UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549







Form 10-Q





(Mark One)




x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2010




o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ________ to _________




Commission File Number    001-32534


ZAP(Exact name of registrant as specified in its charter)California
94-3210624(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification Number)501 4th Street

Santa Rosa, California
95401(Address of principal executive offices)
(Zip Code))Registrant’s telephone number, including area code: (707) 525-8658  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  o  No  x
  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filer 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes  o  No  x
  As of May 12, 2010, there were 111,473,668 shares outstanding of the registrant’s common stock.







ZAP & SUBSIDIARIES


FORM 10-Q


INDEX


Page

No.PART I. Financial InformationItem 1.
Condensed Consolidated Financial Statements (unaudited) :Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 .
1Condensed Consolidated Statements of Operations for the Three months ended March 31, 2010 and 2009.
2Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2010 and 2009.
3Notes to Condensed Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15Item 4T.
Controls and Procedures
27PART II. Other InformationItem 1.
Legal Proceedings
28Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
28Item 3.
Defaults Upon Senior Securities
29Item 4.
Removed and Reserved
30Item 5.
Other Information
30Item 6.
Exhibits
30SIGNATURES

31







Part I. FINANCIAL INFORMATION





Item 1. Financial Statements




ZAP AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited) (In thousands except per share data)




March 31,

2010


December 31,

2009ASSETS

CURRENT ASSETSCash

$
3,435


$
4,800Marketable Securities of related party


2,000



-Accounts receivable, net of allowance for doubtful accounts of $43 and $29


142



156Inventories, net


2,106



1,999Prepaid expenses and other current assets


585



540Total current assets


8,268



7,495Property, and equipment, net of accumulated depreciation


3,765



3,802OTHER ASSETSInvestment in non-consolidated joint venture


1,180



1,225Deposits and other assets


1,290



1,257TOTAL ASSETS

$
14,503


$
13,779LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIESCurrent portion of long-term debt and short-term notes

$
5,894


$
5,889Accounts payable


293



458Accrued liabilities


2,100



2,0466% Senior convertible debt, net of discount of $572 & $133


4,428



1.867Total current liabilities


12,715



10,260Total liabilities


12,715



10,260SHAREHOLDERS’ EQUITYCommon stock, authorized 400 million shares; no par value; and 105,473,668 shares and104,029,107 shares issued and outstanding at March 31, 2010 and December 31 2009, respectively


140,229



138,712Accumulated deficit


(138,441
)


(135,193
)Total shareholders’ equity


1,788



3,519Total liabilities and shareholders’ equity

$
14,503


$
13,779







The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).




- 1 -


ZAP AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(Thousands, except net loss per share amounts)




Three Months

ended

March 31,

2010


Three Months

ended

March 31,

2009NET SALES

$
848


$
1,076COST OF GOODS SOLD


732



786GROSS PROFIT (LOSS)


116



290OPERATING EXPENSESSales and marketing


227



406General and administrative (non-cash stock-based compensation of $850,000 and $1 million for the three months ended March 31, 2010 and 2009, respectively)


2,226



1,460Impairment of assets


—



260Research and development


376



312,829



2,157LOSS FROM OPERATIONS


(2,713
)


(1,867
)OTHER  EXPENSEInterest expense


(486
)


(137
)Loss from equity interest in Joint Venture


(45
)


—(531
)


(137
)LOSS BEFORE INCOME TAXES

$
(3,244
)

$
(2,004
)PROVISION FOR INCOME TAXES


4



4NET LOSS

$
(3,248
)

$
(2,008
)NET LOSS PER COMMON SHARE--- BASIC AND DILUTED

$
(0.03
)

$
(0.03
)WEIGHTED AVERAGE OF COMMONSHARES OUTSTANDING--- BASIC AND DILUTED


104,525



67,045







The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).


