10-K 1 form10-k_16774.htm ZAP FORM 10-K form10-k_16774.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 Or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________________ to _______________________
 
Commission file number: 0-303000
 
ZAP
(Name of small business issuer in its charter)
 
California
94-3210624
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
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 Class
Name 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.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes  o No  x
 
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold or the average bid and asked prices as of June 30, 2009 was $3,240,000.
 
There were a total of 105,223,888 shares of the Registrant’s Common Stock outstanding as of March 25, 2010.
 


 
 
 
 
 
TABLE OF CONTENTS

Item No.
 
Page
     
PART I
   
     
Item 1.
Business.
5
     
Item 1A.
Risk Factors.
10
     
Item 1B.
Unresolved Staff Comments.
14
     
Item 2.
Property.
14
     
Item 3.
Legal Proceedings.
15
     
Item 4.
Submission of Matters to a Vote of Security Holders.
16
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities.
16
     
Item 6. Selected Financial Data  
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
17
     
Item 8.
Financial Statements.
22
     
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
46
     
Item 9A.
Controls and Procedures.
46
     
Item 9B.
Other Information.
47
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance.
47
     
Item 11.
Executive Compensation.
52
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
54
     
Item 13.
Certain Relationships and Related Transactions and Director Independence.
56
     
PART IV
   
     
Item 14.
Principal Accountant Fees and Services.
58
     
Item 15.
Exhibits and Financial Statement Schedules.
58
     
Signatures
 
63
 
 
- 3 -

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K, including management’s discussion and analysis, and other reports filed by the registrant from time to time with the Securities and Exchange Commission contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar expressions. When reading any forward-looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and are subject to risks, uncertainties, assumptions and other factors relating to our industry and results of operations, including but not limited to the following factors:
 
 
·
whether the alternative energy and gas-efficient vehicle market for our 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-efficient 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 Report on Form 10-K the terms “ZAP,” “Company,” “we,” “us” and “our” refer to ZAP and its subsidiaries.
 
PART I
 
Item 1.  Business
 
Overview
 
We design, produce and sell fully electric and other advanced technology vehicles.  Our name, ZAP, stands for Zero Air Pollution® and we are committed to delivering high quality, affordable Electric Vehicles (EV), targeting fleet markets with opportunities to deploy in volume, thus leveraging volume production to achieve efficiency, and cost effectiveness.

We were incorporated in 1994 under the name “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” in 1999 and to ZAP in 2001. Our principal executive offices are located at 501 Fourth Street, Santa Rosa, California 95401. Our telephone number is (707) 525-8658. Our website is www.zapworld.com. Information contained on our website is not incorporated by reference herein and should not be considered part of this Annual Report.

Over the last few months, besides addressing the U.S. government and military markets, the company has been focusing on developing partnerships in Asia, specifically in China and Korea where the governments have announced programs and incentives to encourage adoption and to facilitate EV market development.  To this end, the Company has formed a joint venture in Hangzhou, 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 deliver 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.
 
 
 

 
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.
 
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.org “ 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.
 
Much of the Company’s resources recently, have been devoted to the above projects aimed at laying the framework 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 one 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:
 
·  
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;
 
- 5 -

 
 
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 Automotive Products
 
Our current automotive product line includes the ZAP Truck XL and ZAPVAN Shuttle, two low-speed vehicles for the fleet market, and the Xebra Truck and Sedan.
 
ZAP Truck XL.  The ZAP Truck XL is a plug-in-electric vehicle for fleet operations. The XL can hold up to two passengers and has a convertible bed/platform for moving up to 1900 lbs. of cargo during off-road use. The XL is designed for corporate campuses, warehouses, universities, factories, municipal operations and around the ranch or farm. Classified as a Neighborhood Electric Vehicle, or NEV, the XL is speed-limited 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.
 
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 five passengers in its standard configuration and can support a payload of over 900 lbs. The Shuttle is speed-limited 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 40 miles per charge under ideal driving conditions.
 
Our Future Products
 
We are currently developing the ZAP Alias Roadster with an estimated range of up to 100 miles per charge under ideal driving conditions. The anticipated launch date for the Alias Roadster is 2011.
 
We are also in discussions with international manufacturers and hope to establish additional relationships within the next twelve to thirty-six months for other vehicle platforms.
 
