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 September 30, 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 ofincorporation or organization)
(I.R.S. EmployerIdentification Number)501 4th Street Santa Rosa, CA 95401(Address of principal executive offices) (Zip Code)(707) 525-8658(Registrant’s telephone number)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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.
  Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 PROCEEDINGS DURING THE PRECEDING FIVE YEARS
  Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after thedistribution of securities under a plan confirmed by a court. Yes  oNo  x
 
 State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
  143,775,712 shares of common stock as of November  10, 2010.





ZAP




FORM 10-Q




INDEX




Page

No.PART I. Financial InformationItem 1.
Condensed Consolidated Financial Statements (unaudited) :Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
1Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
2Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
3Notes to Condensed Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15Item 4.
Controls and Procedures
26PART II. Other InformationItem 1.
Legal Proceedings
27Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27Item 3.
Defaults upon Senior Securities
28Item 4.
Submission of Matters to a Vote of Security Holders
28Item 5.
Other Information
28Item 6.
Exhibits
28SIGNATURES

29







Part I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 ZAP AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 (In thousands except per share data)
 September 30,

2010

December 31,

2009ASSETS

CURRENT ASSETSCash
$
935

$
4,800Investment in related party

1,985


—Accounts receivable, net of allowance for doubtful accounts of $24 and $43

300


156Inventories, net

2,146


1,999Prepaid expenses and other current assets

196


540Total current assets

5,562


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

150


3,802OTHER ASSETSInvestment in non-consolidated joint venture

982


1,225Distribution fees for Jonway products

14,400


—Deposits and other assets-net

1,328


1,257Total Other Assets

16,710


2,482TOTAL ASSETS
$
22,422

$
13,779LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIESCurrent portion of long-term debt and short-term notes – related party
$
1,841

$
5,889Accounts payable

286


458Accrued liabilities

990


2,0466% Senior convertible debt, net of discount of $133 at December 31, 2009 – related party

5,000


1,867Total current liabilities

8,117


10,260SHAREHOLDERS’ EQUITYCommon stock, authorized 400 million shares; no par value; and 143,489,997 shares and 104,029,107 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively

156,858


138,712Accumulated other Comprehensive Income

( 15)


—Accumulated deficit

(142,538)


(135,193)Total shareholders’ equity

14,305


3,519Total liabilities and shareholders’ equity
$
22,422

$
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

September 30,

2010

Three Months

ended

September 30,

2009


Nine Months

ended

September 30,

2010


Nine Months

ended

September 30,

2009NET SALES

$
985

$
1,246


$
2,682


$
3,091COST OF GOODS SOLD


837


845



2,318



2,581GROSS PROFIT


148


401



364



510OPERATING EXPENSESSales and marketing


245


254



769



948General and administrative (non-cash stock-based compensation of $1 million and $1.5 million and $1.9 million and $3.6 million for the three and Nine Months ended September 30, 2010 and 2009, respectively)


1,564


2,641



5,579



5,783Impairment of assets


—


218



—



674Research and development


130


81



834



1631,939


3,194



7,182



7,568LOSS FROM OPERATIONS


(1,791
)

(2,793
)


(6,818
)


(7,058
)OTHER INCOME (EXPENSE)Interest expense, net


(1
)

(134
)


(1,046
)


(431
)Gain on extinguishment of debt


—


—



817



—Other income (expense), net


(96
)

5



(291
)


8(97
)

(129
)


(520
)


(423
)LOSS  BEFORE INCOME TAXES

$
(1,888
)
$
(2,922
)

$
(7,338
)

$
(7,481
)PROVISION FOR INCOME TAXES


—


—



(4
)


(4
)NET LOSS

$
(1,888
)
$
(2,922
)

$
(7,342
)

$
(7,485
)NET LOSS PER COMMON SHARE--- BASIC AND DILUTED

$
(0.02
)
$
(0.03
)

$
(0.07
)

$
(0.09
)WEIGHTED AVERAGE OF COMMONSHARES OUTSTANDING--- BASIC AND DILUTED


109,611


93,557



106,846



77,965
 
 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 Nine Months Ended

September 30,2010


2009Net loss

$
(7,342
)

$
(7,485
)Stock-based employee compensation, consulting and other services


1,956



3,604Depreciation and amortization


52



185Allowance for doubtful accounts


(19
)


24Investment in Joint Venture


243Gain on settlement


(818
)


—Changes in other items affecting operations:Receivables


(125
)


203Inventories


(147
)


620Convertible debt discount


133 133Prepaid expenses and other assets


387



475Accounts payable


(177
)


(198
)Accrued liabilities


16



409Deferred revenue


—



(399
)Net cash used in operating activities


(5,841
)


(2,562
)CASH FLOWS FROM INVESTING ACTIVITESPurchase of Marketable Securities


(2,000
)


—Purchase of Equipment


(5
)


(22
)Disposal of equipment, net


25



333Net cash provided by (used in) investing activities


(1,980
)


311CASH FLOWS FROM FINANCING ACTIVITIESProceeds from Issuance of convertible debt


3,000Issuance of common stock


1,008



6,100Proceeds from short-term debt


31



1,138Settlement of short term debt with Al Yousuf


(750
)Stock Issuances for Convertible Debt discounts


667



—Net cash provided by  financing activities


3,956 338



7,238NET INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS


(3,865
)


4,987CASH AND CASH EQUIVALENTS,beginning of period


4,800



341CASH AND CASH EQUIVALENTS,end of period

$
935


$
5,328
 
 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 and Nine Months ended September 30, 2010 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 31, 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 September 30, 2010, these potentially dilutive securities include options for 26.4 million shares of common stock and warrants for 67.6 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 condensed consolidated financial statements after elimination of significant inter-company accounts and transactions.  Our investment 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 nine months of 2010, the joint venture incurred an operating loss of $645,000 of which $242,000 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);
 
 -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.
 - 4 -
 Investment in a Related Party
 
 The Investment in a Related Party is comprised of marketable equity securities, which are restricted until March of 2011, are recorded at mark to market in accordance with GAAP.  The securities are shares of stock in Samyang Optics Ltd. Traded on the Korean stock exchange.  ZAP’s ownership in not material to Samyang Optics Ltd.
 
