS

In 2008, the Company issued stock for inventory and assets and recorded the cost at the intrinsic value of the stock or the fair value of the assets, whichever is more reliably measurable. During 2008, there were 238,000 shares were issued for purchase of inventory and certain assets
STOCK ISSUED FOR SERVICES. In 2008, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the intrinsic value of the stock on the date of grant. During 2008, the Company issued grants for 2.5 million shares as consideration under agreements for consulting and related services, and 744,000 shares were issued for employee compensation.
STOCK ISSUED FOR CASH. During 2008, the Company raised $72,000 in cash due to the conversions of 113,000 of options and warrants.
STOCK ISSUED FOR CONVERSION OF SENIOR CONVERTIBLE DEBT. During 2008 the Company issued 2.5 million shares due to the conversion of the 8% Senior Convertible Debt into shares of common stock.Jonway.
 
The Board of Directors of ZAP has established various series of restricted and unrestricted warrants as outlined below. They also have the right to (i) decrease the exercise price of the warrants, (ii) increase the life of the warrants in which event the exercise price may be increased, or (iii) make such other changes as the Board of Directors of ZAP deems necessary and appropriate under the circumstances provided the changes contemplated do not violate any statutory or common law.
 
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Shares acquired through exercises of warrants for all Series other than Series B, C, D and K are restricted as to sale. However, the warrants may be assigned, sold, or transferred by the holder without restriction.
 
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Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days’days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series.
 
Total warrants outstanding at December 31, 20092010 are summarized as follows (in thousands):
 
 Number of Exercise Expiration Number of  Exercise  Expiration 
 Warrants Price Dates Warrants  Price  Dates 
               
Series B-Unrestricted   2,693 1.09 7-1-12  2,693   1.09   7-1-12 
Series B-2-Restricted   1,679 1.09 7-1-12  1,018   1.09   7-1-12 
Series C-Unrestricted   5,388 1.09 7-1-12  5,388   1.08   various 
Series C-2-Restricted   1,239 1.09 7-1-12  1,239   1.09   10-9-12 
Series D-Unrestricted   6,704 1.09 7-1-12  6,704   1.08   7-1-12 
Series D-2-Restricted   1,294 1.09 7-1-12  1,294   1.09   various 
Series K-Unrestricted   4,356 0.91 7-1-12  4,356   0.91   7-1-12 
Series K-2-Restricted   4,106 0.91 7-1-12  4,106   0.91   7-1-12 
$0.50 Warrants-Restricted 28,000 0.50 8-16-14  18,000   0.50   various 
$0.70 Warrants-Unrestricted      100 0.70 6-2-13  100   0.70   6-2-13 
$1.00 Warrants-Unrestricted   2,470 1.00 7-1-12
$0.80 Warrants-Unrestricted  198   0.80   12-5-11 
$0.91 Warrants-Unrestricted  2,470   0.91   various 
$1.10 Warrants Restricted      794 1.10 Various  590   1.10  
various
 
$1.20 Warrants-Restricted   5,565 1.20 Various  6,796   1.20  various 
$1.25 Warrants-Restricted   1,744 1.25 10-31-10
$1.32 Warrants–Unrestricted      432 1.32 2-20-12  222   1.32   various 
$1.50 Warrants Restricted   1,939 1.50 Various
$2.50 Warrants Restricted      822 2.50 Various
$4.00 Warrants Restricted      363 4.00 2-15-10
$1.36 Warrants Restricted  1,798   1.36  various 
$2.27 Warrants Restricted  363   2.27  2-15-12 
                  
 69,688      57,335         
                  

NOTE 11 14  –  RELATED PARTY

Purchase of Company Owned by ZAP President
ZAP’s President and director Gary Dodd created the company ZAP Motor Manufacturing Kentucky, Inc., a Kentucky corporation, or ZMMK, and has applied for a loan from the U.S. Department of Energy under its Advanced Technology Vehicles Manufacturing Incentive Program.  ZAP has entered into a Manufacturing and Supply Agreement, dated as of March 29, 2009, pursuant to which, conditional upon ZMMK’s receipt of the loan, ZAP would engage ZMMK to manufacture certain of its products. Conditional upon ZMMK’s receipt of the loan, ZAP has the right to purchase a substantial equity ownership interest in ZMMK.
Loss on Investment in Real Property
During 2010, the Company adjusted the $90,000 carrying value of a real property investment made in a prior year through a limited liability company. This Company also had Gary Starr, the founder of ZAP, as a member. We understand the property was disposed of in 2010 and we do not anticipate realizing our investment.
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Rental agreements
 
The Company rents office space, land and warehouse space from Mr. Steven Schneider, its CEO and a major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense was approximately $84,000$116,000 and $108,000 for both the years ended December 31, 20092010 and 2008.2009.
 
Financing provided toAlso in 2010, the Company rented its corporate headquarters from a director of ZAP.  The rental expense was approximately $151,000.
The Additional Investment of $11 million made by Cathaya Capital LLC whose General Partner is Priscilla Lu, ChairmanL.P.
As previously disclosed in the Company’s Current Report on Form 8-K filed on August 10, 2009, on August 6, 2009, Cathaya Capital, L.P., a Cayman Islands exempted limited partnership (the “Cathaya”) purchased 20 million shares of the Board of ZAP
Company’s Common Stock. On August 6, 2009, the Company entered into a Securities Purchase AgreementSecured Convertible Promissory Note with Cathaya Capital, L.P.,for aggregate principal advances of up to $10 million. In addition, the Company issued two warrants to Cathaya exercisable for shares of the Company’s Common Stock.
On July 9, 2010, Cathaya entered into a Cayman Islands exempted limited partnership.securities purchase agreement (the “Cathaya Agreement”) with the Company. Pursuant to the Cathaya Agreement, the InvestorCathaya purchased 2044 million shares of the Company’s Common Stock at a price of $0.25 per share (the “Cathaya Shares”) for an aggregate purchase price of $5$11 million. In addition warrants were also issued to
Priscilla Lu, the investors which grant the holders the right to purchase up to 10,000,000 sharesChairman of the Registrant’s Common Stock at a priceBoard of $0.50 per share.  The warrants expire on August 16, 2014.ZAP, is also the Managing Partner of Cathaya Capital L.P.
 
The Company alsoManagement Agreement with Cathaya Capital L.P.
On November 10, 2010, ZAP entered into a Secured Loan FacilityManagement Agreement with the InvestorCathaya, pursuant to a Secured Convertible Promissory Note. The Note provideswhich ZAP issued Cathaya five million shares of its Common Stock in exchange for an aggregate principal amount of up to $10 million in
Cathaya’s prior and ongoing transaction advisory, financial and management consulting services.
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advancesPrincipals of Cathaya will be available to be madeserve on the Board and will devote such time and attention to the Company byCompany’s affairs as reasonably necessary to accomplish the Investor prior to October 1, 2012. The aggregate principal amountpurposes of this Agreement.
Priscilla Lu who is Chairman of the advances made underBoard of ZAP is also the Note accrues interest atGeneral Partner of Cathaya Capital L.P.
Joint Venture ZAP Hangzhou
On December 11, 2009, the Company entered into a rate per annum equalJoint Venture Agreement to establish a new US-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Holley Group, the greaterparent company of (i) five percent (5%)a global supplier of electric power meters and (ii) three percent (3%) plus prime. The aggregate principal amount of each advance made underBetter World International, LTD , a company focused on infrastructure technology and services for electric vehicles.  Priscilla Lu, PhD who is the Note plus interest becomes due and payable to the Investor on the earlier of (i) the two year anniversarycurrent Chairman of the date such advance was made and (ii) December 31, 2012. The Note is convertible into sharesBoard of the Company’s Common Stock at a conversion rate, subject to any adjustments called for by the terms of the Note, of 2,000 shares of Common Stock for each $1,000 principal amount of the Note being converted. The Note is secured by the terms and conditions of a security agreement covering all of the Compan y’s assets other than those assets specifically excluded from the lien created by the Security Agreement.  Additional warrants were also issued to the holder which grants the right to purchase up to six million shares of the Registrant’s Common Stock at a price of $0.50 per share.  The warrants expire on August 16, 2014.
Financing provided to the Company by Al Yousuf LLC, Whose President is a Director of ZAP
The company entered into various financing arrangements during the second and third quarter 2008 with The Al Yousuf Group who is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf, who is also a Directordirector and shareholder of ZAP who arranged for the note terms and provisions.
On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital toBetter World International LTD.   ZAP and help meetBetter World International LTD  each have a 37.5% interest with Holley Group International owning a 25% interest. The joint venture partners have also funded the growing demand for ZAP electric vehicles. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The Note matures February 28, 2010. Interest only payments are duecapital requirements under the Note monthly commencing August 30, 2008. All principal and interest due under the Noteagreement for a total of $3 million, of which ZAP’s portion is secured by the corporate headquarters building in Santa Rosa, California.
On May 14, 2009 we received a Notice of Delinquent Payments from Mr. Hossein Haghighi, the Chief Financial Officer of Al Yousuf LLC, notifying us that an outstanding principle for inventory advances of $3.4 million plus monthly interest payments has not been paid as required by a $10 million Promissory Note. Mr. Haghighi further indicated that AL Yousuf LLC intended to enforce the collection of the total amounts due under the terms of the note against the Company. The collateral for the note is our corporate headquarters building and land located in Santa Rosa California. The total due on the note is approximately $5.8 million at December 31, 2009 with inventory advances totaling $3.4 million and a building loan of $1.8 million including interest of $.6$1.1 million.
 