- 2 -


ZAP AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)(In thousands)




For the Three Months Ended

March 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(3,244
)

$
(2,008
)Reconciling Items:Stock-based employee compensation, consulting and other services


850



1,001Depreciation and amortization


23



56Allowance for doubtful accounts


—



(4
)Investment in JV


45



—Changes in other items affecting operations:Receivables


14



69Prepaid expenses and other assets


(80
)


(12
)Inventories


(107
)


12Convertible Debt discount


(439
)


—Accounts payable


(165
)


(174
)Accrued liabilities


55



(240
)Deferred revenue


—



(52
)Net cash used for operating activities


(3,048
)


(1,352
)CASH FLOWS FROM INVESTING ACTIVITESDisposal of equipment


16



240Purchase of Marketable Securities


(2,000
)


—Net cash provided by investing activities


(1,984
)


240CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of convertible debt


3,000Proceeds from short-term debt


—



1,145Stock Issuances for Convertible Debt discounts


667Net cash provided by financing activities


3,667



1,145NET INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS


(1,365
)


33CASH AND CASH EQUIVALENTS,beginning of period


4,800



341CASH AND CASH EQUIVALENTS,end of period

$
3,435


$
374






The accompanying notes are an integral part of these condensed consolidated financial statements (unaudited).


- 3 -




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)







NOTE 1 BASIS OF PRESENTATION




The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. All adjustments (all of which are of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010 and 2009 are not indicative of the results that may be expected for the year ending December 31, 2010 or for any other future period. These condensed consolidated financial statements and the notes thereto should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2010 (our “2009 10-K”).




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








NOTE 2 SIGNIFICANT ACCOUNTING POLICIES




NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS




Basic and diluted net income (loss) per common share is based on net income (loss) for the relevant period, divided by the weighted average number of common shares outstanding in each period. Diluted net income per share gives effect to all potentially dilutive common shares outstanding during the period such as options, warrants, convertible preferred stock, and contingently issuable shares. Potentially dilutive securities associated with stock options, warrants have been excluded from the diluted net loss per share amounts, since the effect of these securities would be anti-dilutive. At March 31, 2010, these potentially dilutive securities include options for 25.6 million shares of common stock, warrants for 67.9 million shares of common stock. In addition, $5 million of convertible debt was excluded from the calculation.




PRINCIPLES OF CONSOLIDATION -The accounts of the Company and its consolidated subsidiaries are included in the condensedconsolidated financial statements after elimination of significant inter-company accounts and transactions.  OurInvestment in non-consolidated joint venture is accounted for by the equity method of accounting.  It represents our 37.5% interest in the ZAP Hangzhou Joint Venture.  During the first quarter of 2010, the joint venture incurred an operating loss of $118,000 of which $45,000 is ZAP’s share.




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);




- 4 -


-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.




FAIR VALUE OF FINANCIAL INSTRUMENTS


The carrying amount reported in the balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because in general, the interest on the underlying instruments fluctuates with market rates.





Marketable Securities





The marketable equity securities, which are restricted are recorded at cost since they are held in safekeeping by the issuing company and can not be sold until March of 2011.  The securities are shares of stock in Samyang Optics Ltd. traded on the Korean stock exchange. ZAP’s ownership is not material to Samyang Optics Ltd. Fair value approximates carrying value at March 31, 2010.




USE OF ESTIMATES -The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Company’s consolidated financial statements and accompanying notes. Estimates were made relating to the useful lives of fixed assets, valuation allowances, impairment of assets and valuation of stock-based compensation and contingencies. Actual results could differ materially from those estimates.




ACCOUNTS RECEIVABLE- The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. 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.




INVENTORY- The Company maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company’s products and corresponding demand were to decline, then additional reserves may be deemed necessary. Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out method) or market.




IMPAIRMENT AND LONG-LIVED ASSETS - The Company evaluates the improvement and long-lived assets at least annually by analyzing its operating results and considering significant events or changes in the business environment.




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 the safety recall , ZAP Truck and ZAP Shuttle Van vehicles and other varying warranties.At March 31, 2010, the Company has recorded a warranty liability for $293,000 for estimated repair costs and the Xebra Safety Recall.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.




- 5 -


CASH AND CASH EQUIVALENTS - The Company considers highly liquid investments with maturities from the date of purchase of three months or less to be cash equivalents.