 
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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.
 
ZAPINO.  The ZAPINO is a plug-in-electric scooter with a highly efficient hub wheel motor. 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 3 Personal Transporters.  The ZAPPY3 Pro is designed to meet the requirements of material handling, warehousing, fabrication, and construction industries. For the mobility market, we have the ZAPPY EZ and ZAPPY Standard.
 
Licenses, Patents and Trademarks
 
We have the following patents covering our electric vehicles:

United States Patent
Date
Subject
Patent No. 5,491,390
2/13/1996
Electric motor power system for bicycles, tricycles, and scooters
Patent No. 5,671,821
9/30/1997
Electric motor system
Patent No. 5,848,660
12/15/1998
Portable Collapsible Scooter (ZAPPY)
Patent No. 5,634,423
6/3/1997
Personal Submersible Marine Vehicle
Patent No. 5,423,278
6/13/1995
Submersible Marine Vessel
Patent No. 5,303,666
4/19/1994
Submersible Marine Vessel
Patent No. 6,748,894
6/15/2004
Submersible Marine Vessel (sea scooter)
Patent No. 6,588,528
7/8/2003
Electric Vehicle Drive System
Patent No. 5,842,535
12/1/1998
Electric Drive Assembly for Bicycles
Patent No. 6,050,357
4/18/2000
Powered Skateboard
Patent No. 6,059,062
5/9/2000
Powered Roller Skates
Patent No. 5,735,361
4/7/1998
Dual-Pole Personal Towing Vehicle
Patent No. 5,913,373
6/22/1999
Dual-Pole Dual-Wheel Personal Towing Vehicle
Patent No. D433,718
11/14/2000
Portable Collapsible Scooter (ZAPPY)
Patent No. D347,418
5/31/1994
Scuba Scooter
Patent No. D359,022
6/6/1995
Scuba Scooter
Patent No. D453,726
02/19/2002
Submersible Marine Scooter
Patent No. D540,400
04/10/2007
Three Wheeled Vehicle (Zappy 3)
Patent No. D550,588
09/11/2007
Three Wheeled Sedan (Xebra)
Patent No. D550,043
09/13/2007
Three Wheeled Pickup Truck
 
The following patent applications have been filed but have not been allowed as of the date of this filing.

Patent No. 12550323
08/29/2009
Heater for electric car
Patent No. 12550325
08/29/2009
Air conditioner for electric car
Patent No. 12550328
08/26/2009
Power line interlock for electric car
Patent No. 29343082
09/05/2009
Electric Van
Patent No. 29343083
09/05/2009
Electric Truck
Patent No. 29343597
09/16/2009
Electric Scooter
Patent No. 61295001
01/14/2010
Hub Wheel Motor Scooter
Patent No. 61295025
01/14/2010
Hub Wheel Motor Car
Patent No. 61295040
01/14/2010
Systems and methods for converting imported vehicles to meet regulatory requirements and to improve safety
 
- 7 -

 
Patent No. 61295043
01/14/2010
Charging station with Solar Panels
Patent No. 61295046
01/14/2010
Parking meter with EV recharging capability
Patent No. 61295048
01/14/2010
Charging station with protective door
 
On March 18, 2010, we acquired a license from Battelle Memorial Institute for the following letter patents and patent applications:

Patent No. 7010363
U.S.
03/07/2006
Electrical Appliance Energy Consumption Control Methods and Electrical Energy Consumption of Systems (12782-E CON)
Patent No. 7420293
U.S.
09/02/2008
Electrical Appliance Energy Consumption Control Methods and Electrical Energy Consumption of Systems (12782-E)
Patent No. 7149605
U.S
12/12/2006
Electrical Power Distribution Control Methods, Electrical Energy Demand Monitoring Methods, and Power Management Devices (13538-B)
Patent No. 11/453465
U.S
06/24/2006
Electrical Power Distribution Control Methods, Electrical Energy Demand Monitoring Methods, and Power Management Devices (13538-B CON)
Patent No. 2520765
Canada EP, Japan
06/08/2004
Frequency Based Power Monitoring and Management (13538-B)
Patent No. 2008-196188 (13538-B DIV)
Japan
06/08/2004
Frequency Based Power Monitoring and Management (13538-B)
Patent No. 12/384766
U.S.
04/07/2009
Method and Apparatus for Smart Battery Charging (16172-E)
Patent No. 12/466312
U.S.
05/14/2009
Battery Charging Control Methods, Electrical Vehicle Charging Methods, Battery Charging Control apparatus, and Electrical Vehicles (16206-E)
Patent No. 12/467192
U.S.
05/15/2009
Battery Charging Control Methods, Electrical Vehicle Charging Methods, Battery Charging Control apparatus, and Electrical Vehicles (16206-E)
 