On September 25, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SW 245950) was filedHangzhou will combine ZAP’s intellectual property, electric vehicle technology and know how with Holley’s experience in electric metering to develop electric vehicles and related technologies targeting the Chinese market. The companies plan to use their knowledge of the local Chinese market to target opportunities for electric vehicle growth within China’s vehicle fleets. As part of this relationship, ZAP Hangzhou plans to begin the installation of manufacturing facilities at Holley’s Hangzhou facilities in the Superior Court for the County of   Sonoma.  The complaint alleges causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The President of Al Yousuf LLC, Eqbal Al Yousuf, is a member of ZAP’s board of directors.  In its Complaint, Al Yousuf LLC claims that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Plaintiff seeks to foreclose on the property that secures the loan agreement and recover attorney’s fees of approximately $125,000, and obtain such other and further relief as the Count may deem just and proper.  ZAP has responded to the Complaint.  The parties are engaged in settlement discussions.near future.
 
In additionWe account for  37.5% interest in the Company borrowed $760,000 from Portable Energy LLC; a privateZAP Hangzhou Joint Venture by the equity company equally owned 50% by ZAP and Al Yousuf. These borrowings are due on demand.method of accounting.  During 2010, the joint venture incurred an operating loss of $848,000 of which $318,000 is our share.
 
 
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NOTE 1215 – LITIGATION

In the normal course of business, we may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows. The Company estimates the amount of potential exposure it may have with respect to litigation claims and assessments. The previous litigation matters at December 31, 20082010 were all resolved during 20092010 with no material affect on the Company’s financial statements.
 
On September 25, 2009, a complaint captionedMarch 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC v ZAP (Case No. SW 245950)pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was filed in the Superior Court for the County of   Sonoma.  The complaint alleges causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The President ofaccepted by Al Yousuf LLC Eqbal Al Yousuf, is a memberon April 5, 2010. The material terms of ZAP’s board of directors.  In its Complaint,the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC claims that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Plaintiff seeks to foreclose ontotal combined cash sum of $1,800,000 over a period of two years; (2) transfer the property that secureslocated at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the loan agreementproperty located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation. The cash sum is scheduled to be paid as follows: three equal payments of $250,000 on Quarters ended March 31, 2010, June30, 2010 and recover  their attorney’s feesSeptember 30, 2010, one payment of $500,000 on December31, 2010 and obtain such otherthe final payment of $550,000 on March 31, 2011, which has been made on time.  As a result of the aforementioned settlement approximately $5.1 million of short term debt due to Al Yousuf was cancelled and further relief as the Count may deem j ust and proper.  ZAP has  responded     to the Complaint.  The parties are engaged in settlement discussions.a gain of $818,000 was recorded.
 

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On March 2, 2010 a complaint was filed by Integrity Automotive LLC; Randall Waldman (a former director of ZAP) v. ZAP, et al , case no. 10CI01383 in the Jefferson Circuit Ct. Division 10, State of Kentucky. The complaint alleges the following causes of action against ZAP: (1) Breach of Contract; (2) Civil Conspiracy; (3) Breach of Fiduciary Duty; and (4) Conversion. These causes of action stem from a purported joint venture intended to manufacture automobiles in the State of Kentucky and seeks unspecified actual and punitive damages. The matter has been tendered to our attorney. We   intend to vigorously defend the plaintiff’s claims. We also believe that the ultimate resolution of this claim will not have a material adverse effect on our consolidated financial position or on the result sresults of operations.

Rainbow Cycle & Marine & Siloam Springs Cycle, v. Voltage Vehicles, Arkansas Motor Vehicle Commission, Case No. 10-008. On April 1, 2010, Rainbow Cycle & Marine & Siloam Spring Cycle (the "Dealer"), an automobile dealer in the State of Arkansas, submitted a complaint to the Arkansas Motor Vehicle Commission (the "Commission") regarding 6 Xebra vehicles purchased from ZAP in 2008, each at the price of $8,750. The Dealer requested that the Commission order the Company to refund all monies paid by the Dealer to the Company for the vehicles, to pay all transportation costs, and in addition to assess penalties and interest charges against ZAP in an unspecified amount. The Commission issued a Notice of Hearing on August 11, 2010, setting a hearing for September 15, 2010 on the Dealer's Complaint. ZAP responded with a Motion to Dismiss, which the Commission set for hearing on December 15, 2010 and at the same time continued the hearing on the Dealer's Complaint to the same date. After the hearing, the Commission ruled that ZAP was required to refund the Dealer's purchase price for the vehicles and to pay for transportation of the vehicles off of the Dealer's premises. In response, ZAP's local counsel filed a Petition for Judicial Review on March 1, 2011, in the Circuit Court of Pulaski County, State of Arkansas, challenging the Commission's decision. Service on the Commission and counsel for the Dealer was completed shortly thereafter, and the dealer's responsive pleading is due in early April.
 
 
NOTE 13 – SEGMENT REPORTING
In accordance with the provisions of SFAS No. 131, the Company has identified three reportable segments consisting of sales and marketing of electronic consumer products, the Zappy 3 scooters and ATV’s, Rechargeable portable energy products, operation of a retail car outlet and sales to and sales of advanced technology vehicles for the Xebra (™) electric vehicles.  These segments are strategic business units that offer different services.  They are managed separately because each business requires different resources and strategies.  The Company’s chief operating decision making group, which is comprised of the Chief Executive Officer and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to al locate resources and in assessing performance.  The performance of each segment is measured based on its profit or loss from operations before income taxes.

Electric Consumer products and corporate expenses represent sales of our ZAPPY 3 which is a three wheeled electric scooter and the overall corporate expenses for the company. Many of these expenses relate to the overall development of our core business, Electric Consumer Products. The Portable energy Segment was sold in June of 2008 and we have therefore included all activity for 2008 with the Electric Consumer Products.

Car outlet represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles.

Advanced Technology Vehicles represents the sales activity of advanced technology vehicles, now the Xebra a three-wheeled plug in electric vehicle to ZAP Dealers through-out the U.S.
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The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands):
  Electric     Advanced    
  Consumer  Car  Technology    
  Products  outlet  Vehicles  Total 
             
Year ended December 31, 2009:            
Net sales $430  $1,588  $2,050  $4,068 
Gross profit(loss)  (64)  328   464   728 
Depreciation, amortization and impairment  502   15   493   1,010 
Net loss  (9,383)  (67)  (1,237)  (10,687)
Total assets  11,705   450   1,624   13,779 
                 
Year ended December 31, 2008:                
Net sales $876  $1,727  $4,985  $7,588 
Gross profit(loss)  (218)  299   718   799 
Depreciation, amortization and impairment  211   22   46   279 
Net loss  (9,317)  (132)  (358)  (9,807)
Total assets  5,953   571   2,702   9,226 
                 

NOTE 14 – SUPPLEMENTAL CASH FLOW INFORMATION
 
A summary of non-cash investing and financing information is as follows (in thousands):
  2010  2009 
Cash paid during the year for:      
     Income taxes $—  $4 
     Interest $—  $— 

 
  Year ended December 31 
    
  2009  2008 
       
Cash paid during the year for:      
Income taxes $4  $4 
Interest  —   — 
         

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Common stock and warrants and debt issuances for:for (in thousands):
 
Issuance of shares for deposit on future acquisition
1,000—
Inventory—155
Prepaid professional fees—1,639
Debt converted to common stock—743
  2010  2009 
Purchase of Distribution rights for Jonway Products  (14,400)  — 
Purchase of Distribution rights for Better World Products  (2,160)  — 
Debt converted to common stock  (5,259)  — 

NOTE 17 – SUBSEQUENT EVENTS
ZAP completed the acquisition of 51% of Jonway pursuant to that certain Equity Transfer Agreement entered into between ZAP and Jonway Group Co., Ltd., dated July 2, 2010 for a total purchase price of $30,580,000 of which $29,030,000 in cash and 4 million shares of stock valued at $1 million have been paid.  Currently , Jonway  Group and ZAP are discussing the form of payment of the remaining $550,000 owed to Jonway  Group and the interpretation of a provision regarding an adjustment due to currency fluctuations in the exchange rate of the U.S. dollar to Chinese Yuan between ZAP’s payment dates.  ZAP funded a portion of the purchase price of the acquisition through a Senior Secured Convertible Note and Warrant Purchase Agreement dated as of January 12, 2011,  with China Electric Vehicle Corporation (or CEVC), a British Virgin Island company whose sole shareholder is Cathaya.
Pursuant to the agreement, (i) CEVC purchased from ZAP a Senior Secured Convertible Note in the principal amount of $19 million, (ii) ZAP issued to CEVC a warrant exercisable for two years for the purchase up to 20,000,000 shares of ZAP’s Common Stock at $0.50 per share, subject to adjustments as set forth therein, (iii) ZAP, certain investors of ZAP and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009, (iv) ZAP, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certain Registration Rights Agreement, dated as of August 6, 2009, as amended to grant certain registration rights relating to the note and the warrant, and (v) ZAP and CEVC entered into a Security Agreement securing the note with all of ZAP’s assets and property.
Conversion of Derivative Liabilities
During the first quarter of 2011 certain derivative liabilities were converted into 4.1 million shares of ZAP stock. At December 31, 2010 these financials instruments were fair valued at $5.5 million and included on our Balance Sheet.
 