NOTE 3 STOCK-BASED COMPENSATION




COMMON STOCK ISSUED FOR OTHER THAN CASH




Services performed and other transactions settled in the company’s common stock are recorded at the estimated fair value of the stock issued if that value is more readily determinable, than the fair value of the consideration received.




We have stock compensation plans for employees and directors, which are described in Note 8 to our consolidated financial statements in our 2009Annual Report on Form 10-K as filed with the SEC on March 30, 2010. We recognize the stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All of our stock-based compensation is accounted for as an equity instrument.




We utilized the Black-Scholes valuation model for estimating the fair value of the stock compensation granted after the adoption of SFAS 123R, with the following range of assumptions.





Three Months Ended

March 31, 2010Expected Dividend yield
0%Expected volatility
137.8-150.1Risk-free interest rate
2.30 to2.80 %Expected life (in years) from grant date
5 to 5.75Exercise price
$0.36 to $0.78





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 5 to 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 three months ended March 31, 2010 was $0.36. We 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 adjusted to actual forfeiture experience as needed.





- 6 -


A summary of options under the Company’s stock option plans from January 1, 2010 through March 31, 2010 is as follows: (the number of shares is in thousands)





WeightedAverageRemainingWeighted
ContractualNumber of
Average
TermShares
Exercise Price
(in years)Outstanding December 31, 2009
25,452
$  0.56
7.74Options granted under the plan
228
$  0.36
4.90Options exercised
—
—
—Options forfeited and expired
—
—
—Outstanding March 31, 2010
25,680
$  0.56
7.74





Aggregate intrinsic value is the sum of the amounts by which the quoted market price of our stock exceeded the exercise price of the options at March 31, 2010, for those options for which the quoted market price was in excess of the exercise price (“in-the-money­ options”). There were 3.6 million options valued at $208,000 in the money at March 31, 2010.




As of March 31, 2010, total compensation cost of unvested employee stock options is $4.4 million. This cost is expected to be recognized through December 2012. We recorded no income tax benefits for stock-based compensation expense arrangements for the three months ended March 31, 2010, as we have cumulative operating losses, for which a valuation allowance has been established.








NOTE 4 - INVENTORIES


Inventories at March 31, 2010 and December 31, 2009 are summarized as follows (thousands):





March 31,

2010


December 31,

2009Advanced technology vehicles

$
1,104


$
1,138Vehicles-conventional


415



389Parts and supplies


468



528Finished goods


398



2032,385



2,258Less - inventory reserve


(279)



(259
)$
2,106


$
1,999








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 11.







- 7 -





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.





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.





On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation. Although a settlement was reached, the property transfer documents have not been recorded as of May 13, 2010.





- 8 -


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





The Company has issued to Samyang Optics a subordinated convertible promissory notes in the principal amount of $5 million .





We have a total lending facility from this investor of $10 million under the Convertible note and have drawn a total  of  $5 million through March 31, 2010. 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.





In April of 2010, ZAP’s CEO, Steven Schneider was appointed the Vice Chairman of the Board of Samyang Optics.





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 March 31, 2010 no advances were made to the Company from this Secured Loan Facility.







NOTE 6  INCOME TAXES




We follow generally accepted accounting principles practiced in the United States.  We commenced a review of our tax position taken in our tax returns that remain subject to examination. Based upon our review, we do not believe we have any unrecognized tax benefits or that there is a material impact on our financial condition or results of operations.




We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are subject to U.S. federal or state income tax examinations by tax authorities for all years in which we reported net operating losses that are being carried forward. We do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.




We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax





- 9 -


expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized for the period ended March 31, 2010.







NOTE 7  RELATED PARTY TRANSACTIONS




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 $22,400 and $21,000 for the three months ended March 31, 2010 and 2009.





Financing provided to the Company by Samyang Optics whose Vice Chairman is the CEO of ZAP.





The Company has  issued to Samyang Optics a 6%  subordinated convertible promissory notes in the principal amount of $5 million.




We have a total lending facility from this investor of $10 million under the Convertible note and have drawn a total  of  $5 million through March 31, 2010. 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.