 Distribution Agreement with Goldenstone Worldwide Limited
 
 On September 28, 2010, ZAP entered into an International Distribution Agreement (the Distribution Agreement) with Goldenstone Worldwide Limited as the distributor of Jonway products both in the U. S. and internationally. The agreement required the issuance of 30 million shares of ZAP common stock valued at $14.4 million. The shares are currently held in escrow to be released upon the completion of our acquisition of a 51% interest in Zhejiang Jonway Automobile Co., Ltd .
 The shares are currently held in escrow until all of the relevant and required documentation is completed as agreed and released in writing by the CEO of ZAP or December 15, 2010 whichever occurs earlier.
 
 The Jonway Group Limited had granted the international distribution rights for all of its products to Goldenstone Worldwide Limited.
 Accumulated other comprehensive Income
 
 Accumulated other comprehensive Income represents unrealized losses in investments.
 
 
 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 September 30, 2010, the Company has recorded a warranty liability for $110,000 for estimated repair costs and the Xebra Safety Recall. In 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 because the Xebra is classified as a motorcycle, it should have two separate brake reservoirs.
 
 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.
 - 5 -
 NOTE 3  STOCK-BASED COMPENSATION
 
 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.
 
 Nine Months Ended

September 30, 2010
Nine Months Ended

September 30, 2009Expected Dividend yield

0%
0%Expected volatility

1.392-1.501
137.8-158.2Risk-free interest rate

1.66 to 2.32 %
2.30to 3.15%Expected life (in years) from grant date

5 to 5.75
5 to 5.75Exercise price

$0.30 to $0.36
$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 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 and Nine Months ended September 30, 2010 was $0 and $0.34 respectively. 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.
 
 A summary of options under the Company’s stock option plans from January 1, 2010 through September 30, 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
4.74Options granted under the plan
228
$  0.36
4.90Options exercised
—
—
—Balance March 31, 2010
25,680
$  0.56
4.74Options granted under the plan

Options exercised

Options forfeited and expired



Balance June 30, 2010
1,139

—

—



26,819
$ 0.34

—

—



$0.55
4.9

—

—



4.74Options granted under the plan
—
—Options exercised
(140)
$0.25Options forfeited and expired
( 800)
$0.25Balance September 30, 2010
25,879
$0.55
4.23
 
 - 6 -
 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 September 30, 2010, for those options for which the quoted market price was in excess of the exercise price (“in-the-money­ options”). There were 21.2 million options valued at $2.6 million in the money at September 30, 2010.
 
 As of September 30, 2010, total compensation cost of unvested employee stock options is 7 million. This cost is expected to be recognized through April 2013. . We recorded no income tax benefits for stock-based compensation expense arrangements for the nine months ended September 30, 2010, as we have cumulative operating losses, for which a valuation allowance has been established.
 
 NOTE 4  INVENTORIES, NET-Inventories are as follows:
 September 30,

2010


December 31,

2009Advanced transportation vehicles

$
1,209


$
1,138Vehicles - conventional


350



389Parts and supplies


716



528Finished goods


260



203$
2,535


$
2,258Less - inventory reserve

$
(389)


$
(259)$
2,146


$
1,999
 
 
 NOTE 5 –  SHORT-TERM DEBT PROMISSORY NOTE
 
 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. The cash sum is scheduled to be paid as follows: three equal payments of $250,000 on Quarters ended March 31, 2010, June30, 2010 and September 30, 2010, one payment of $500,000 on December31, 2010 and the final payment of $550,000 on March 31, 2011. As of September 30, 2010, $1.05 million was due to Al Yousuf under this settlement.  As a result of the aforementioned settlement approximately $5.1 million of Short term debt due to Al Yousuf was cancelled and a gain of $818,000 was recorded.
 
 Also included in the short term debt is $760,000 which the Company borrowed 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 subordinated convertible promissory notes to Samyang Optics 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 September 30, 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
 
 - 7 -
 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 under this the Note shall be converted into shall be restricted securities. The parties have amended the agreement to allow for a new conversion date which will be mutually determined by ZAP and  Samyang Optics Co. Ltd. We are also proposing a new conversion price.
 
 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 September 30, 2010 no advances were made to the Company from this Secured Loan Facility.
 
 
 NOTE 6  INCOME TAXES
 
 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 as a result of this.
 
 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 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 September 30, 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 $68,600 and $63,000 for the Nine Months ended September 30, 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 $5.0 million.
 - 8 -
 We have a total lending facility from this investor of $10 million under the Convertible note and have drawn a total  of  $5.0 million through September 30, 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.  Any shares of Common Stock issued under this the Note will be restricted securities. The parties have amended the agreement to allow for a new conversion date that will be mutually determined by ZAP and   Samyang Optics Co. Ltd.  We are also proposing a new conversion price.
 