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NOTE 15 – SUBSEQUENT EVENT

As previously disclosed in the Company’s Current Report on Form 8-K filed on February 2, 2010, on January 27, 2010,Sale of Stock to ZAP (the “Company”) and Samyang Optics Co. Ltd. (“Samyang”) entered into an Investment Agreement pursuant to which Samyang agreed to invest $3 million in convertible notes of the Company (the “Samyang Investment”) and the Company agreed to invest $2 million in Samyang (the “ZAP Investment”).  Pursuant to the Investment Agreement, the Samyang Investment was to be completed by February 15, 2010 and the ZAP Investment was to be completed within one month following the Samyang Investment.  

On February 11, 2010, the Samyang Investment was completed through the purchase of a subordinated convertible promissory note of the Company in the principal amount of $3 million dollars by Samyang (the “Note”) pursuant to a note purchase agreement entered into with Samyang dated December 31, 2009. 

In the event the Company consummates, prior to the Maturity Date, a public offering pursuant to a registration statement (an “Offering”), then all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company simultaneously with the closing of the Offering at a price per share equal to 95% of the price at which shares are sold in the Offering.  In the event the Company has not consummated an Offering on or prior to May 30, 2010, all principal, together with all accrued and unpaid interest under the Note, shall automatically convert into shares of Common Stock of the Company at a price per share equal to 90% of the closing price per share.  The shares of Common Stock that the Note shall be converted into shall be restri cted securities and shall be subject to resale restrictions under Rule 144.

In connection with the completion of the Samyang Investment, on February 24, 2010 the Company purchased equity securities of Samyang for an aggregate purchase price of $2 million.CO-CEO
 
On January 11, 2011, Alex Wang the CO CEO of ZAP entered into a private placement subscription agreement to provide the Company with $5 million in exchange for 5 million shares of ZAP stock by April 15, 2011. The Company has received a total of $2 million per the agreement through March 31, 2011. The remaining $3 million is due by April 15, 2011.

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Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Changes in Registrant’s Certifying Accountant
The Company was notified in January 2010 that the audit practice of Bagell, Josephs, Levine & Company, LLC, the Company’s independent registered public accounting firm, or BJL, was combined with Friedman LLP, or Friedman, on January 1, 2010. As of the same date, BJL resigned as the independent registered public accounting firm of the Company and, with the approval of the Audit Committee of the Company’s Board of Directors, Friedman was engaged as the Company’s independent registered public accounting firm.
During the two years ended December 31, 2008 and 2009, respectively, and from December 31, 2008 through the engagement of Friedman as the Company’s independent registered public accounting firm, neither the Company nor anyone on its behalf consulted Friedman with respect to any accounting or auditing issues involving the Company. In particular, there was no discussion with the Company regarding the application of accounting principles to a specified transaction, the type of audit opinion that might be rendered on the financial statements, or any matter that was either the subject of a disagreement, as described in Item 304 of Regulation S-K promulgated by the Securities and Exchange Commission, or SEC, with BJL, or a “reportable event” as described in Item 304(a)(1)(v) of Regulation S-K.Not applicable.
 
Item 9A.  Controls and Procedures.
 
Conclusion Regarding the EffectivenessEvaluation of Disclosure Controls and Procedures
 
We maintain disclosureDisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, or Exchange Act, is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and Chief Financial Officer, or collectively, the Certifying Officers, are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submitsubmitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC rules and forms.


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forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
AsUnder Section 404 of the endSarbanes-Oxley Act of the period covered by this report, the Certifying Officers evaluated the effectiveness2002, our management team is required to evaluate our internal control over financial reporting. During our review of our disclosure controlsfinancial statements and procedures. Based onresults for the evaluation,year ended December 31, 2010, our management, under the Certifying Officerssupervision and with the participation of our Chief Executive Officer and Chief Financial Officer, identified an internal control matter that rose to the level of a material weakness with respect to certain derivative liabilities. Consequently, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at December 31, 2010.  This weakness is discussed below under the section titled “Management’s Report on Internal Control Over Financial Reporting.”
  Management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the consolidated financial statements for the year ended December 31, 2010 fairly present in all material respects the financial condition and results of operations for us in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
Management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance that information required to be disclosed by usregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the reports that we fileUnited States, or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
The Certifying Officers have also concluded, based on their evaluation of our controlsGAAP.  Internal control over financial reporting includes those policies and procedures that as(a) pertain to the maintenance of December 31, 2009, our internal controls over financial reporting are effectiverecords that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide a reasonable assurance that transactions are recorded as necessary to permit preparation of achieving their objective.
The Certifying Officersfinancial statements in accordance with GAAP, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have also concluded that there was no changea material effect on the financial statements.  A “material weakness” is a deficiency, or a combination of deficiencies, in our internal controls over financial reporting identified in connection with the evaluation that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.reporting such that there is a reasonable possibility that a material misstatement of a registrant’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.  
 
(b) Changes in Internal Controls overDuring our review of our financial statements and results for the year ended December 31, 2010, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Reporting.
There were no changesOfficer, assessed the effectiveness of our internal control over financial reporting based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.  As a result of that occurredassessment, we identified the following internal control over financial reporting matter that rises to the level of a material weakness:
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We did not maintain effective controls over the identification, recording and oversight of certain derivative liabilities and the evaluation of the application of generally accepted accounting principles relating to these complex accounting instruments.
 We conducted an extensive review of our debt instruments and believe that we have properly accounted for them as of December 31, 2010. 
Changes in internal control over financial reporting
No significant changes were made in our internal control over financial reporting during the year ended December 31, 2009Company’s fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
 
Item 9B.  Other Information.
 
Not applicable.
 
PART III
 
Item 10.  Directors, Executive Officers and Corporate Governance.

The Company’sInformation relating to our directors and executive officers will be presented in our definitive proxy statement in connection with our 2011 Annual Meeting of Shareholders to be filed within 120 days of our fiscal year-end. That information is incorporated into this report by reference. We have adopted a code of ethics that applies to our principal executive officers and their ages asall members of March 25, 2010 are as follows:

Name
Age
Position
Steven M. Schneider49Chief Executive Officer and Director
Gary Dodd65President and Director
William Hartman62Chief Financial Officer
Amos Kazzaz54Chief Operating Officer
Mark Abdou36Director
Priscilla Lu57Director, Chairperson of the Board
Peter H. Scholl63Director
Eqbal Al Yousuf50Director
Steven M. Schneider –Chief Executive Officer and Director
Mr. Schneider has been a director and Chief Executive Officer of ZAP since October 2002. Mr. Schneider has a 30-year career in the automotive industry and a long-time interest in fun, fuel-efficient cars.  He has served as ZAP’s CEO since 2002, when the Company acquired Auto Distributors, Inc. and Voltage Vehicles, businesses he founded which specialized in the distribution of electric and alternative fuel vehicles including automobiles, motorcycles and bicycles.  Mr. Schneider also founded the RAP Group, an automotive liquidator and reseller, which ZAP also acquired.  He serves on the board of directors of Apollo Energy
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Systems, a developer of fuel cells and advanced batteries.  He also serves as a director of Rotoblock Corporation, a public company focused on the continued development of the oscillating piston engine.  He is an active member with various industry groups,our finance department, including the Electric Drive Transportation Association in Washington, DC, andprincipal accounting officer. This code of ethics is a member of the Bay Area Alliance of CEOs.  He lectures frequently on industry topics at universities and other organizations.  He was recently appointed as the Vice Chairman of Samyang Optics Co. Ltd. of South Korea and is also a Senior Advisor for Economic Development in China. This position assists the Administration Committee of Yuhang Zutan (Innovation Sone) for Yuhang District, Hangzhou, P.R. China. Mr. Schneider possesses particular knowledge and experien ce in automobile industry that strengthens the Board of Director’s collective qualifications, skills, and experience.
Gary Dodd – President and Director
Mr. Dodd has been a director of ZAP since June 2009 and has served as President of ZAP since June 2009.  Mr. Dodd served as one of the first general managers for Toyota Motor Corporation’s first plant in the United States.  Mr. Dodd also served as chairman of the management committee and participated actively in the plant’s TPS (Toyota Production System) programs.  He chaired the committee that developed the Toyota Supplier Support Center, and in 1993, he was appointed General Manager of National Manufacturing Relations for all of the company’s United States manufacturing, design, testing, and component parts production interests.  With the support of Toyota, Mr. Dodd started his own company and supplied Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Ford and General Mot ors with JIT, sequenced component parts from eleven plant locations, which he built in locations close to his customers. Mr. Dodd possesses particular knowledge and experience in automobile manufacturing that strengthens the Board of Director’s collective qualifications, skills, and experience.
William Hartman – Chief Financial Officer
Mr. Hartman has served as Chief Financial Officer of ZAP since March 2001. He was engaged with the Company as a financial consultant starting in January 2001. Prior to his engagement at ZAP, Mr. Hartman provided financial and accounting consulting services to various Internet start up companies in the San Francisco Bay Area from 1999 to 2001. Mr. Hartman is a Certified Public Accountant in the State of California with a Masters in Accounting Degree from the State University of New York. He also had previous public accounting experience as an audit manager with PricewaterhouseCoopers in San Francisco.
Amos Kazzaz – Chief Operating Officer
Mr. Kazzaz has served as Chief Operating Officer of ZAP since March 2007. Prior to joining ZAP, Mr. Kazzaz served as Vice President of Cost Management at United Airlines, Inc., an international airline, where he oversaw United Airline’s operations, process improvement, and cost management. From 2003 to 2006, Mr. Kazzaz served as United Airline’s Vice President of Financial Planning and Analysis during which time he accounted for United Airline’s planning and analysis function and capital budget. From 2002 to 2004, Mr. Kazzaz served as United Airline’s Vice President of the Business Transformation Office, the company’s first enterprise project management office, during which time he was responsible for identifying areas of revenue and cost improvements. Concurrently, Mr. Kazzaz served as the Chief Operating Officer at Avolar, a subsidiary of United Airlines. He currently sits on the Boards of Directors of Alliant Credit Union, SkyTech Solutions in India, and Integres. Mr. Kazzaz holds a bachelors degree in International Affairs from the University of Colorado and a Masters in Business Administration from the University of Denver.
Mark Abdou – Director
Mr. Abdou has served as a director of ZAP since June 2009.  Since April 2009, Mr. Abdou has served as the Chief Executive Officer and Managing Partner of Libertas Law Group. From August 2008 to March 2009, Mr. Abdou served as General Counsel and Sr. Vice President of GTX Corp, a technology company committed to developing miniaturized GPS tracking and cellular location-transmitting technology
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platforms for integration into a wide variety of consumer products. From December 2003 to August 2008, Mr. Abdou was a partner at Richardson & Patel, LLP. At Richardson & Patel, Mr. Abdou established an extensive network of banking and lending professionals and service providers including clients located in the middle-east. Mr. Abdou received his Bachelor of Arts degree in Biological Sciences from the University of Southern California in 1996, and his Juris Doctorate from the UC Berkeley School of Law (Boalt Hall) in 1999. Thereafter, he was licensed to practice law by the California State Bar in 1999. Mr. Abdou possesses particular knowledge and experience in law and international business that strengthen the Board of Director’s collective qualifications, skills, and experience.
Priscilla Lu – Director and Chairman
Dr. Lu has served as a director of ZAP since August 2009.  Dr. Lu has served as Managing Partner and Founder of Cathaya Funds, a private equity fund for China focused at mature businesses leveraging cross border alliances since 2009. From 2003 to 2009, Dr. Lu was a China advisor to Mayfield and helped found GSR Fund (overseeing US$1B investments) in China. From 2008, Dr. Lu was Founder and CEO of ViDeOnline, a company which delivered digital media over secured broadband and mobile networks to service providers to China broadband operators. She was also Founder, Chairman and CEO of interWAVE Communications and took the company public on the NASDAQ. interWAVE built the largest set of mobile GSM and CDMA networks in Africa with over 165 networks worldwide. Before this, Dr. Lu was at AT&T Bell Laboratories for 16 years, wh ere she led efforts in digital switching and networking, and developed the early technologies in CMOS VLSI in microprocessors. She has a B.S. and M.S. in Computer Science and Mathematics from University of Wisconsin, Madison and holds a Ph.D. in Electrical Engineering and Computer Science from Northwestern University, funded as a Bell Labs Scholar. Dr. Lu has 50 plus patents in telecommunications and networking. She is on several boards of directors, including Intel’s Consumer Board of Advisors and on Northwestern University’s Engineering School’s McCormick Advisory Board.  She is also founding member of the Cleantech Group in China. Dr. Lu possesses particular knowledge and experience in technology and international business that strengthen the Board of Director’s collective qualifications, skills, and experience.
Peter H. Scholl – Director
Mr. Scholl has served as a director of ZAP since 2006.  Since 2005, Mr. Scholl has been an independent engineering consultant. From 2003 to 2005, Mr. Scholl served as President of Rotoblock Inc. in Canada and Rotoblock Corporation, a Nevada corporation, in the development of Oscillating Piston Engine technology. He served as President of Unimont Inc., a real estate development firm, in Penticton, Canada from 2001 to 2003. From 1996 to 2000, Mr. Scholl worked on the development of water purification systems in Arizona. Mr. Scholl has a Bachelor’s of Science degree in Mechanical Engineering from the Institute of Technology in Biel, Switzerland. Mr. Scholl possesses particular knowledge and experience in technology that strengthen the Board of Director’s collective qualifications, skills, and experi ence.
Eqbal Al Yousuf – Director
Mr. Al Yousuf has served as a director of ZAP since 2007.  Mr. Al Yousuf is the President of Dubai’s Al-Yousuf Group and Al Yousuf LLC. He has a Bachelors Degree in Computer Science and a Bachelors Degree in Economics. He graduated from the University of Minnesota in May 1983. After he graduated, he joined his father’s firm as Managing Director and in 1988 he was appointed as Deputy Chairman, 2001 as Vice Chairman, and 2004 as Chief Executive Officer. In 2005, Mr. Al Yousuf was appointed as the President of Al Yousuf Group; a company that for more than 55 years has grown into a multi-million Dirham conglomerate covering operations ranging from motor vehicles, boat manufacturing, auto rental, real estate development, home electri cal appliances, computer operating systems, electronics and transportation and has proved to be one of the reputed and leading business groups in U.A.E. He has held this position since 2005.
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Mr. Al Yousuf possesses particular knowledge and experience in international business that strengthen the Board of Director’s collective qualifications, skills, and experience.
There are no family relationships among any of our officers or directors.
Board of Directors
Corporate Governance Principles and Board Matters
ZAP is committed to having sound corporate governance principles and practices. ZAP’s primary corporate governance documents, including our Code of Ethics and Committee Charters, are available to the public on our website at http://www.zapworld.com. The following is a discussion of our current governance principles and practices.

 
Board Meetings
During 2009, our Board of Directors met or conferred by telephone 6 times.  During 2009, all directors attended at least 75% of the aggregate of (i) the total number of meetings of the Board during 2009 and (ii) the total number of meetings held by all committees of the Board on which such director served in 2009. The Company does not have a policy with regard to attendance of directors at annual meetings, but encourages them to be present.
Committees of the Board
Audit Committee
The Board of Director’s Audit Committee is comprised of Peter Scholl and Mark Abdou.  During 2009, the Audit Committee met 4 times. The members of the Audit Committee are able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement.  The Board of Directors has determined that Mr. Scholl qualifies as an audit committee financial expert as defined within the SEC rules.
The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of the accounting, auditing, and reporting practices of the Company. The Audit Committee’s role includes overseeing the work of the Company’s internal accounting and financial reporting and internal auditing processes and discussing with management the Company’s processes to manage business and financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements. The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to prepare or issue audit reports on the financial statements and internal control over financial reporting of the Company. The Audit Committee relies on the expertise and knowledge of management and the independent auditor in carrying out its oversight responsibilities. The Audit Committee’s specific responsibilities are delineated in the Audit Committee Charter. The Audit Committee Charter is available on our website at http://www.zapworld.com.
Compensation Committee
The Board of Director’s Compensation Committee is comprised of Priscilla Lu, Mark Abdou and Peter Scholl. During 2009, the Compensation Committee met in conjunction with the Board of Directors meetings. A copy of the Compensation Committee Charter is available on our website at http://www.zapworld.com. The Compensation Committee, among other things, advises the Board on all matters pertaining to compensation programs and policies, approves the compensation payable to each of the
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officers of the Company, reviews proposed compensation of executives as provided in the Company’s executive compensation plan and administers the Company’s stock option plans.
Corporate Governance and Nominating Committee
The Board of Director’s Corporate Governance and Nominating Committee, or the Governance Committee, is comprised of Peter Scholl. During 2009, the Governance Committee met in conjunction with the Board of Directors meetings. The Governance Committee has adopted a charter, which has been ratified and approved by the Board of Directors.  A copy of the committee’s charter is available on our website at http://www.zapworld.com.
The Governance Committee, among other things, identifies, evaluates and recommends individuals qualified to be directors of the Company.  Members of the Board of Directors should have the highest professional and personal ethics and values. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be able to provide insights and practical wisdom based on their experience and expertise. They should be committed to enhancing shareholder value and should have sufficient time to effectively carry out their duties. Their service on other boards of public companies should be limited to a reasonable number.
The Governance Committee annually reviews the appropriate skills and characteristics required of board members in the context of the current composition of the Board of Directors, the operating requirements of the Company and the long-term interests of the shareholders. In conducting this assessment, the committee considers diversity, age, skills, and such other factors as it deems appropriate given the current needs of the Board of Directors and the Company, to maintain a balance of knowledge, experience and capability.
Code of Ethics
The Board of Directors has adopted a Code of Ethics to provide guidance on maintaining the Company’s commitment to being honest and ethical in its business endeavors.  The Code of Ethics covers a wide range of business practices, procedures and basic principles regarding corporate and personal conduct and applies to all directors, executives, officers and employees. A copy of the Code of Ethics is available on our website http://www.zapworld.com or may be obtained by written request submitted to the Corporate Secretary at ZAP, 501 Fourth Street, Santa Rosa, CA 95401.  The Company intends to satisfy any disclosure requirements regarding amendments to, or waivers from, any provision of the Code of Ethics by disclosing on the Company’s website, by press release and/or on a Current Report on Form 8-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers, directors and persons beneficially owning more than 10% of the outstanding common stock of the Company to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Officers, directors, and greater than 10% beneficial owners of common stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. The Company believes that during the fiscal year ended December 31, 2009, all officers and directors timely filed the initial statement of beneficial ownership of securities on Form 3.  The Company also believes that during the fiscal year ended December 31, 2009, all o fficers and directors timely reported certain transactions on Form 4s except for Mr. Eqbal Al Yousuf, our Director, who did not report certain sales of securities in the last few days of December 2009, until March of 2010.
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Item 11.  Executive Compensation.Compensation