In April of 2010, ZAP’s CEO, Steven Schneider was appointed the Vice Chairman of the Board of Samyang Optics.





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 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.




- 10 -


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.





On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation. Although a settlement was reached, the property transfer documents have not been recorded as of May 13, 2010.





In addition the Company has  borrowed previously $760,000 from Portable Energy LLC; a private equity company equally owned 50% by ZAP and Al Yousuf. These borrowings are due on demand.








NOTE 8 – COMMITMENTS





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 thecurrentChairman 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.




- 11 -


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.




OurInvestment in non-consolidated joint venture is accounted for by the equity method of accounting.  It represents our 37.5% interest in the ZAP Hangzhou Joint Venture.  During the first quarter of 2010, the joint venture incurred an operating loss of $118,000 of which $45,000 is ZAP’s share.





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.  Selling prices have yet to be determined and no purchases have been made as of March 31, 2010.





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.




- 12 -


NOTE 9    SEGMENT REPORTING




In accordance with generally accepted accounting principles practiced in the United States, the Company has identified three reportable segments consisting of sales and marketing of electronic consumer products, the Zappy 3 scooters and ATV’s, operation of a retail car outlet and sales to and sales of advanced technology vehicles for the Xebra (TM), ZAP Truck and ZAP Shuttle Van 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.




Car outlet represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles, now the Xebra, a three-wheeled plug in electric vehicles, ZAP Truck and ZAP Shuttle Van, four wheeled LSV plug in electric vehicles to retail customers.




Advanced Technology Vehicles represents the sales activity of advanced technology vehicles, now the Xebra, a three-wheeled plug in electric vehicle, ZAP Truck and ZAP Shuttle Van, four wheeled LSV plug in electric vehicles to ZAP Dealers through-out the U.S.




SEGMENT REPORTINGElectronicConsumerProducts and





AdvancedCorporate


Car


TechnologyExpenses


Outlet


Vehicles


TotalsFor the 3 months ended of March 31, 2010:Net Sales

$
103


$
517


$
228


$
848Gross profit


24



94



(2)



116Net Income (Loss)


(2,799)



(46)



(403)



(3,248)Total Assets


12,328



481



1,694



14,503For the 3 months ended of March 31, 2009:Net Sales

$
158


$
582


$
336


$
1,076Gross profit (Loss)


59



139



92



290Net Loss


(1,700)



35



(343)



(2,008)Total Assets


5,654



613



2,609



8,876







- 13 -





NOTE 10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:





Three Months EndedMarch 31,(in thousands)2010


2009Cash paid during the period for interest

$
—


$
76Cash paid during the period for income taxes

$
4


$
4








NOTE 11 – SUBSEQUENT EVENTS





As previously disclosed originally in ZAP’s Quarterly Report on Form 10-Q filed on November 16, 2009, a complaint captioned Al Yousuf LLC v ZAP (Case No. SCV 245950) was filed in the Superior Court for the County of Sonoma on September 25, 2009 (the “Complaint”).  The Complaint alleged causes of action for judicial foreclosure and deficiency judgment in connection with a loan agreement with Al Yousuf LLC.  The president of Al Yousuf LLC, Eqbal Al Yousuf, is a member of ZAP’s Board of Directors.  In the Complaint, Al Yousuf LLC claimed that ZAP had failed to make scheduled payments required under the loan agreement which is secured by real property that serves as ZAP’s principal executive offices.





On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010.





The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation.  Although a settlement was reached, the documents have not been recorded as of   May 13,2010.











- 14 -





ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.




THIS QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE “FILINGS”) CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS “SEEK”, “ANTICIPATE”, “BELIEVE”, “ESTIMATE”, “EXPECT”, “INTEND”, “PLAN”, “BUDGET”, “PROJECT”, “MAY BE”, “MAY CONTINUE”, “MAY LIKELY RESULT”, AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS:




o
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;




o
OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENTOUR GROWTH STRATEGIES, o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OURPRODUCTS;




o
OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;




o
OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;




o
OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING MARKET FOR ELECTRIC AND GAS-EFFICIENT VEHICLES;




o
CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND




o
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.