 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 July 9, 2010, Cathaya agreed to make a further investment in the Company by entering into a securities purchase agreement (the “Cathaya Agreement”) with the Company. Pursuant to the Cathaya Agreement, Cathaya will purchase 44 million shares of the Company’s Common Stock at a price of $0.25 per share (the “Cathaya Shares”) for an aggregate purchase price of $11 million. The closing of this investment is conditioned upon the receipt of Governmental Approvals in connection with the Acquisition Transaction –see note 8 and is expected to close simultaneously with the Acquisition Transaction.
 
 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.
 
 Management Agreement with Cathaya Capital L.P.
 
 On November 10, 2010 the Board of Directors of ZAP approved the payment to Cathaya, as compensation for services rendered prior to the date of this Agreement since the date of the Investment and to be rendered by Cathaya during the term of this Agreement (the “Base Fee”), in Cathaya’s sole discretion, either (i) a fee equal to $2,500,000 in cash (the “Cash Fee”) or (ii) a number of shares of ZAP Common Stock equal to the Cash Fee divided by $0.50 per share (the “Share Fee”) plus the reasonable out-of-pocket costs and expenses incurred by Cathaya in rendering services hereunder.  The Base Fee will be payable at the earlier of (i) the closing of the transaction contemplated by the Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd, dated July 2, 2010, between the Company and  Jonway Group Co., Ltd. and (ii) March 31, 2011.  The foregoing notwithstanding, the Company shall issue Five Million (5,000,000) shares of Common Stock on the date of this Agreement and such shares shall be set aside in escrow to be delivered to Cathaya as the Share Fee in the event Cathaya elects the Share Fee in satisfaction of the Base Fee.  In the event Cathaya elects the Cash Fee, such shares shall be returned to the Company.  In the event the term of this Agreement is extended beyond the Initial Term the compensation for services performed by Cathaya during such extension shall be determined by mutual agreement of the Company and Cathaya.
 
 - 9 -
 Cathaya hereby agrees during the term of this engagement to consult with the Company’s board of director (the “Board”) and management of the Company in such manner and on such business and financial matters as may be reasonably requested from time to time by the Board, including, but not limited to:Corporate, acquisition and divestiture strategies;Budgeting of future corporate investments;Debt and equity financings;Sourcing, identifying and executing acquisitions in conjunction with management;Ongoing management of investor and lender relationships in conjunction with management; and Assisting management in presentations to the investment community and analysts of acquired companies and results of acquisition strategy.
 
 Principals of Cathaya will be available to serve on the Board and will devote such time and attention to the Company’s affairs as reasonably necessary to accomplish the purposes of this Agreement.
 
 It should be noted that Priscilla Lu who is Chairman of the Board of ZAP is also the General Partner of Cathaya Capital L.P.
 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.
 NOTE 8 – COMMITMENTS
 
 Acquisition of 51% Interest in  Jonway Automobile Co., Ltd
 
 On July 2, 2010, Zap (the "Company") entered into an Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd. (the "Equity Transfer Agreement") with Jonway Group Co., Ltd. to acquire a 51% interest in Zhejiang Jonway Autombile Co., Ltd., a limited liability company of the People's Republic of China ("Zhejiang"), for $29,030,000 (the "Acquisition Transaction"). Zhejiang is engaged in the business of, among other things, manufacturing and sales of automobile spare parts and UFO brand automobiles. According to the terms of the Equity Transfer Agreement, following the completion of the Acquisition Transaction, Zhejiang will convert into a Chinese foreign limited liability joint venture company (the "Zhejiang Joint Venture"). The closing of the Acquisition Transaction is conditioned on, among other things, the receipt of certain approvals, registrations and licenses from the Ministry of Commerce of the People's Republic of China, the Zhejiang Administration of Industry and Commerce, and the local counterparts of these entities and other relevant government authorities ("Governmental Approvals").
 - 10 -
 According to the terms of the definitive agreements, ZAP has to right to acquire the remaining 49% of Jonway Auto at the same valuation by March 30, 2011 or at a then current valuation after that date. ZAP intends this transaction to be phase one of a two-phase acquisition, whereby the two companies will combine their complementary expertise, leveraging ZAP's EV technology and Jonway Auto's quality ISO 9000 certified mass production capabilities to address the new alternative energy vehicle market. ZAP intends to acquire the remaining 49 percent of Jonway Automobile following completion of the first phase and following final regulatory approval. The Company has also entered into a Joint Venture Contract with Jonway Group Co., Ltd., Wang Gang and Wang Xiaoying, which shall govern the Zhejiang Joint Venture.
 
 Additional Investment of $11 million by Cathaya Capital L.P
 
 As previously disclosed in the Company’s Current Report on Form 8-K filed on August 10, 2009, on August 6, 2009, Cathaya Capital, L.P., a Cayman Islands exempted limited partnership (the “Cathaya”) purchased 20 million shares of the Company’s Common Stock. On August 6, 2009, the Company also entered into a Secured Convertible Promissory Note with Cathaya for aggregate principal advances of up to $10 million. In addition, the Company also issued two warrants to Cathaya exercisable for shares of the Company’s Common Stock.
 
 On July 9, 2010, Cathaya agreed to make a further investment in the Company by entering into a securities purchase agreement (the “Cathaya Agreement”) with the Company. Pursuant to the Cathaya Agreement, Cathaya will purchase 44 million shares of the Company’s Common Stock at a price of $0.25 per share (the “Cathaya Shares”) for an aggregate purchase price of $11 million. The closing of this investment is conditioned upon the receipt of Governmental Approvals in connection with the Acquisition Transaction and is expected to close simultaneously with the Acquisition Transaction.
 