           Information required by this item will be presented in our definitive proxy statement. That information is incorporated into this report by reference.
Executive Compensation
The following executive compensation disclosure reflects all compensation awarded to, earned by or paid to the executive officers below for the fiscal year ended December 31, 2009 and 2008.  The following table summarizes all compensation for fiscal year 2009 received by our Chief Executive Officer, and the Company’s other most highly compensated executive officers who earned more than $100,000 in fiscal year 2009 and 2008 also referred to in this Annual Report, as the named executive officers.
SUMMARY COMPENSATION TABLE
Name and principal position
 
Year
 
Salary ($)
 
Bonus ($)
 
Stock Awards ($) (1)
 
Option Awards ($) (2)
 
Non-Equity Incentive Plan Compensation ($)
 
Nonqualified Deferred Compensation Earnings ($)
 
All Other Compensation ($)
 
Total ($)
 
Steven Schneider, CEO2009179,000—31,7503,522,541———3,733,291
 2008131,865 30,835————   162,700
Gary Dodd, President (3)2009  58,33750,000—   318,780———   427,117
 2008————————
William Hartman, CFO2009125,000—35,015   167,000———   327,015
 2008121,500     300,500———   422,000
Amos Kazzaz, COO2009125,000——   156,886———   281,886
 2008115,90010,50025,500————   151,900
(1)Stock awards are based on the stock price on the date of issue.
(2)Option awards were valued using the Black Scholes method
(3)Mr. Dodd became President on June 1, 2009.
Employment Agreements
As of the date of this Annual Report, we do not have employment agreements with our officers other than Gary Dodd. On December 1, 2009, the Compensation Committee of the Board of Directors approved the award of a stock option to purchase one million shares of the Company’s common stock (the “New Stock Option”) to each Officer  and Gary Starr in exchange for the termination of a stock option to purchase one million shares of Common Stock that had been previously granted to each Officer and Gary Starr. The exercise price of the New Stock Options was set at $0.25 per share, which is higher than the closing trading price of the Company’s common stock on the date of grant.  One third of the shares subject to the N ew Stock Options vested as of the date of grant, and the remainder shall vest ratably each month until vesting is completed on November 30, 2011.
Gary Dodd
A definitive employment agreement was executed by ZAP on June 10, 2009 with Mr. Dodd. Under the terms of the agreement, Mr. Dodd’s base salary is one hundred fifty thousand dollars ($150,000) per annum, payable $100,000 in cash salary and $50,000 of ZAP common stock in substantially equal semi-monthly installments, commencing on June 1, 2009. Additionally, Mr. Dodd received 1,000,000 shares of ZAP common stock upon signing his agreement and options to purchase 150,000 shares of common stock annually. The term of Mr. Dodd’s employment shall extend for a period of 18 months from June 1, 2009 unless terminated sooner. If Mr. Dodd is terminated, he will receive a lump sum payment equal to the balance of the monthly salary for the remaining term of the agreement.
The following table sets forth certain information concerning stock option awards granted to our named executive officers.
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OPTION AND WARRANT AWARDS
 
STOCK AWARDS
Name
 
 
Number of securities underlying unexercised options (#) Exercisable
 
 
Number of securities underlying unexercised options (#) Unexercisable
 
 
Equity Incentive Plan Awards: Number of securities underlying unexercised unearned options (#)
 
 
Option exercise price ($)
 
 
Option expiration date
 
 
Number of shares or units of stock that have not vested (#)
 
 
Market value of shares or units of stock that have not vested ($)
 
 
Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)
 
 
Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($)
 
Steve Schneider (3)    220,000 — — 0.23 7/5/12        
Steve Schneider (3)    550,000   — 1.15 6/23/14        
Steve Schneider (2)    566,117   — 1.20 11/16/14        
Steve Schneider (2)    348,588   — 0.85 6/7/15        
Steve Schneider (2)    572,686     0.94 11/9/17        
Steve Schneider (4) 1,063,480     1.08 7/1/12        
Steve Schneider (4) 2,690,000     1.08 7/1/12        
Steve Schneider (4) 3,190,000     1.08 7/1/12        
Steve Schneider (4) 3,025,000     0.91 7/1/12        
Steve Schneider (4) 1,690,786     0.91 7/1/12        
Steve Schneider (1)    572,686     1.00 7/1/12        
Steve Schneider (3)    390,966     0.83 8/11/16        
Steve Schneider (7) 4,231,127 5,702,813   0.39 08/6/14        
Gary Dodd
 1,150,000     0.40 06/01/14        
William Hartman (4)    807,369 — — 0.91 7/1/12        
William Hartman (4)      22,000     1.08 7/1/2012        
William Hartman (7)    425,925    574,075 — 0.25 11/30/14        
William Hartman (6)    367,000     0.78 08/28/18        
Amos Kazzaz (7)    400,258    539,479   0.25 11/30/14        
Note: All options and warrants issued before February 28, 2007 were adjusted for the 10% stock dividend authorized by the Board of Directors effective on this date.
(1)The award represents warrants which are exercisable at the time of issuance per employment agreement
(2)The award vest at the date of grant.  The option has a ten year life. Issued per the employment agreements
(3)The award vests equally over 36 months from date of grant.  The option has a ten year life.
(4)The award is warrants to purchase ZAP Common  stock, these five year warrants were initially issued on June 1, 2002 at the time of the Reorganization. In January, 2007 they were extended another five years until June 1, 2012 with their original exercise prices also adjusted.
(5)The award vests equally over 36 months from date of grant.  The option has a ten year life. Issued per their employment agreement.
(6)The award vested at the date of grant.  The option has a ten year life.  Issued per the employment agreement
(7)The Option becomes exercisable with one third on November 30, 2009 and the remainder on a monthly basis through November 30, 2011.
Director Compensation
The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the outside directors below for the fiscal year ended December 31, 2009.
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Compensation of Directors
The outside directors receive $30,000 per annum as compensation for services and $4,000 per annum for each committee served. The cash portion is limited to $12,000 with the remainder paid in company stock.  In addition to the aforementioned, the outside directors also receive $25,000 of the Company’s common stock and 60,000 options to purchase common stock. For service on the Board of Directors, the outside directors receive options to purchase 18,000 shares of common stock for each committee of the Board of Directors served on.
Directors are also reimbursed for out-of-pocket travel and other expenses incurred in attending Board and/or committee meetings.
The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the outside directors below for the fiscal year ended December 31, 2009.
Name
 
 
Fees Earned or Paid in Cash ($)
 
 
Stock Awards ($)
 
 
Option Awards ($)
 
 
Non-Equity Incentive Plan Compensation ($)
 
 
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
 
 
All Other Compensation ($)
 
 
Total ($)
 
Mark Abdou
 12,000 51,000 29,760 — — —      92,760
Priscilla Lu
 — —  2,241,925 (1) — — — 2,241,925
Peter H. Scholl
 12,000 51,000 29,760 — — —      92,760
Eqbal Al Yousuf
 — — — — — — —
(1) Issued in connection with Cathaya Capital Financing in August 2009.
 