We have the following trademarks covering our electric vehicles:

United States Trademark
 
Subject
Trademark No. 2759913
09/02/2003
Cap’n Billy’s Wiz-Bang and design
Trademark No. 2240270
04/20/1999
Electricruizer
Trademark No. 2534197
01/29/2002
ETC Express
Trademark No. 2878219
08/21/2004
ETC Traveler
Trademark No. 2248753
06/01/1999
Powerbike
Trademark No. 2224640
02/16/1999
Powerski
Trademark No. 2329466
02/16/1999
The Future is Electric
Trademark No. 1794866
09/28/1993
ZAP
Trademark No. 2912329
12/21/2004
ZAP Car
Trademark No. 2335090
03/2/2000
ZAP Electric Vehicle Outlet
Trademark No. 2885816
09/21/2004
ZAP Seascooter
Trademark No. 2330894
03/21/2000
ZAPPY
Trademark No. 2371240
07/25/2000
Zapworld.com
Trademark No. 2320346
02/22/2000
Zero Air Pollution
Trademark No. 2689203
02/18/2003
Swimmy
Trademark No. 3648538
06/30/2009
ZAP Alias
Trademark No. 3254373
06/26/2007
ZAP Battery
Trademark No. 3519941
10/21/2008
ZAP Truck
Trademark No. 77/427823
10/2//2008
ZAP X
Trademark No. 77/466225
10/28/2008
ZAP ZIP
Trademark No. 3520501
10/21/2008
ZAPINA
 
- 8 -

 
Trademark No. 3297140
09/25/2007
ZAPINO
Trademark No. 3519994
10/21/2008
iZAP
Trademark No. 3318875
10/23/2007
Empower
Trademark No 3318874
10/23/2007
Empower (design)
Trademark No. 77/17885
07/14/2009
Pegasus
Trademark No. 3520550
10/21/2008
PLUGGY
Trademark No. 3376385
01/29/2008
Recharge it all
Trademark No. 3452022
06/24/2008
Ride the Future
Trademark No. 3297900
09/25/2007
XEBRA
Trademark No. 3525769
10/28/2008
Obvio!
Trademark No. 3525774
10/28/2008
Obvio! And design
 
Company Background

Founded in 1994, ZAP has invented, designed, patented, manufactured, 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 developing and marketing electric vehicles such as a zero-emission ZAP® electric bicycle, the ZAP Power System, which adapts to most bicycles, and the ZAPPY® folding 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 vehicles and the fuel-efficient Smart Car. In 2005, we introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline. From 2006 to 2009, we introduced the Xebra Truck, ZAP Truck XL and ZAPVAN Shuttle.  To date, we have delivered more than 100,000 electric vehicles and consumer products to customers in more than 75 countries, establishing 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 on 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 is 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 Asian 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 affected 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.
 
 
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Sources and Availability of Parts and Supplies
 
Materials, parts, supplies and services used in our 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 products.   We strive to have at least two sources for parts and supplies.
 
Inflation
 
Our 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.
 
Subsidiaries
 
We have the following wholly-owned subsidiaries:  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. Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles. ZAP Stores is engaged primarily in consumer sales of ZAP products at one location and ZAP Manufacturing is engaged primarily in the distribution of ZAP products. ZAP World Outlet, ZAP Rental Outlet and RAP Group are not currently operating subsidiaries.
 
Employees
 
As of March 26, 2010, the Company had a total of 35 employees  all of which  are full-time employees. At present, there are no employment agreements with the officers of the Company, except Gary Dodd. On January 15, 2010, three of our officers agreed to terminate their 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.
 
Item 1A.  Risk Factors
 
We have a history of losses and our future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on our business and the value of our common stock.
 