 Pursuant to the terms of the Cathaya Agreement, upon the closing of the additional investment, the Company will also enter into an amended and restated registration rights agreement with Cathaya.
 
 Priscilla Lu, the Chairman of the Board of ZAP, is also the Managing Partner of Cathaya Capital L.P.
 
 Joint Venture ZAP Hangzhou
 
 On December 11, 2009, the Company entered into a Joint Venture Agreement to establish a new US-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Holley Group, the parent company of a global supplier of electric power meters and Better World International, LTD , a company focused on infrastructure technology and services for electric vehicles.  Priscilla Lu, PhD who is the current Chairman of the Board of ZAP is also the Founder and General Partner of Better World International LTD.   Both ZAP and Better World International LTD will each have a 37.5% interest with Holley Group International owning a 25% interest. The joint venture partners have also funded the initial capital requirements under the agreement for a total of $3 million of which ZAP’s portion is $1.2 million.
 
 ZAP Hangzhou will combine ZAP’s intellectual property, electric vehicle technology and know how with Holley’s experience in electric metering to develop electric vehicles and related technologies targeting the Chinese market. The companies plan to use their knowledge of the local Chinese market to target opportunities for electric vehicle growth within China’s vehicle fleets. As part of this relationship, ZAP Hangzhou plans to begin the installation of manufacturing facilities at Holley’s Hangzhou facilities in the near future.
 
 Our Investment 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 nine Months of 2010, the joint venture incurred an operating loss of $645,000 of which $242,000 is ZAP’s share.
 - 11 -
 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 September 30, 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.
 
 Distribution Agreement with Goldenstone Worldwide Limited
 
 On September 28, 2010, ZAP entered into an International Distribution Agreement ( the Distribution Agrrement)  with Goldenstone Worldwide Limited as the distributor of Jonway products both in the U. S. and internationally. The agreement required the issuance of 30 million shares of ZAP common stock valued at $14.4 million. The shares are currently held in escrow to be released upon the completion of our acquisition of a 51% interest in Zhejiang Jonway Automobile Co., Ltd .
 NOTE 9    SEGMENT REPORTING
 
 In accordance with the provisions of SFAS No. 131, the Company has identified three reportable segments consisting of sales and marketing of electronic consumer products, the Zappy 3 scooters and ATV’s, 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
 - 12 -
 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 results are summarized as follow (in thousands):

Electronic

Consumer

Products

and

Corporate

Expenses


Car

Outlet


Advanced

Technology

Vehicles


TotalsFor the 3 months ended of September 30, 2010:Net Sales

$
75


$
419


$
491


$
985Gross profit


16



45



87



148Net Income (Loss)


(1,692
)


(49
)


(147
)


(1,888
)Total Assets


20,013



440



1,969



22,422For the 3 months ended of September 30, 2009:Net Sales

$
83


$
435


$
728


$
1,246Gross profit (Loss)


7



88



306



401Net Loss


(2,2,( 2,898
)


(21
)


(3
)


(2,922
)Total Assets


10,106



465



1,934



1 12,505For the 9 months ended of September 30, 2010:Net Sales

$
255


$
1,424


$
1,003


$
2,682Gross profit


75



269



20



364Net Loss


(6,228
)


(92
)


(1,022
)


(7,342
)Total Assets


20,013



440



1,969



22,422For the 9 months ended of

September 30, 2009:Net Sales

$
365


$
1,307


$
1,419


$
3,091Gross profit (Loss)


(34
)


288



256



510Net Loss


(6,580
)


(20
)


(885
)


(7,485
)Total Assets


10,106



465



1,934



12,505
 
 - 13 -
 NOTE 10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 Nine Months Ended

September30,

(in thousands)2010


2009Cash paid during the period for interest

$
110


$
76Cash paid during the period for income taxes

$
4


$
4Non-cash investing and financing activities:Reclassification of long term debt to short term:Increase in short term debt ---


—



1,772Decrease in long term debt


—



(1,772
)Purchase of Distribution rights for Jonway products


(14,400
)


—Patent Acquisition


(115
)


—
 
 
 NOTE 11 SUBSEQUENT EVENTS:
 
 Management Agreement with Cathaya Capital L.P.
 
 On November 10, 2010 the Board of Directors of ZAP approved the payment to Cathaya, as compensation for services rendered prior to the date of this Agreement since the date of the Investment and to be rendered by Cathaya during the term of this Agreement (the “Base Fee”), in Cathaya’s sole discretion, either (i) a fee equal to $2,500,000 in cash (the “Cash Fee”) or (ii) a number of shares of ZAP Common Stock equal to the Cash Fee divided by $0.50 per share (the “Share Fee”) plus the reasonable out-of-pocket costs and expenses incurred by Cathaya in rendering services hereunder.  The Base Fee will be payable at the earlier of (i) the closing of the transaction contemplated by the Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd, dated July 2, 2010, between the Company and  Jonway Group Co., Ltd. and (ii) March 31, 2011.  The foregoing notwithstanding, the Company shall issue Five Million (5,000,000) shares of Common Stock on the date of this Agreement and such shares shall be set aside in escrow to be delivered to Cathaya as the Share Fee in the event Cathaya elects the Share Fee in satisfaction of the Base Fee.  In the event Cathaya elects the Cash Fee, such shares shall be returned to the Company.  In the event the term of this Agreement is extended beyond the Initial Term the compensation for services performed by Cathaya during such extension shall be determined by mutual agreement of the Company and Cathaya.
 