Item 12:12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Shareholder Matters

           
The following table sets forth certainInformation required by this item will be presented in our definitive proxy statement. That information as of March 26, 2010, with respect to the holdings of (1) each person who is the beneficial owner of more than five percent of our common stock, (2) each of our directors, (3) the CEO and each named executive officer, and (4) all of our directors and executive officers as a group.
Beneficial ownership of the common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a person exercises sole or shared voting or investment powers, or of which a person has a right to acquire ownership at any time within 60 days of March 26, 2010. Except as otherwise indicated, and subject to applicable community property laws, the persons named inincorporated into this table have sole voting and investment power with respect to all shares of common stock heldreport by them. Applicable percentage ownership in the following table is based on 105,223,888 shares of common stock outstanding as of March 26, 2010, plus, for each individual, any securities that individual has the right to acquire within 60 days of March 26, 2010.reference.
- 54 -
Unless otherwise indicated below, the address of each of the principal shareholders is c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401.
Name and Address
 
Shares Beneficially Owned
 
Percentage of Class
Beneficial Owners of More than 5%:    
Jeffrey G. Banks (1), the Banks Group
 10,268,987 13.56%
Gary Starr (2)
   8,980,654   8.07%
Gang Wang, Jonway Automobile Group
   4,000,000   5.89%
Current Directors and  Named Executive Officers:    
Steven Schneider (3)
 20,802,588 19.77%
Priscilla Lu (4), Cathaya Capital L.P.
 42,085,000 39.99%
Eqbal Al Yousuf (5)
   9,699,114   8.72%
William Hartman (6)
   2,318,617   2.20%
Gary Dodd (7)
   1,288,900   1.22%
Amos Kazzaz *
 — 
—
Mark Abdou *
 
—
 
—
Peter Scholl *
 
—
 
—
All Directors and Executive Officers as a group (8) persons)
 76,194,219 71.90%
*Less than 1%.
(1)Includes warrants to purchase 4 million shares of common stock.
(2)Includes 6,013,000 shares of common stock issuable upon the exercise of various warrants and 1,942,000 shares of common stock issuable upon the exercise of stock options.
(3)Includes 12,231,000 shares of common stock issuable upon the exercise of various warrants and 5,463,000 shares of common stock issuable upon the exercise of stock options.
(4)Includes 40 million shares of common stock issuable upon the exercise of various warrants and 2,085,000 shares of common stock issuable upon the exercise of stock options.
(5)Shares were issued to Al-Yousuf  LLC of which Mr. Al Yousuf is the President. Includes warrants to purchase 1,744,000 million shares of common stock
(6)Includes 929,000 shares of common stock issuable upon the exercise of various warrants and 781,000 shares of common stock issuable upon the exercise of stock options.
(7)Includes 1,150,000 shares of common stock issuable upon the exercise of stock options.
Equity Compensation Plan Information
We have adopted stock incentive plans to provide incentives to attract and retain officers, directors, key employees and consultants. We currently have reserved a total of 44 million shares of our common stock for granting awards, 10 million shares under our 2002 Incentive Stock Option Plan, and 4 million shares under our 2006 Incentive Stock Option Plan 10 million  shares under our 2007 Stock Incentive Plan and 20 million shares under our 2008 Stock Incentive plans . All plans were approved by our shareholders.
A summary of options under the Company’s stock option plans from December 31, 2008 through December 31, 2009 is as follows (the number of shares is in thousands):
  
Number of Shares
  
Weighted Average Exercise Price
  
Weighted Average Remaining Contractual Term (in years)
 
Outstanding December 31, 2008
  11,666  $1.04   8.39 
Options granted under the plan
  —   —   — 
Options exercised
  —   —   — 
Options forfeited and expired
  —   —   — 
Outstanding March 31, 2009
  11,666  $.96   8.00 
Options granted under the plan
  1,150  $0.40   10.0 
Options exercised
  —   —   — 
Options forfeited and expired
  (2,542)  —   — 
Outstanding June 30, 2009
  10,274  $.39   10.0 
Options granted under the plan
  17,034  $0.78   10.0 
Options exercised
  —   —   — 
 
 
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Options forfeited and expired
  (444)  —   — 
Outstanding September 30, 2009
  26,864  $0.56   7.74 
Options granted under the plan
  2,350  $0.25     
Options exercised
  —   —   — 
Options forfeited and expired
  (3,762)  —   — 
Outstanding December 31, 2009
  25,452  $.56   7.74 
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of our stock exceeded the exercise price of the options at December 31,2009, for those options for which the quoted market price was in excess of the exercise price. There were 3.7 million options were in the money valued at $516,600 as of December 31, 2009.
Item 13.  Certain Relationships and Related Transactions, and Director Independence.Independence

           
Related Party Transactions
Rental agreements
The Company rents office space, land and warehouse space from Mr. Steven Schneider, its Chief Executive Officer and a major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense was approximately $84,000 for each of the years ended December 31, 2009 and 2008.
Financing provided to the Company by Cathaya Capital LLC whose General Partner is Priscilla Lu, Chairman of the Board of ZAP
On August 6, 2009, the Company entered into a Securities Purchase Agreement with Cathaya Capital, L.P., a Cayman Islands exempted limited partnership, or Cathaya. Pursuant to the agreement, Cathaya purchased 20 million shares of the Company’s common stock at a price of $0.25 per share for an aggregate purchase price of $5 million. In addition warrants were also issued to the investors which grant the holders the right to purchase up to 10,000,000 shares of the Company’s common stock at a price of $0.50 per share.  The warrants expire on August 16, 2014.
The Company also entered into a Secured Loan Facility with Cathaya pursuant to a Secured Convertible Promissory Note, or the Note. The Note provides for an aggregate principal amount of up to $10 million in advances to be made to the Company by Cathaya prior to October 1, 2012. The aggregate principal amount of the advances made under the Note accrues interest at a rate per annum equal to the greater of (i) five percent (5%) and (ii) three percent (3%) plus prime. The aggregate principal amount of each advance made under the Note plus interest becomes due and payable to Cathaya on the earlier of (i) the two year anniversary of the date such advance was made and (ii) December 31, 2012. The Note is convertible into shares of the Company’s common stock at a conversion rate, subject to any adjustments call ed for by the terms of the Note, of 2,000 shares of common stock for each $1,000 principal amount of the Note being converted. The Note is secured by the terms and conditions of a security agreement covering all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.  Additional warrants were also issued to the holder which grants the right to purchase up to six million shares of the Company’s common stock at a price of $0.50 per share.  The warrants expire on August 16, 2014.
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Financing provided to the Company by Al Yousuf LLC, Whose President is a Director of ZAP
The Company entered into various financing arrangements during the second and third quarter of 2008 with the Al Yousuf Group which is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf, who is also a member of the Board of Directors of ZAP and arranged the note terms and provisions.
On July 30, 2008, we received a $10 million financing arrangement from the Al Yousuf Group to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The note matured on February 28, 2010. Interest only payments were due under the note monthly commencing August 30, 2008. All principal and interest due under the note is secured by the corporate headquarters building in Santa Rosa, California.
On May 14, 2009, we received a Notice of Delinquent Payments from Mr. Hossein Haghighi, the Chief Financial Officer of Al Yousuf LLC, notifying us that an outstanding principle for inventory advances of $3.4 million plus monthly interest payments has not been paid asInformation required by a $10 million Promissory Note. Mr. Haghighi further indicated that AL Yousuf LLC intended to enforce the collection of the total amounts due under the terms of the note against the Company. The collateral for the notethis item will be presented in our definitive proxy statement. That information is our corporate headquarters building and land located in Santa Rosa, California. The total due on the note is approximately $5.8 million at December 31, 2009 with inventory advances totaling $3.4 million and a building loan of $1.8 million and interest of $0.6 million.incorporated into this report by reference.
On September 25, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SW 245950) was filed in the Superior Court for the County of Sonoma.  The complaint alleges causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  In its Complaint, Al Yousuf LLC claims that ZAP has failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.  Al Yousuf LLC seeks to foreclose on the property that secures the loan agreement and recover their attorneys fees and obtain such other and further relief as the court may deem just and proper.  ZAP has responded to the complaint and the parties are engaged in settlement discussions.
In addition, the Company borrowed $760,000 from Portable Energy LLC; a private equity company equally owned 50% by ZAP and Al Yousuf. These borrowings are due on demand.
Director Independence
The following directors are independent directors as that term is defined under NASDAQ Rule 4200(a) (15):
Peter Scholl
Mark Abdou
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PART IV
 
Item 14.  Principal Accountant Fees and Services.
Audit and Non-Audit Fees
The following table presents fees for professional audit services rendered by Friedman LLP for the audit of the Company’s annual financial statements for the year ended December 31, 2009 and Bagell Josephs, Levine & Co. LLC for the audit of the Company’s annual financial statements for the year ended December 31, 2008:
  
2009
  
2008
 
Audit fees:1 
 $134,000  $140,000 
Audit-related fees: 2 
  —   — 
Tax fees:3 
  —   — 
All other fees:4 
  —   — 
Total
 $134,000  $140,000 
Services

           
(1)Audit fees include fees invoiced for the audit of the Company’s annual financial statements and the quarterly reviews of these statements, as well as fees for consultation regarding accounting issues and their impact on or presentation in the Company’s financial statements.
(2)This category includes fees billed for assurance and related services that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported under “Audit Fees,” and generally consist of fees for due diligence in connection with acquisitions, registration statements, accounting consultation and audits of employee benefit plans.
(3)This category includes fees billed for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice.
(4)The Company generally does not engage Friedman LLP or Bagell, Joseph, Levine Company, LLC for “other” services.
Information required by this item will be presented in our definitive proxy statement. That information is incorporated into this report by reference.
 