We incurred net losses of $10.7 million, $9.8 million, $28 million, for the years ended December 31, 2009, 2008 and 2007, respectively.  We can give no assurance that we will be able to operate profitably in the future.
 
 
 
- 10 -

 
 
Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
 
The electric vehicle industry is in its infancy and has experienced substantial change in the last few years.  To date, demand for and interest in electric vehicles has been sporadic.  As a result, growth in the electric vehicle industry depends on many factors, including:
 
 
·
continued development of product technology;
 
 
·
the environmental consciousness of customers;
 
 
·
the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines;
 
 
·
widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and
 
 
·
whether future regulation and legislation requiring increased use of nonpolluting vehicles is enacted.
 
We cannot assure you that growth in the electric vehicle industry will continue.  Our business may suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
 
We 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 with, and are dependent upon, existing electric vehicle technology.  As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology.  However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or create necessary technology.  As a result, 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 which 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 current 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.
 
 
- 11 -

 
 
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 insurance 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 against 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 separate 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.
 
 
- 12 -

 
 
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 requirements before they can be sold in the United States.  The risks, delays, and expenses incurred in connection with such compliance could be substantial.
 
Manufacturing overseas may cause problems for us.
 
We have been shifting our manufacturing overseas. 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 our 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.
 
We may not be able to protect our internet address.
 
We currently hold the internet address, http://www.zapworld.com, a portal through which we sell our products.  We may not be able to prevent third parties from acquiring internet addresses that are confusingly similar to our address, which could adversely affect our business.  Governmental agencies and their designees generally regulate the acquisition and maintenance of internet addresses.  However, the regulation of internet addresses in the United States and in foreign countries is subject to change.  As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business.
 
Our success is heavily dependent on protecting our intellectual property rights.
 
We rely on a combination of patent, copyright, trademark, and trade secret protections to protect our proprietary technology.  Our success will, in part, depend on our ability to obtain trademarks and patents.  We hold several patents registered with the United States Patent and Trademark Office, or USPTO.  These registrations include both design patents and utility patents.  In addition, we have recently submitted provisional 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.  We cannot assure you that the trademarks and patents issued to us will not be challenged, invalidated, or circumvented, or that the rights granted under those registrations will provide competitive advantages to us.
 
- 13 -

 
 
We also rely on trade secrets and new technologies to maintain our competitive position.  Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets.  Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
 
We may be exposed to liability for infringing intellectual property rights of other companies.
 
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.
 
We may face risks associated with past sales of unregistered securities.
 
In the past, we have had numerous sales of our securities which were not registered under federal or state securities laws.  We have strived to comply with all applicable federal and state securities laws in connection with our issuances of unregistered securities.  However, to the extent we have not complied, there may be liability for the purchase price of the securities sold together with interest and the potential of regulatory sanctions.
 
Our stock price and trading volume may be volatile which could result in substantial losses for our stockholders.
 
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 our 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 our common stock may fluctuate and cause significant price variations to occur.  We have experienced significant volatility in the price of our stock over the past few years.  We cannot assure you that the market price of our 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 have not paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
Item 1B.  Unresolved Staff Comments.
 
Not applicable.
 
Item 2.  Property.
 
The chart below contains a summary of our principal facilities:
 
 
- 14 -

 

Location
Use
Square Feet
Rent
501 Fourth Street, Santa Rosa, CA
Corporate Headquarters (1)
20,000
$                –
9 th Street, Santa Rosa, CA
Warehousing
36,764
$       10,030
806 Donahue Street, Santa Rosa, CA
Vehicle Storage
21,954
$         9,659
3362 &3405 Fulton Road, Santa Rosa, CA
Office, Automobile Lot
21,780
$         7,000
44720 Main Street, Mendocino, CA
Potential Retail Outlet
5,500
$                –
 
(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% 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 our facilities are rented or leased. The properties located at 3362 and 3405 Fulton Road are rented on a month-by-month basis from our Chief Executive Officer. We plan to continue to rent properties based on our needs. We believe these properties are adequate for our foreseeable needs.
 
We believe our insurance policies cover all insurance requirements of the landlords. We own the basic tools, machinery and equipment necessary for the conduct of our repairs, our minimal research and development, and vehicle prototyping activities. We believe that the above facilities are generally adequate for present operations. At present, our products are manufactured by third parties on a contract basis.
 