 Cathaya hereby agrees during the term of this engagement to consult with the Company’s board of director (the “Board”) and management of the Company in such manner and on such business and financial matters as may be reasonably requested from time to time by the Board, including, but not limited to:Corporate, acquisition and divestiture strategies;Budgeting of future corporate investments;Debt and equity financings;Sourcing, identifying and executing acquisitions in conjunction with management;Ongoing management of investor and lender relationships in conjunction with management; and Assisting management in presentations to the investment community and analysts of acquired companies and results of acquisition strategy.
 
 Principals of Cathaya will be available to serve on the Board and will devote such time and attention to the Company’s affairs as reasonably necessary to accomplish the purposes of this Agreement.
 
 It should be noted that Priscilla Lu who is Chairman of the Board of ZAP is also the General Partner of Cathaya Capital L.P.
 
 On November 6, 2010, Cathaya Capital LLP paid $10 million to  Zhejiang Jonway Automobile Co. Ltd  on behalf of ZAP.  As noted in ZAP’s Forms 8K filed on July 9, 2010 and September 13, 2010 this payment is the initial down payment of US$10 million towards the 51% acquisition of Zhejiang Jonway Automobile Co. Ltd. The total cash  portion of the acquisition is $29million. Also as noted in ZAP’s Form 8K on July 9, 2010, this advance by Cathaya Capital was in conjunction with their agreement to make a further investment in the Company by entering into a securities purchase agreement (the “Cathaya Agreement”) with the Company. Pursuant to the Cathaya Agreement, Cathaya will purchase 44 million shares of the Company’s Common Stock at a price of $0.25 per share (the “Cathaya Shares”) for an aggregate purchase price of $11 million. The stock due by ZAP has not been issued to Cathaya Capital as of November 12, 2010 but is anticipated to be done shortly.
 
 
 - 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:
 
 -
whether the alternative energy and gas-efficient vehicle market for our products continues to grow and, if it does, the pace at which it may grow;
 -
our ability to attract and retain the personnel qualified to implement our growth strategies, our ability to obtain approval from government authorities for our products;
 
 -
our ability to protect the patents on our proprietary technology;
 
 -
our ability to fund our short-term and long-term financing needs;
 
 -
our ability to compete against large competitors in a rapidly changing market for electric and gas-efficient vehicles;
 
 -
changes in our business plan and corporate strategies; and
 
 -
other risks and uncertainties discussed in greater detail in various sections of this report, particularly the section captioned “risk factors.”
 
 Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
 
 Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made in our filings. You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report to reflect new events or circumstances unless and to the extent required by applicable law.
 
 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 third quarter of 2010 and through the date of this report are as follows:
 
 1)
In July, 2010, we entered into an Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd. with Jonway Group Co., Ltd. to acquire a 51% interest in Zhejiang Jonway Automobile Co., Ltd., a limited liability company of the People's Republic of China.  In September 2010, we received approval from the Commerce Department of Zhejiang Province for this proposed acquisition. ZAP and Jonway now intend to move forward to satisfy the remaining conditions to closing the transaction, including but not limited to those related to financing, foreign exchange authority approval in China and share registration.
 
 2)
Cathaya Capital, L.P. agreed to invest US$11 million in ZAP to finance the 51 percent  interest acquisition of Zhejiang Jonway Automobile Co. Ltd. upon final closing of the transaction. Cathaya Capital, L.P. is a cross border fund focused on investing in technology based growth opportunities in China by combining international companies that bring technologies or could give global market presence to high growth potential Chinese companies. Cathaya invested $ 5 million in ZAP in 2009.
 
 - 15 -
 3)
Our first Alias electric car has been sold to distribution partner Samyang Optics of Korea. Samyang Optics has taken delivery of a red Alias that first appeared at National Automobile Dealers Association Expo in New Orleans. The same Alias debuted to the public earlier this year at the Korea EV Challenge, sponsored by Samyang Optics. Samyang Optics and ZAP Jonway have formed a business venture to introduce electric vehicles (EV’s) to Korea. The government’s goal is to commercialize EV’s and capture 10 percent of the global market by 2015. Korea wants EV’s to comprise 10 percent of domestic small car sales by 2020.
 
 4)
The Internal Revenue Service (IRS) has determined that the ZAPTRUCK XL and ZAPVAN Shuttle qualify under the American Recovery and Reinvestment Act for a ten percent tax credit up to a maximum of $2,500, if purchased after February 17, 2009 and before January 1, 2012 under Internal Revenue Code Section 30. We believe that these tax credits make our ZAP electric trucks and vans even more affordable to own and operate
 
 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 September 30


Nine Months

ended September 302010


2009


2010


2009Statements of Operations Data:Net sales


100
%


100
%


100
%


100
%Cost of sales


(85.0
)


(67.8
)


(86.4
)


(83.5
)Operating expenses


(196.9
)


(255.5
)


(267.8
)


(244.4
)Loss from operations


(181.8
)


(223.1
)


(254.2
)


(227.9
)Net loss


(191.7
)


(233.5
)


(273.8
)


(241.7
)
 
 
 Quarter Ended September 30, 2010 Compared to Quarter Ended September 30, 2009
 
 Net  sales for the quarter ended September 30, 2010 were $985,000 and compared to $1,246,000 for the period ended September 30, 2009.
 