- 15 -


In this quarterly report on Form 10-Q the terms “ZAP,” “Company,” “we,” “us” and “our” refer to ZAP and its subsidiaries.




Recent Developments




Some of the noteworthy events for the Company that occurred during the First quarter of 2010 and through the date of this report are as follows:




1)
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.




2)
We  also began the pilot production of the ZAP Taxi  at ZAP Hangzhou, the joint venture in Hangzhou with Holley Group, a global producer of electric power meters.  The vehicles will be initially aimed at the Asian market, such as taxi fleets, as well as intra-campus transportation for large corporate, government, military and university campuses
  3)
At the Beijing Motor Show in April, we displayed our all-electric ZAP Taxi targeting the fleet market as well as its   innovative all-electric Alias prototype sports car. We introduced their design and engineering expertise to the Chinese media and outlined production plans to bring all-electric vehicles to the Chinese market.
  4)
We have been selected as one of five companies to convert a prototype United States Postal Service (“USPS”) van from conventional gasoline powered internal combustion to plug-in-electric for delivery in July 2010 for field testing by the USPS.




5)
In February we received $3 million in financing through the issuance of convertible debt  to Samyang Optics Co Ltd of South Korea and invested $2 million in exchange  their stock  which is publicly traded  . We have also accepted a purchase order from Samyang Optics Co. Ltd.  for 100 electric SUVs to be built through our  partnership with China auto manufacturer Zhejiang Jonway Automobile Co. Ltd.




Results of Operations




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




Three months

ended March 312010


2009Statements of Operations Data:Net sales


100
%


100
%Cost of sales


(86.3
)


(73.0
)Operating expenses


(333.6
)


(200.5
)Loss from operations


(319.9
)


(173.5
)Net loss


(383.0
)


(186.7
)







- 16 -





Quarter Ended March 31, 2010 Compared to Quarter Ended March 31, 2009





Net  sales for the quarter ended March 31, 2010 were $848,000 compared to $1.1 million for the period ended March 31, 2009.




Our first quarter sales of Advanced Technology vehicles such as the ZAP Truck, ZAP Van and Xebra, our three wheeled electric car and Zapino a full size electric road scooter decreased  by $228,000 from $336,000 for the period ended  March 31,  2009 to $228,000 for the period ended March 31, 2010. The decrease of $108,000 is primarily due to lowered selling prices for certain volume deals on the sale of our three wheeled Xebra Line. The introduction and sales of the four wheeled ZAP Truck and ZAP Van of $107,000 in the first quarter partially offset the decrease.




Our retail car lot experienced a decrease of $64,000 in sales for the first quarters from $582,000 in 2009 to $517,000 in 2010. The decrease was due to the mix of available vehicles for resale. During the first quarter the retail car lot had many SUV’s and trucks that experienced less consumer demand. The business segment was also affected by US government rebates to new large new car dealers.




In our Consumer Product segment first quarter sales decreased from $158,000 in 2009 to $103,000 in 2010 for the first quarter ended March 31.  The decrease is primarily due to less consumer demand for the ZAPPY 3 Pro together with the Company’s shift in marketing efforts to become a major distributor of electric vehicles.




Gross profitdecreased by $174,000 from a gross profit of $290,000 for the first quarter ended March 31, 2009 to a gross profit of $116,000  for the quarter ended March 31, 2010.




Advanced Technology vehicles gross profit decreased from a $92,000 gross profit for the period ended March 31, 2009 to a gross loss of  $2,000  for the period ended March 31, 2010. The decrease was due to lower sales volumes for the quarter ended March 31, 2010 and certain volume sales to our dealers at discounted sales prices.




The Consumer Products segment experienced a decrease in gross profit in the first quarter from $59,000 in 2009 to a gross profit of $24,000 in 2010. The decrease was due to increased expense for additions to our  inventory reserve to provide for slow moving items.




Our retail car lot gross profits  decreased by $45,000 from $92 ,000  for the quarter ended March 31, 2009  to $94,000 for the quarter ended March 31,  2010. The lower profits are due to  the mix of vehicle models sold during the quarter and  to lower sales volumes.