Item 3.  Legal Proceedings.
 
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, 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 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.
 
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
 
 
- 15 -

 
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 results of operations.
 
 
 
Item 4.  Submission of Matters to a Vote of Security Holders during the Fourth Quarter.
 
None
 

PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder 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”.
 
   
Bid price
 
Period
 
High
   
Low
 
Fiscal Year 2009:
           
December 31, 2009
  $ 0.41     $ 0.17  
September 30, 2009
    0.45       0.33  
June 30, 2009
    0.46       0.12  
March 31, 2009
    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  
 
Holders
 
We have approximately 3,477 record holders of our common stock as of March 25, 2010, 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 Trust & Transfer Company.
 
Dividends
 
We have never declared nor paid any cash dividends on our common stock, and we do not anticipate that we 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 our 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.
 
 
- 16 -

 
Recent Sales of Unregistered Securities
 
The following lists sales of unregistered 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. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions.
 
Employee Compensation — On various dates throughout the last fiscal year, the Company 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 4 million shares of restricted common stock valued at $1 million to a principal shareholder of a private company in connection with a potential strategic transaction.  We relied on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, for the issuance of these securities.
 
Item 6.  Selected Financial Data.

Not required for Smaller Reporting Companies.

 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Summary of Key Accomplishments During Fiscal Year 2009
 
Recent Developments
 
A number of significant events and developments have occurred during fiscal year 2009 and through the date of this report including the following:
 
 
·
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.
 
 
·
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.
 
 
- 17 -

 
 
·
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 DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
 
Net sales 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 million or 46%.
 
Sales in the Advanced Technology segment decreased from $4.9 million in 2008 to $2.1 million in 2009. The tight U.S. credit and general economic conditions negatively impacted our dealer sales in 2009. In addition, we also decreased our production of three wheel electric vehicles to transition to 4 wheel electric vehicles.
 
We experienced a decrease of $492,000 in sales of consumer products from $876,000 in 2008 to $430,000 in 2009. The decrease was due in part to the discontinuance of our Latin America operation during 2009 and also no sales of portable energy products during 2009. In June of 2008, we transferred our product line to a new 50% owned entity, portable energy.
 
Our retail car lot experienced a slight decrease in sales from $1.7 million in 2008 to $1.6 million in 2009. The customer demand remained consistent for both years.  Due to the current recession many consumers chose lower priced pre- owned vehicles that are distributed through our retail car outlet
 
Gross profit was $728,000 for the year ended December 31, 2009 compared to $799,000 for the year ended December 31, 2008 resulting in a decrease of $71,000.  However, as a percentage of sales it increased from 11% in 2008 to 18% in 2009.
 
In our Advanced Technology segment our gross profit decreased from a gross profit of $718,000 in 2008 to $464,000 in 2009. The decrease was primarily due to lower sales volumes and the establishment of an allowance to repair Xebras for the safety recall.
 
In our Consumer Products segment we experienced a decrease of $154,000 in gross loss from $218,000 in 2008 to a gross loss of $64,000 in 2009. The gross loss was less due to higher sales volumes and better margins on the new ZAPPY 3 Pro Scooter.
 
 
- 18 -

 
Gross profits in our retail car lot increased $29,000 from $299,000 for the year ended December 31, 2008 to $328,000 for the year ended December 31, 2009. The increase in gross profits was due to higher sales volumes and better mix of vehicle models with higher margins.
 
Sales and marketing expenses for the year ended December 31, 2009 decreased by $621,000 from $1.8 million in 2008 to $1.2 million in 2009. The decrease was due elimination of certain sales and marketing positions during 2009. 
 
General and administrative expenses for the year ended  December 31, 2009 increased by $630,000 from $7.9 million in 2008 to $8.5 million in 2009.  The primary reason for the increase was due to the increase in legal fees to settle prior year’s legal matters and to respond to the Al Yousuf lawsuit, see Notes 5 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.
 
Impairment of Assets represents the impairment for the phase out of our Latin American dealer and adjustments to certain of our building improvement projects.
 
Research and development expenses increased by $135,000 from $416,000 in 2008 to $551,000 in 2009.
 