 Our third 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 $236,000 from $727,000 in 2009 to  $491,000 in 2010. The decrease was due to less consumer demand and financing difficulties in the U.S. economy.
 
 Our retail car lot experienced a decrease of $15,000 in sales for the third quarter of 2010 from $435,000 in 2009 to $420,000 in 2010. The increase was due to the mix of available vehicles for resale. During the third quarter the retail car lot had many SUV’s and trucks that experienced more consumer demand.
 
 In our Consumer Product segment third quarter sales decreased $11,000 from $83,000 in 2009 to $72,000 in 2010 for the third quarter ended September 30, 2010.  We experienced some supply issues as we contracted with a manufacturer.
 
 The current U. S. economic recession has also caused an overall decrease in sales of all products.
 
 - 16 -
 Gross profitdecreased by $253,000 from a gross profit of $401,000 for the third quarter ended September 30, 2009 to a gross profit of $148,000 for the quarter ended September 30, 2010.
 
 The Gross profit for the Advanced Technology vehicles decreased $212,000 from a gross profit of $306,000 for the quarter ended September 30, 2009 to a gross profit of $94,000 for the quarter ended September 30, 2010. The major reason was due to lower sales volume.
 The gross profit in the third quarter for our car lot decreased $49,000 from $88,000 in the third quarter of 2009 to $39,000 in the third quarter of 2010. The decrease was primarily due to writing down the value of inventory to lower of cost or market value.
 The Consumer Products segment experienced an increase of $6,000 in gross profits of $7,000 in 2009 to a gross profit of $13,000 in 2010. The increase was due to less costs for quality control labor. In the third quarter of 2009, we experienced repairs for the ZAPPY 3 Pro model, since then we have changed manufacturers.
 
 Sales and marketing expenses decreased by $9,000 from $ 254,000 for the quarter ended September 30, 2009 to $245,000 in the third quarter of 2010. The decrease was due to lower sales volume.
 
 General and administrative expenses decreased by $1,000,000 from $2.6 million for the quarter ended September 30, 2009 to $1.6 million in the quarter ended September 30, 2010. The decrease was due to higher professional fees incurred in the third quarter 2009. In the third quarter of 2009,  we  incurred higher legal expenses for the financing arrangement with Cathaya Capital LLC. The expensing of stock options was also higher  in 2009 due to issuances to employees and those required by the Cathaya Financing agreement.
 
 Research and developmentexpenses increased by $49,000 from $81,000 in the quarter ended September 30, 2009 to $130,000 for the third quarter ended September 30, 2010. The increase was due to work on the development of the Alias prototype vehicle, USPS conversion and Taxi conversion projects.  All of these projects served to further our knowledge of the planning and manufacturing of new electric vehicles. We were also able to efficiently convert conventional gas vehicles to electric.
 
 Of the G&A and R&D expenses for the three months ended September 30, 2010, $52,000 or 40% was spent in the development of the Alias vehicles for the XPRIZE competition, $58,500 or 45% was used in the development of the EV SUV, $19,500 or 15% was spend in the development of our conversion process.
 
 Interest expense,net decreased from an expense of $134,000 in third quarter 2009 to $1,000 in third quarter of 2010. The decrease was due  to the debt settlement agreement with Al Yousuf.
 
 Other income (expense)increased $101,000 from income of $5,000 for the third quarter of 2009 to other expense of $96,000 in the third quarter of 2010. The increase was due to a loss incurred for our ZAP Hangzhou Joint Venture of $58,000. The Joint Venture has incurred expenses to successfully convert conventional gas vehicles to electric in China and to display our products at the China Bejing  Motor Show.
 
 Net lossWe experienced a net loss of approximately $1.9 millionfor the third quarter ended September 30, 2010 as compared to a net loss of $2.9 million for the third quarter ended September 30, 2009.
 
 Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
 
 Net sales for the Nine Months ended September 30, 2010, were $2.7 million compared to $3.1 million for the Nine Months ended September 30 in the prior year.
 
 Sales in the Advanced Technology segment decreased from $1,419,000 for the nine months ended in 2009 to $1,003,000 for the nine months ended in 2010 for the Nine Months ended
 
 Our retail car lot experienced an increase in sales of $118,000 from $1,307,000 in the nine months ended September 2009 to $1,425,000 million in the nine months ended September 30, 2010. The increase was due to strong sales in the first Nine Months of 2010. Due to the current recession many consumers chose lower priced pre-owned vehicles that are distributed through our retail car outlet.
  September 30. The tight U.S. credit and general economic conditions negatively impacted our dealer sales in the first Nine Months of 2010.
 
 We experienced a decrease of $127,000 in sales of consumer products from $365,000 in 2009 to $238,000 in 2010 due to fewer ZAPPY 3 scooters available for resale as we searched for a new outside contractor manufacturer in 2009.
 
 - 17 -
 Gross profitdecreased by $146,000 from $510,000 for the Nine Months ended September 30, 2009  to $364,000 for the Nine Months ended September 30, 2010 .
 
 In our Advanced Technology segment our gross profit decreased by $236,000 from a gross profit of $256,000 for the Nine Months ended September 30, 2009 to $20,000 for the Nine Months ended September 30, 2010.  The decrease was due to lower sales volumes and sales to certain Dealers at a discount price for our three wheeled Xebra vehicles.
 
 In our Consumer Products segment we experienced an increase of $91,000 in gross profits from a gross loss of $34,000 in 2009 to a gross profit of $57,000 in 2010. The increase was due to the exclusion of ZAP Latin America in 2010 that was phased out  in late 2009.
 