Sales and marketing expenses decreased by $179,000 from $406,000 for the quarter ended March 31, 2009 to $227,000 in 2010.





The decrease was primarily due to less expenses for trade shows and use of outside consultants for marketing purposes.




General and administrative expenses increased by $766,000 from $1.5 million for the quarter ended March 31, 2009 to $2.2 million in 2010. The reason for the increase was due to an increase in consulting and professional fees for the issuance of convertible debt and for the review of joint venture and potential acquisitions by the company. In addition, the  expensing of employee options was greater as the result of amortizing the recent issuance of stock options over their contractual life.




Research and development expenses  increased by $344,000 from $31,000  for the first ended March 31, 2009  to $376,000 for the first quarter ended March 31, 2010.  We incurred expenses to develop additional working prototypes of the Alias Vehicle.  We also spent additional funds to convert various prototype  gas vehicles to electric for the United States Post Office and for  Chinese Taxis.




Interest  expenseincreased from $137,000 in first quarter 2009 to $486,000 in first quarter of 2010. The increase was due to the higher loan balance on the promissory note and the settlement with Al Yousuf regarding the short term debt. See legal proceedings.




- 17 -


Other expenseof $45,000 represents the Company’s equity percentage net loss from our Investment in ZAP Hangzhou joint venture .




Net lossfor the first quarterended March 31, 2010 was $3.2 million as compared to a loss of $2 million for the period ended March 31, 2009.




Liquidity and Capital Resources




In the first three months of 2010, net cash used for operating activities was $4.6 million. Cash used in the first three months of 2010 was comprised of the net loss incurred for the first three months of $3.2 million plus net non-cash expenses of $873,000 and the net decrease of $2.2 million in operating assets and liabilities. In the first three months of 2009, the Company used cash for operations of $1.4million was comprised of the net loss of $2 million plus net non-cash expenses of $1.1 million and the net decrease in operating assets and liabilities of $397,000.




Investing activities provided cash of $16,000 and $240,000 in the first three months ended March 31, 2010 and 2009, respectively. The disposal of equipment resulted in increases to cash.




Financing activities for the first three months ended March 31, 2010 provided cash of $3.3 million compared with financing activities that provided cash of $1.1million in 2009. During the first quarter of 2010,we issued $3 million of convertible debt to Samyang Optics. In 2009, we received $1 million from a private placement and another $1.2 million through short term borrowings.




The Company had cash of $3.4 million at March 31, 2010 as compared to $374,000 at March 31, 2009. The Company had working capital deficits of $4.4 million and $3.5 million for the periods ended March 31, 2010 and 2009 respectively.




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 Al-Yousuf group is a major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note.




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 $2.8 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 March 31, 2010  including interest.





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.





On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation.




- 18 -


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.





6% Senior Convertible Notes





The Company has issued to Samyang Optics a subordinated convertible promissory notes in the principal amount of $5 million.




We have a total lending facility from this investor of $10 million under the Convertible note and have drawn a total  of  $5 million through March 31, 2010. 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.





In April of 2010, ZAP’s CEO, Steven Schneider was appointed the Vice Chairman of the Board of Samyang Optics.





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.





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.








- 19 -


CRITICAL ACCOUNTING POLICIES




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.




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 for credit losses 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 March 31, 2010 and 2009, respectively. 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.




FAIR VALUE OF FINANCIAL INSTRUMENTS


The carrying amount reported in the balance sheet for cash and cash equivalents, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported for notes payable approximates fair value because in general, the interest on the underlying instruments fluctuates with market rates.





Marketable Securities





The marketable equity securities are recorded at cost since they are held in safekeeping by the issuing company and can not be negotiated until March of 2011.  We therefore view any gross unrealized gains in the value of our marketable securities as temporary increases.




Inventory Valuation




We adjust the value of our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and development of new products by our competitors. Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods, and are carried at the lower of cost (first-in, first-out method) or market.




Deferred Tax Asset Realization




We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.




- 20 -





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.





The Company recently 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.