In 2009 we incurred additional costs to build working prototypes of the Alias vehicle. We also spent additional funds in 2009 to develop methods to convert gas vehicles to electric.
 
Interest expense, net increased by $109,000 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. The increase was due to the higher loan balance on the promissory note with Al Yousuf, see also note 5.
 
Other income (expense) decreased from an expense of $56,000 in 2008 to an expense of $8 for the year ended 2009.
 
The expense was less in 2009, since we did not incur the one time donation to the Red Cross or offering costs on the convertible debt as we experienced in 2008.
 
Net Loss was $10.7 million for the year ended December 31, 2009 as compared to a net loss of $9.8 million for period ended December 31, 2008.
 
 
- 19 -

 
Liquidity and Capital Resources
 
The Company used cash in operations of $ 2.1 million and $6.4 million during the years ended December 31, 2009 and 2008, respectively. Cash used in operations in 2009 was the result of the net loss incurred for the year of $10.7 million, offset by non-cash expenses of $7.6 million. In 2009, non-cash expenses included $1.6 million for 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 the net loss incurred for the year of $9.8 million, offset by non-cash expenses of $5.6 million. In 2008, non-cash included $2.8 million related to stock-based compensation  for consulting and other services, $2.5 million for stock-based compensation to employees.

In 2009, the net change in operating assets and liabilities resulted in a cash increase of $1 million. The change was primarily due to decreases for  inventory.

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 million and $110,000 during the year ended December 31, 2009 and 2008, respectively. 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.

Financing activities provided cash of $7.8 million and $2.5 million during the year ended December 31, 2009 and 2008, respectively. 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 $10 million financing facility established by Al Yousuf.
 
The Company had cash and cash equivalents of $4.8 million at December 31, 2009 as compared to $341,000 at December 31, 2008. The Company had working capital deficits of $2.8 million 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 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.
 
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.
 
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 ,if 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 our  shares.
 
At present, we require additional capital to continue expanding our  current operations.  The Company’s primary 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)to continue building our dealer network and expanding ZAP’s market initiatives.  ZAP also requires 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.
 
Critical Accounting Policies and Use of Estimates
 
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles which requires our management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.


 
 
- 21 -

 
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 2008
26
   
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2009 and 2008
27
   
Consolidated Statement of Cash Flows for the years ended December 31, 2009 and 2008
28
   
Notes to Consolidated Financial Statements
29
 

 

 

 
- 22 -

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
and Shareholders of ZAP
 
We have audited the accompanying consolidated balance sheet of ZAP as of December 31, 2009, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for year ended December 31, 2009. 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 audit.
 
We conducted our audit 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 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 statements, 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 -

 
 
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 no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements audited by us present fairly, in all material respects, the consolidated financial position of ZAP as of  December 31, 2008 and the consolidated results of its operations and its cash flow for each of the years in the two-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States.
 
 

/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 -

 
ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
 DECEMBER 31, 2009 and 2008
(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  
 
Property and equipment, net
    3,802       4,335  
                 
Other assets:
               
Investment in non-consolidated joint venture
    1,225        
Deposits and other
    1,257       260  
                 
    $ 13,779     $ 9,226  
                 
 LIABILITIES AND SHAREHOLDERS’ EQUITY
                 
Current liabilities:
               
Current portion of long-term debt and short term notes
  $ 5,889     $ 2,976  
Accounts payable
    458       474  
Accrued liabilities
    2,046       1,575  
Deferred revenue
          587  
6% Senior convertible debt, net of discount of $133
    1,867        
                 
                 
Total current liabilities
    10,260       5,612  
                 
Secured convertible note, less current portion
          1,772  
                 
                 
Total Liabilities
    10,260       7,384  
                 
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  
                 
Accumulated deficit
    (135,193 )     (124,505 )
                 
Total shareholders’ equity
    3,519       1,842  
                 
    $ 13,779     $ 9,226  
                 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
- 25 -

 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
 (In thousands; except per share data)
 
 
      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 -

 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
 (In thousands)
 
    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 -

 
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 (In thousands)
 
 
 
Year ended December 31,
 
             
    2009     2008  
   
(in thousands)
 
Cash from Operating activities:
               