 Gross profits in our retail car lot decreased by $19,000 from $288,000 for the Nine Months ended September 30, 2009 to $269,000 for the Nine Months ended September 30, 2010. The decrease in gross profits was due to higher sales at auction with lower margins.
 
 Sales and marketing expenses decreased in the first Nine Months of 2010 by $179,000 from $948,000 in the first nine months in 2009 to $769,000 in 2010. The decrease was due to less expense for outside consultants used for sales and marketing activities and lower commissions.
 
 General and administrative expensesfor the Nine Months ended September 30, 2010 decreased by $200,000 from $5.8 million in the first nine months in 2009 to $5.6 million in the first nine months in 2010. In 2009, we incurred higher legal expenses for the financing arrangement with Cathaya Capital LLC. The expensing of stock options was also higher in the first nine months in 2009 due to issuances to employees and those required by the Cathaya Financing agreement.
 
 Research and development expensesincreased by $671,000 from $163,000 in the first nine months in 2009 to $834,000 in the first nine months in 2010. The increase was the result of the development of the Alias Prototype, the USPS conversion and UFO Taxi Conversion Projects.  All of these projects served to further our knowledge of planning and manufacturing of new electric vehicles. We were also able to efficiently convert conventional gas vehicles to electric.
 
 Of the G&A and R&D expenses for the nine months ended September 30, 2010, $390,000 or 47% was spent in the development of the Alias vehicles for the XPRIZE competition, $288,000 or 37% was used in the development of the EV SUV and $156,000 or 16% was spent in the development of our conversion process.
 
 Interest expense, netincreased by $615,000 from an interest expense of $431,000 for the first Nine Months of 2009 to interest expense of $1,046,000 in the Nine Months ended September 30, 2010.The increase was due to discount recorded on the $5 million convertible debt to reflect a discounted stock conversion price.  We also agreed to pay additional interest to Al Yousuf LLC with respect to the debt settlement with Al Yousuf LLC.
 
 Gain on extinguishment of debtThe increase was due to a gain of $817,000 for the settlement of our debt with Al Yousuf LLC, for the settlement of our debt with Al Yousuf LLC, where certain of our properties were transferred at appraised fair value replacement costs versus our recorded historical acquisition costs to satisfy our obligations to Al Yousuf LLC. At present, we are seeking to lease back our corporate headquarters with an option to repurchase from Al Yousuf LLC.
 
 Other expenseincreased $300,000 from income of $8,000 for the third quarter of 2009 to other expense of $292,000 in the third quarter of 2010. The increase was due to the loss on our ZAP Hangzhou Joint Venture of $242,000 and our investment in Portable Energy of $58,000. The Joint Venture has incurred expenses to successfully convert conventional gas vehicles to electric in China and to display our products at the China Beijing Motor Show.
 
 Net lossfor the Nine Months ended September 30, 2010 was $7.3 million compared to $7.5 million for the Nine Months ended September 30, 2009.
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 Liquidity and Capital Resources
 
 In the first Nine Months of 2010 net cash used for operating activities was $6.0 million. Cash used in the first Nine Months of 2010  was comprised of the net loss incurred for the first Nine Months of $7.3 million plus net non-cash expenses of $1.3 million and the net decrease of $37,000 in operating assets and liabilities. In the first Nine Months of 2009, the Company used cash for operations of $2.6 million was comprised of the net loss of $7.5 million plus net non-cash expenses of $3.8 million, and the net increase in operating assets and liabilities of $1.1million.
 
 Investing activities used cash flows of $2.0 million for the first Nine Months ended September 30, 2010 compared to Investing activities earned $311,000 for the first nine months of 2009. Decreases to cash resulted from the purchase of marketable securities from Samyang, purchase of equipment and patents  and the disposal of equipment in 2010 and 2009 respectively.
 
 Financing activities for the first Nine Months ended September 30, 2010 provided cash of $4.0million as compared with $7.2 million in 2009. In 2010, the Company received $3 million through the issuance of convertible debt and $1 million through the issuance of common stock to a private individual. In 2009, cash increases due to the issuance of $6.1 million through the issuance of common stock and $1.1 million through the issuance of  short term debt.
 
 We had cash of $935,000 at September 30, 2010 as compared to $5.3 million at September 30, 2009. We had a working capital deficit of $2.6 million and working capital of $48,000 for the periods ended September 30, 2010 and 2009 respectively. The decrease in cash and working capital was due to funds needed during the period for our operating needs.
 
 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 September 30, 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 under this the Note shall be converted into shall be restricted securities. The parties have amended the agreement to allow for a new conversion date that will be mutually determined by ZAP and  Samyang Optics Co. Ltd. We are also discussing a change in the conversion price.
 
 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.
 
 Management expects to have sufficient cash for operations for the next 12 months.
 
 
 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);
 
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 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 September 30, 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.
 
 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.
 
 
 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.
 
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 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 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 certain 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.
On July 2, 2010, we entered into an Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd. with Jonway Group Co., Ltd. to acquire a 51% interest in Zhejiang Jonway Automobile Co., Ltd., a limited liability company of the People's Republic of China.  We believe this transaction will facilitate cost-effective manufacturing of our electric vehicles and give us access to the Chinese market through Jonway's distribution channels of more than 80 factory direct dealerships that feed into hundreds of factory authorized dealers.  Jonway's volume manufacturing capacity gives us a strong manufacturing base with the means of commercializing our innovative EV
 
 2.
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.
  3.
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 Show Military and Governments markets – The Company qualified as a supplier for GSA (General Service Administration), facilitating the ease at which government organizations can place orders for ZAP products.
 