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Public Accounting Firm
 
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.PART IV
 
Item 15.  Exhibits and Financial Statement Schedules.
 
(a) (a)           Documents filed as part of this report.
 
1. Financial Statements
 
The following Financial Statements of ZAP and ReportsReport of Independent Registered Public Accounting Firm have been filed as part of this Form 10-K:
 
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Report of Independent Registered Public Accounting Firm48
 2.
Consolidated Balance Sheets as of December 31, 2010 and 200949
Consolidated Statement of Operations for the years ended December 31, 2010 and 200950
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2010 and 200951
Consolidated Statement of Cash Flows for the years ended December 31, 2010 and 200952
Notes to Consolidated Financial Statement SchedulesStatements53
 
None –
2. Financial Statement Schedules

All financial statement schedules are omitted becausesince the required information is inapplicable or the information is presented in the consolidated financial statements or notes to the financial statements.
3. Exhibits
The list of Exhibits required by Item 601 of Regulation S-K. See part (b) below.thereto.
 
(b)           Exhibits.
The following table lists the exhibits filed as part of this report. In some cases, these exhibits are incorporated into this report by reference to exhibits to our other filings with the Securities and Exchange Commission.

Exhibit
Number
Description
2.1Approved Second Amended Plan of Reorganization dated as June 20,17, 2002. (5)
78
3.1Amended and Restated Articles of Incorporation. (4)
3.2Certificate of Determination of Series SA Convertible Preferred Stock. (14)(13)
3.3[Bylaws]Bylaws. (30)
4.1Form of common share purchase warrant of the Company heldCommon Stock Purchase Agreement by and among ZAP and Fusion Capital Fund II, L.P. dated as of July 22, 2004. (6)
4.2Form of Series B common stock purchase warrantWarrant to Purchase Common Stock of the Company. (14)(13)
4.3Form of SeriesClass K common stock purchase warrantWarrant to Purchase Common Stock of the Company. (14)(13)
10.1Settlement Agreement between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders dated June 27, 2001. (3)
10.310.22004 Consultant Stock Plan. (7)
10.410.3Convertible Promissory Note dated April 26, 2004, issued toby and among the Company and Jeffrey G. Banks and Karen A. Banks, Trustees of the Banks Living Trust.Trust dated as of April 12, 2004. (1)
10.510.4Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLCby and ZAP. (3)
10.6Promissory Note $2,000,000 —among Atocha Land LLC and ZAP.ZAP dated as of March 7, 2003. (3)
10.710.5Warrant AgreementPromissory Note by and among Atocha Land LLC and ZAP dated April 26, 2004, issued to Banks Living Trust. (1)as of March 7, 2004. (3)
10.810.6Common Stock Purchase Agreement between ZAPby and Fusion Capital Fund II, LLC. (6)
10.9Registration Rights Agreement between ZAP and Fusion Capital Fund II, LLC. (6)
10.10Form of Common Stock Purchase Warrant between ZAPamong the Company and Fusion Capital Fund II, LLC dated as of July 22, 2004. (6)
10.1110.7Registration Rights Agreement for Consulting Services with Evan Rapoportbetween the Company and Fusion Capital Fund II, LLC dated January 8,as of July 22, 2004. (1)
10.12Asset Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of various autos (1)
10.13Agreement for Private Placement Investment received dated April 14, 2004 with Phi-Nest Fund LLP (1)(6)
 
 
- 59 -79
 
Exhibit
Number
10.8
Description
Form of Common Stock Purchase Warrant by and among the Company and Fusion Capital Fund II, LLC dated as of July 20, 2004. (6)
10.9Consulting Agreement by and among the Company and Evan Rapoport dated as of January 8, 2004. (1)
10.10Asset Purchase Agreement by and among the Company and Jeff Banks dated as of April 12, 2004. (1)
10.11Private Placement Investment Agreement by and among the Company and Phi-Nest Fund LLP dated as of April 14, 2004. (1)
10.12Consulting Agreement by and among the Company and Elexis International, Inc. dated as of April 21, 2004. (1)
10.13Consulting Agreement by and among the Company and Sunshine 511 Holdings dated as of February 21, 2004. (1)
10.14ConsultingConversion Agreement by and among the Company and Smart Automobile, LLC dated April 21, 2004 with Elexis International (1)
10.15Consulting Agreement dated April 21, 2004 with Sunshine 511 Holdings (1)
10.16Definitive Stock Agreement datedas of October 25, 2004 with Smart-Automobile, LLC2004. (2)
10.1710.15Master Distribution Agreement betweenby and among Apollo Energy Systems, Inc. and Voltage Vehicles Corporation a subsidiarydated as of ZAP.August 6, 2004. (8)
10.1810.16ZAP Floor Line and Dealer Development Agreement withby and among the Company and Clean Air Motors, LLC for a $45 Million Floor Plan Linedated as of Credit for Qualified ZAP DealersJune 28, 2004. (9)
10.1910.17Exclusive Purchase, License and Supply Agreement betweenby and among ZAP and Smart Automobile, LLC and ZAP. (10)dated as of April 19, 2004. (1)
10.2010.18Amendment dated November 15, 2004 to previous consulting agreement with Sunshine Holdings 511 (14)(13)
10.2110.19Secured Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP. (14)(13)
80
10.2210.20ZAP assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest Fund, LLP as collateral on note payable (14)dated as of December 30, 2004. (13)
10.2310.21Promissory note receivable dated January 6, 2005 for $1 million loan due from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC) (14)(13)
10.2410.22Security Agreement dated January 6, 2005 from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC) to secure loan above. (14)(13)
10.25Common Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage Fund LP (14)
10.26Form of Common Stock Purchase Warrant between ZAP and Platinum Partners Value Arbitrage Fund LP (14)
10.27Common Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP (14)
10.28Form of Common Stock Purchase Warrant between ZAP and Lazarus Investment Partners LLP (14)
10.2910.23Termination of Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC (11)dated as of February 22, 2005. (10)
10.3010.24Financing Agreement between ZAP and Surge Capital II, LLC (12)dated as of September 12, 2005. (11)
10.3110.25Exclusive Purchase, License, and Supply Agreement between ZAPby and among the Company, Voltage Vehicles, and Obvio! Automotoveiculos S.P.E. Ltda (13)dated as of September 15, 2005. (12)
10.3610.26Agreement dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile (15)Automobile. (14)
10.3710.27Amendment Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC (16)LLC. (15)
10.3810.28Exclusive Distribution Agreement dated May 1, 2005, as supplemented by a letter dated June 9, 20062006. (16)
10.29ZAP Guarantee. (17)
81
10.39ZAP Guarantee (18)
10.4010.30Shandong Jindalu Vehicle Co., Ltd. GuaranteeGuarantee. (18)
10.31Agreement to Form Joint Venture between Shadong Jindalu and ZAP dated as of September 21, 2006. (19)
10.41Joint Venture Negotiations dated September 21, 2006 (20)
10.4210.32Security Purchase Agreement between ZAP and Certain Institutional Investors (21)dated as of December 5, 2006. (20)
10.4310.33Purchase and Amendment Agreement between ZAP and Certain Institutional Investors (22)dated as of February 20, 2007. (21)
10.4410.34Form of Convertible Note (22)Note. (21)
10.4510.35Form or Warrant (22)Warrant. (21)
10.4610.36Purchase order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its Xebra 2007 model year electric vehicles (23)vehicles. (22)
10.4710.37Distribution agreement this week with PML FlightLink Limited (PML) for the purchase of an advanced wheel motor and control system (24)system.(23)
10.4810.38Joint Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market and distribute electric a and hybrid vehicles for the worldwide passenger car, truck and bus markets (25)markets. (24)
10.4910.39Form SB-2 Registration of Common Stock.
10.5010.40Settlement and Mutual Release Agreement with Gemini Master Fund, LTD and Gemini Strategies, LLC dated May 7, 2008.(22) (21)
10.5110.41Note Purchase Agreement with Al Yousuf dated May 8, ,2008.(22)2008. (21)
10.5210.42Promissory Note in favor of Al Yousuf LLC, dated July 30, 2008 and Deed of Trust, Assignment of Leases, Rents and Security Agreement and Fixture Filing by ZAP in favor of Al Yousuf LLC, dated July 30, 2008.(23) (22)
 