- 21 -


2.
The company is displaying its all-electric ZAP Taxi targeting the fleet market as well as its innovative all-electric Alias prototype sports car at the Beijing Motor ShowMilitary 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 2009 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;





- 22 -


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.





- 23 -


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.





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.




Risk Factors





We have a history of losses and our future profitability on a quarterlyor 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  $3.2 million $10.7 million, $9.8 million  for the three months ended March 31, 2010 and the years ended December 31, 2009 and  2008  respectively.  We can give no assurance that we will be able to operate profitably in the future.





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;





- 24 -


·
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.





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.




- 25 -





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.





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.





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.




- 26 -


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.





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 4T. Controls and Procedures


Disclosure Controls and Procedures




Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis,





- 27 -


information required to be disclosed by us in the reports filed, furnished or submitted under the Exchange Act. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.




Changes in Internal Control Over Financial Reporting




There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.





PART II - OTHER INFORMATION


ITEM 1.  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.




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.




On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation.





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. Although no specific monetary demand is included, the Complaint seeks punitive damages, actual damages, and interest.   All of the defendants answered and cross-complained on March 29, 2010, and discovery was served on plaintiff requiring responses in early May 2010.  The Company intends to defend itself vigorously in this matter. We do not believe this matter will have a material effect on our financial statements.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds




The following lists sales of unregistered securities during the quarter ended March 31, 2010 that were not previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K. We relied on the





- 28 -


exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the issuance of these securities. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions. The offer and sale of the following securities was exempt from the registration requirements of the Securities Act under Rule 506 insofar as (1) except as stated below, each of the investors was accredited within the meaning of Rule 501(a); (2) the transfer of the securities were restricted by the company in accordance with Rule 502(d); (3) there were no more than 35 non-accredited investors in any transaction within the meaning of Rule 506(b), after taking into consideration all prior investors under Section 4(2) of the Securities Act within the twelve months preceding the transaction; and (4) none of the offers and sales were effected through any general solicitation or general advertising within the meaning of Rule 502(c).




On January 12, 2010  the Company issued 500,000  shares of common stock valued at $175,000  in exchange for services.




On February  2, 2010, the Company issued 228,000 shares of common stock  valued at  $ 93,000 to compensate directors for their services. Also on that date the Company issued 722,388  shares valued at $245,000 in exchange for services.




On March 31, 2010 , the Company issued 249,870 shares valued at $77,000  in exchange for services.




Item 3. Defaults upon Senior Securities




Related Party Dispute




Please note the indebtness is due to a related party—Al Yousuf LLC whose President Mr. Eqbal Al Yousuf is also a Director of ZAP.




On July 30, 2009 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, 2009. 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 $2.8 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, including interest, is approximately $5.7 million at March 31, 2010 with inventory advances totaling $3.9 million and a building loan of $1.8 million plus interest.





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.




- 29 -


On March 1, 2010, ZAP filed an offer to settle the Complaint with Al Yousuf LLC pursuant to Section 998 of the California Code of Civil Procedure (the “Settlement Offer”), which was accepted by Al Yousuf LLC on April 5, 2010. The material terms of the Settlement Offer are that ZAP shall (1) pay to Al Yousuf LLC the total combined cash sum of $1,800,000 over a period of two years; (2) transfer the property located at 501 Fourth Street, Santa Rosa, California to Al Yousuf LLC; and (3) transfer the property located at 44720 Main Street, Mendocino, California to Al Yousuf LLC in exchange for ending the litigation.





Item 4.  Submission of Matters to a Vote of Security Holders




Not Applicable




Item 5.  Other Information




Not Applicable




Item 6.  Exhibits





(b) Exhibits.





Exhibit

Number

Description31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.














- 30 -





SIGNATURES




In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




ZAPDated: May  13, 2010
By:
/s/ Steven SchneiderName: Steven SchneiderTitle: Chief Executive Officer (Principal Executive Officer)





Dated: May 13, 2010
By:
/s/ William HartmanName: William HartmanTitle: Chief Financial Officer

(Principal Financial and Accounting Officer)













- 31 -