 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.
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 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;
 
 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
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 Our current automotive product line includes the ZAP Truck XL and ZAPVAN Shuttle, two low-speed vehicles for the fleet market, and the Xebra Truck and Sedan.
 
 ZAP Truck XL.  The ZAP Truck XL is a plug-in-electric vehicle for fleet operations. The XL can hold up to two passengers and has a convertible bed/platform for moving up to 1900 lbs. of cargo during off-road use. The XL is designed for corporate campuses, warehouses, universities, factories, municipal operations and around the ranch or farm. Classified as a Neighborhood Electric Vehicle, or NEV, the XL is speed-limited by its controller to travel at speeds up to 25 mph and provides a range of up to 30 miles per charge under ideal driving conditions.
 
 ZAPVAN Shuttle.  The ZAPVAN Shuttle is a multi-purpose, plug-in-electric vehicle for municipalities, colleges and universities, airports, hospitals or corporate campuses. The Shuttle is designed to transport large cargo and passenger loads. The Shuttle can hold up to five passengers in its standard configuration and can support a payload of over 900 lbs. The Shuttle is speed-limited by its controller to travel at speeds up to 25 mph and provides a range of up to 30 miles per charge under ideal driving conditions.
 
 Xebra Truck.  The Xebra Truck can hold up to two passengers and can support a payload of up to 500 lbs.  The Xebra Truck provides a range of up to 40 miles per charge under ideal driving conditions.
 
 Xebra Sedan.  The Xebra Sedan can hold up to four passengers.  The Xebra Sedan provides a range of up to 40 miles per charge under ideal driving conditions.
 
 Our Future Products
 
 We are currently developing the ZAP Alias Roadster with an estimated range of up to 100 miles per charge under ideal driving conditions. The anticipated launch date for the Alias Roadster is 2011.
 
 We are also in discussions with international manufacturers and hope to establish additional relationships within the next twelve to thirty-Nine 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 is uncertain.
 
 We have a history of losses and our future profitability on a quarterlyor annual basis is uncertain, which could have an effect on our business and the value of our common stock.  We incurred net losses of $7.3 million, $10.7 million, $9.8 million for the Nine Months ended September 30, 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.
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 Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
 
 The electric vehicle industry is in its infancy and has experienced substantial change in the last few years.  To date, demand for and interest in electric vehicles has been sporadic.  As a result, growth in the electric vehicle industry depends on many factors, including:
 
 ·
continued development of product technology;
 
 ·
the environmental consciousness of customers;
 
 ·
the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines;
 
 ·
widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and
 
 ·
whether future regulation and legislation requiring increased use of nonpolluting vehicles is enacted.
 
 We cannot assure you that growth in the electric vehicle industry will continue.  Our business may suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
 
 We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position.
 
 Our current products are designed for use with, and are dependent upon, existing electric vehicle technology.  As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology.  However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or create necessary technology.  As a result, our potential inability to adapt and develop the necessary technology may harm our competitive position.
 
 The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.
 
 We rely on a small group of suppliers to provide us with components for our products, some of whom are located outside of the United States.  If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them.  Changes in business conditions, wars, governmental changes, and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers.  Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products.  A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
 
 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.
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 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 other parties from acquiring internet addresses that are confusingly similar to our address, which could adversely affect our business.  Governmental agencies and their designees generally regulate the acquisition and maintenance of internet addresses.  However, the regulation of internet addresses in the United States and in foreign countries is subject to change.  As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business.
 
 Our success is heavily dependent on protecting our intellectual property rights.
 
 We rely on a combination of patent, copyright, trademark, and trade secret protections to protect our proprietary technology.  Our success will, in part, depend on our ability to obtain trademarks and patents.  We hold several patents registered with the United States Patent and Trademark Office, or USPTO.  These registrations include both design patents and utility patents.  In addition, we have
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 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 of 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.
 
 Item4:  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, 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.
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 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 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. At present, the discovery process is continuing.  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 September 30, 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 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 August 5, 2010 the Company issued 500,000 shares of common stock valued at $190,000 for a placement to a privateparty.
 
 On August 19, 2010 the Company issued 270,000 shares of common stock valued at $102,600 for a placement to a privateParty and 16,200 shares for services valued at $8,100. The Company also issued 120,000 shares of common stock valued at $59,000 to two employees as compensation.
  On August 25, 2010 the Company issued 302,631 shares of common stock valued at $115,000 for a placement to a privateParty.
 On September 19, 2010 the company issued 297,358 shares of common stock valued at $140,100 in exchange for services.
 On September 28, 2010 Company issued 30 million shares valued at $14.4 million for a distribution agreement for certain Jonway products both in the U.S. and internationally.
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 Item 3.  Defaults upon Senior Securities
 Not Applicable
 
 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

Description10.68

Management Agreement with Cathaya Capital L.P.10.69

Distribution Agreement with Goldstone World Wide Ltd.31.1

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.
 
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 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:    November 12, 2010
By:
/s/ Steven SchneiderName:  Steven SchneiderTitle: Chief Executive Officer

(Principal Executive Officer)
 
 Dated:    November 12, 2010
By:
/s/ William HartmanName:  William HartmanTitle: Chief Financial Officer

(Principal Financial and Accounting Officer)
 
 
 
 
 
 
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