Net loss
  $ (10,687 )   $ ( 9,807 )
Items not requiring the current use of cash:
               
Amortization of note discount and deferred offering
               
Costs
          156  
Stock-based employee compensation
    3,662       1,852  
Stock-based compensation for consulting and other
               
services
    1,470       2,753  
Stock-based compensation for interest and other
               
penalties
          17  
Depreciation and amortization
    322       215  
Impairment of fixed assets and goodwill
    687       67  
Allowance for doubtful accounts
    10       (139 )
Changes in other items affecting operations:
               
Accounts receivable
    211       135  
Inventories
    623       (1,606 )
Prepaid expenses
    301       (20 )
Other assets
          (150 )
Accounts payable
    (16 )     345  
Accrued liabilities
    471       (677 )
Deferred revenue
    (587 )     (165 )
                 
Cash used for operating activities
    (3,533 )     (7,024 )
                 
Cash from Investing activities:
               
Investment in unconsolidated joint venture
    (1,225 )      
Acquisition of property and equipment
    (22 )     (286 )
Proceeds from sale of equipment
          176  
                 
Cash used for investing activities
    (1,247 )     (110 )
                 
Cash from Financing activities:
               
Issuance of common stock
    6,100        
Exercise of warrants and options
          72  
Pay-off of convertible debt
          (431 )
Proceeds from issuance of convertible debt
    2,000       475  
Proceeds from debt, net of issuance costs
    1,139       2,976  
Borrowings (repayments) on long-term debt
          44  
Cash provided by financing activities
    9,239       3,136  
                 
Increase (decrease) in cash and cash equivalents
    4,459       (3,998 )
Cash and cash equivalents at beginning of year
    341       4,339  
                 
Cash and cash equivalents at end of year
  $ 4,800     $ 341  
 
 
See accompanying notes to consolidated financial statements.
 
 
 
- 28 -

 
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. 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’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 produced 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:
 
Principles of consolidation
 
The accompanying consolidated financial statements include the accounts of ZAP, Voltage Vehicles (“VV”) and ZAP Stores for the years ended December 31, 2009 and 2008. All subsidiaries are 100% owned by ZAP. 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 the ZAP name. The term 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. 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 agreements.  The Company has recognized $587,000 and $165,000 of revenue for the year ended December 31, 2009 and 2008 resulting in an ending balance in deferred revenue is zero- and $587,000 at December 31, 2009 and 2008.
 
 
 
- 29 -

 
Allowance for doubtful accounts
 
The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. The Company records an allowance for doubtful accounts receivable at the end of each period based on an analysis of individual aged accounts receivable balances. As a result of this analysis, the Company believes that its allowance for doubtful accounts is adequate at December 31, 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.
 
Cash and cash equivalents
 
The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Company maintains the majority of its cash balances with one financial institution. At times the balances may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
 
Inventories
 
Inventories consist primarily of vehicles (gas and electric), parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out method) or market.
 
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:
 
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 and is depreciated or amortized using straight-line and accelerated methods over the asset’s estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows:
 
Machinery and equipment
5 years
Computer equipment and software
3-5 years
Office furniture and equipment
5 years
Vehicles
5 years
Leasehold improvements
10 years or life of lease, whichever is shorter
Building and improvements
39.5 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 estimated net realizable value.
 
Advertising costs
 
The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to $113,000 and $218,000 for the years ended December 31, 2009 and 2008, respectively.
 
Warranty

The Company provides 30 to 90 day warranties on its personal electric products and records the estimated cost of the product warranties at the date of sale. 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):
 
 
 
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 -

 
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
 
The Company has no components of other comprehensive loss other than its net loss, and, accordingly, its comprehensive loss is equivalent to its net loss for the periods presented.
 
Stock-based compensation
 
We have stock compensation plans for employees and directors, which are described in Note 7 to our consolidated financial statements.

Share-based compensation is measured as the fair value of the award at its grant date based on the estimated number of awards that are expected to vest, and recorded over the applicable service period. In the absence of an observable market price for a share-based award, the fair value is based upon 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 dividends on the underlying shares and the risk-free interest rate. Compensation expense has been recognized based on the estimated grant date fair value method using the Black-Scholes valuation model.
 
The dividend yield 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 plans 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.
 