 
- 60 -82
 
Exhibit
Number
Description
10.5310.43Subscription Agreement dated June 9, 2009 from The Banks Group LLC. (27)(26)
10.5410.44Subscription Agreement dated June 9, 2009 from The Banks Development Trust. (27)(26)
10.5510.45Warrant to Purchase Common Stock dated June 9, 2009 issued to The Banks Group,LLC. (27)(26) 
10.5610.46Warrant to Purchase Common Stock dated June 9, 2009 issued to The Banks Development Trust (27)Trust. (26)
10.5710.47Employment Agreement with Gary Dodd, President of ZAP (28)ZAP. (27)
10.5810.48Securities Purchase Agreement dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.5910.49Secured Convertible Promissory Noted dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6010.50Security  Agreement dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6110.51Warrant (First) to Purchase  Common Stock dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6210.52Warrant (Second) to Purchase Common  Stock dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6310.53Registration Rights Agreement dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6410.54Voting Agreement dated August 6, 2009 with Cathaya Capital L.P (29)L.P. (28)
10.6510.55Indemnification Agreement dated August 6, 2009 with Priscilla Lu (29)Lu. (28)
10.6610.56Amendment to Prior Employment AgreementsAgreement dated August 6, 2009 with Steven Schneider (29)Schneider. (28)
83
10.6710.57Joint Venture Contract regarding ZAP Hangzhou dated December 11, 2009 with Better World International, LTD and Holley Group. (29)
10.58Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd., dated July 2, 2010. (31)
10.59Joint Venture Contract, dated July 2, 2010 with Jonway Group (30)Co., Ltd. (31)
10.60Securities Purchase Agreement, dated July 9, 2010. (32)
10.61Senior Secured Convertible Note and Warrant Purchase Agreement with China Electric Vehicle Corporation dated January 12, 2011. (33)
10.62Senior Secured Convertible Promissory Note to China Electric Vehicle Corporation dated January 12, 2011. (33)
10.63Warrant to Purchase Common Stock to China Electric Vehicle Corporation dated January 12, 2011. (33)
10.64Amended and Restated Registration Rights Agreement dated January 12, 2011. (33)
10.65Amended and Restated Voting Agreement dated January 12, 2011. (33)
10.66Employment Agreement with Benjamin Zhu (Zhu Li Dong), Chief Executive Officer of ZAP.
10.672002 Incentive Stock Plan. (34)
10.682006 Incentive Stock Plan. (35)
10.692007 Consultant Stock Plan. (36)
10.702008 Equity Compensation Plan. (37)
10.71
Remy Inc. and Zap - Development and Supply Agreement
10.72
Note Purchase Agreement with Samyang Optics Co. LTD December 31, 2009
10.73
ZAP Subordinated Convertible Promissory Note dated February 11, 2010
10.74
International Distribution Agreement dated January 27, 2010
10.75
Purchase Order for ZAP Jonway UFO Electric SUV dated
10.76
Amendment to that certain Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd., dated July 2, 2010, between ZAP and Jonway Group Co., Ltd.
10.77
Management Agreement between ZAP and Cathaya Capital, L.P., dated November 10, 2010. (38)
10.78
Distribution Agreement between ZAP and Goldenstone Worldwide Limited, dated October 10, 2010. (38)
84
21.1List of subsidiaries.
24.123.1
PowerConsent of Attorney (see page 61)
Friedman LLP — Form S-8
31.1Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Principal Financial Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
_________________________

 (1)Previously Filedfiled as an exhibit to the Registrants’ Quarterly Report on Form 8-K for10QSB filed with the quarter ended March 31,Securities and Exchange Commission on May 17, 2004 and incorporated by reference.
 (2)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K of November 6,5, 2004 and incorporated by reference.
 (3)Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for10KSB filed with the year ended December 31, 2003Securities and Exchange Commission on March 30, 2004 and incorporated by reference.
 (4)Previously filed with Pre-effective Amendment Numberas an exhibit to the Registrant’s Registration Report on Form S-8 filed on February 3, 2006 as amended by the exhibit to the Registrant’s Quarterly Report on Form SB-2 registration statement10QSB filed with the Securitieson August 14, 2006 and Exchange Commission on October 3, 2001.incorporated by reference.
 (5)Previously filed as an exhibit to the Registrant’s Form 8-K of October 20,July 12, 2002 and incorporated by reference.
 (6)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K datedfiled with the Securities and Exchange Commission on July 22,29, 2004 and incorporated herein by reference.
 (7)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-117560)filed with the Securities and Exchange Commission on July 22, 2004.2004 and incorporated herein by reference.
 (8)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on October 6, 2004 and incorporated herein by reference.
 (9)Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10QSB forfiled with the period ended June 30,Securities and Exchange Commission on August 16, 2004 and incorporated herein by reference.
 (10)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on April 21, 2004February 25, 2005 and incorporated herein by reference.
 (11)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on February 25,September 16, 2005 and incorporated herein by reference.
85
 (12)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on September 16,21, 2005 and incorporated herein by reference.
 (13)Previously filed as an exhibit to the Registrant’s CurrentYearly Report on Form 8K10KSB filed with the Securities and Exchange Commission on September 21,April 5, 2005 and incorporated herein by reference.
 (14)Previously filed as an exhibit to the Registrant’s YearlyCurrent Report on Form 10KSB for8-K filed with the period ended December 31, 2004Securities and Exchange Commission on July 20, 2006 and incorporated herein by reference.
- 61 -
 (15)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on July 20,September 6, 2006 and incorporated herein by reference.
 (16)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on SeptemberNovember 6, 2006 and incorporated herein by reference.
 (17)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.
 (18)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.
 (19)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.
 (20)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on November 6,December 11, 2006 and incorporated herein by reference.
 (21)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on December 11, 2006February 26, 2007 and incorporated herein by reference.
 (22)Previously filed as an exhibit to the Registrant’s Current Report on Form 8K8-K filed with the Securities and Exchange Commission on FebruaryApril 26, 2007 and incorporated herein by reference.
 (23)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2007 and incorporated herein by reference.
(24)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 3, 2007 and incorporated herein by reference.
 (25)(24)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 17, 2007 and incorporated herein by reference.
 (26)(25)Previously filed as an exhibit to the Registrant’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on September 24, 2007, effective on October 2, 2007 and incorporated herein by reference.
(27) (26)
Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 11, 2009 and incorporated herein by reference.
(28) (27)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2009 and incorporated herein by reference.
(29) (28)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on  August 10, 2009 and incorporated herein by reference.
(30) (29)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2009 and incorporated herein by reference.

 (30)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 3, 2006 and incorporated herein by reference.
 (31)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 2, 2010 and incorporated herein by reference.
 (32)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2010 and incorporated herein by reference.
(33)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 21, 2011 and incorporated herein by reference.
(34)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 on February 3, 2006 and incorporated herein by reference.
(35)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 on April 11, 2007 and incorporated herein by reference.
(36)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 on April 11, 2007 and incorporated herein by reference.
(37)Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 on March 13, 2009 and incorporated herein by reference.
(38)Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 12, 2010 and incorporated herein by reference.
 
- 62 -86
 
SIGNATURES
SIGNATURES
 
In accordance withPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ZAP
By:
/s/ Steven M. Schneider
Steven M. Schneider
Chief
Steven M. Schneider
Co-Chief Executive Officer
(PrincipalCo-Principal Executive Officer)
Date: March 31, 2010
April 15, 2011
By:  /s/ Alex Wang
Alex Wang
Co-Chief Executive Officer
(Co-Principal Executive Officer)
Date: April 15, 2011
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Steven M. Schneider, Alex Wang and William HartmanBenjamin Zhu as his or her attorney-in-fact for him or her, in any and all capacities, to sign each amendment to this annual report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
 
In accordance withPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
Position
Date
By: /S/ STEVENSTEVEN M. SCHNEIDER
Steven M. Schneider
Director and Co-Chief Executive Officer
(co-principal executive officer)
April 15, 2011
By: /S/ ALEX WANG
Alex Wang
Director and ChiefCo-Chief Executive Officer
(principalco-principal executive officer)
March 31, 2010April 15, 2011
By: /S/ WILLIAM HARTMAN
William Hartman
Chief Financial Officer, Secretary
(principal financial and accounting officer)
March 31, 2010April 15, 2011
By: /S/ GARY DODD
Gary Dodd
Director and President
 
March 31, 2010April  15, 2011
By:  /S/ AMOS KAZZAZ
Amos Kazzaz
Chief Operating OfficerMarch 31, 2010
By: /S/ PRISCILLA LU
Priscilla Lu
Director and Chairperson
 
March 31, 2010April 15, 2011
By: /S/ MARK ABDOU
Mark Abdou
DirectorMarch 31, 2010April  15, 2011
By: /S/ PETER H. SCHOLL
Peter H. Scholl
DirectorMarch 31, 2010
April 15, 2011
 
 
- 63 -87