The estimates of share-based compensation expenses are significant to our 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.

 
 
- 32 -

 
Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy 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. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors. 
 
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 - INVENTORIES
 
Inventories at December 31, 2009 and 2008 are summarized as follows (thousands):
 
    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  
                 
 
 
 
 
- 33 -

 
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, 2009 and 2008 are as follows (in thousands):
 
    2009     2008  
Balance as of January 1,
  $ 526     $ 302  
Provision for slow moving inventory
    336       307  
Write-off of slow moving inventory
    (603 )     ( 83 )
                 
Balance as of December 31,
  $ 259     $ 526  
                 
 
 
NOTE 3 - PROPERTY AND EQUIPMENT
 
Property and equipment at December 31, 2009 and 2008 are summarized as follows (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  
                 
 
 
The land and building and certain equipment, with a net book value of $3.7 million and $3.9 million at December 31, 2009 and 2008 respectively, are pledged as security for certain indebtedness (see Note:5). Depreciation and amortization expense for the years ended December 31, 2009 and 2008 was approximately $322,000 and $215,000, respectively.
 
 
NOTE 4 - OTHER ACCRUED LIABILITIES
 
Accrued liabilities at December 31, 2009 and 2008 consisted of the following (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  
                 
 
 
 
- 34 -

 
NOTE 5 –  SHORT-TERM DEBT PROMISSORY 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 Security 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 the 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.

 
- 35 -

 
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 proper.  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 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.
 
 
- 36 -

 
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.
 
 
- 37 -

 
 
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
 
 
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.
 
 
 
- 38 -

 
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 which 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 Automobile
 
On January 15, 2010, 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 4 million shares of common stock valued at $1 million as a refundable deposit on a future acquisition.
 
Distribution Agreement 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 compliance 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.

Further, 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, 2010 and 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 following the issuance of the securities.
 
 
- 39 -

 
NOTE 10 – SHAREHOLDERS’ EQUITY
 
Common stock
 
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 4 million shares valued at $1 million as a deposit for a 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.
 
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.
 
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.
 
 
- 40 -

 
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days’ written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series.
 
Total warrants outstanding at December 31, 2009 are summarized as follows (in thousands):
 
   
Number of
 
Exercise
 
Expiration
   
Warrants
 
Price
 
Dates
   
 
 
 
 
 
Series B-Unrestricted
 
  2,693
 
1.09
 
7-1-12
Series B-2-Restricted
 
  1,679
 
1.09
 
7-1-12
Series C-Unrestricted
 
  5,388
 
1.09
 
7-1-12
Series C-2-Restricted
 
  1,239
 
1.09
 
7-1-12
Series D-Unrestricted
 
  6,704
 
1.09
 
7-1-12
Series D-2-Restricted
 
  1,294
 
1.09
 
7-1-12
Series K-Unrestricted
 
  4,356
 
0.91
 
7-1-12
Series K-2-Restricted
 
  4,106
 
0.91
 
7-1-12
$0.50 Warrants-Restricted
 
28,000
 
0.50
 
8-16-14
$0.70 Warrants-Unrestricted
 
     100
 
0.70
 
6-2-13
$1.00 Warrants-Unrestricted
 
  2,470
 
1.00
 
7-1-12
$1.10 Warrants Restricted
 
     794
 
1.10
 
Various
$1.20 Warrants-Restricted
 
  5,565
 
1.20
 
Various
$1.25 Warrants-Restricted
 
  1,744
 
1.25
 
10-31-10
$1.32 Warrants–Unrestricted
 
     432
 
1.32
 
2-20-12
$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
   
 
       
   
69,688
       
   
 
       

 
NOTE 11 – RELATED PARTY

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 for both 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. Pursuant to the Agreement, the Investor 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 Registrant’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 the Investor pursuant to a Secured Convertible Promissory Note. The Note provides for an aggregate principal amount of up to $10 million in
 
 
 
- 41 -

 
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 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.
 
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 Director 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 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 matures February 28, 2010. Interest only payments are 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 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 million.
 
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 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.
 
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.
 
 
 
- 42 -

 

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, 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.  Plaintiff seeks to foreclose on the property that secures the loan agreement and recover  their attorney’s fees 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.
 

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 results of operations.
 
 
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 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.

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