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, 2012





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





Commission File Number    001-32534





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

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

Identification Number)501 4th Street

Santa Rosa, California
95401(Address of principal executive offices)
(Zip Code))Registrant’s telephone number, including area code: (707) 525-8658





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





Yes  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  x   No  o





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


Large accelerated filer  o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





Yes  o   No  x





As of November 14, 2012, there were300,156,177 shares outstanding of the registrant’s common stock.













INDEX


Page

No.PART I. Financial InformationItem 1.
Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011
1Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2012 and 2011.
2Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2012 and 2011.
3Notes to Condensed Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29Item 3.
Quantative and Qualitative Disclosures about Market Risk
37Item 4.
Controls and Procedures
37PART II. Other InformationItem 1.
Legal Proceedings
37Item 1A.
Risk Factors
37Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38Item 3.
Defaults Upon Senior Securities
38Item 4.
Mine Safety Disclosures
38Item 5.
Other Information
38Item 6.
Exhibits
38SIGNATURES

39











PART I – FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSZAP AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except share data)(Unaudited)September 30,


December 31,ASSETS

2012


2011Current assets:Cash and cash equivalents

$
567


$
5,859Restricted Cash


15,122



6,128Marketable Securities


1,422



1,830Notes receivable from Jonway Auto dealers


1,152



1,457Accounts receivable, net of allowance of $286 in 2012 and $9 in 2011


3,846



2,963Inventories, net


15,051



11,118Prepaid expenses and other current assets


2,782



1,984Total current assets


39,942



31,339Property, plant and equipment, net


56,654



46,953Land use rights, net


9,808



10,075Other assets:Investment in joint ventures


994



1,290Distribution fee for Jonway Products andBetter Worlds Products


11,819



13,439Intangible assets, net


4,672



5,002Goodwill


324



324Due from related party


4,678



1,137Advance payments to related party


--



11,616Deposits and other assets


328



313Total other assets


22,815



33,121Total assets

$
129,219


$
121,488LIABILITIES AND  EQUITYCurrent liabilities:Short term loans

$
2,612


$
5,485Senior convertible debt


19,301



-Accounts payable


20,273



15,164Accrued liabilities


6,667



8,030Notes payable


29,976



10,528Advances from customers


3,004



1,971Taxes payable


515



885Due to related party


2,187



2,122Other payables


2,697



2,116Total current liabilities


87,232



46,301Long term liabilities:Warranty costs


818



592Senior convertible debt


-



19,000Total long term liabilities


818



19,592Total liabilities


88,050



65,893Commitments and contingenciesZAP Shareholders' EquityCommon stock, no par value; 800 million shares authorized;300,156,120 and 297,746,376 shares issued andoutstanding at September 30, 2012 and December 31, 2011, respectively


229,704



225,378Accumulated other comprehensive income


579



1,051Accumulated deficit


(208, 649
)


(195,596
)Total ZAP shareholders’ equity


21,634



30,833Non-controlling interest


19,535



24,762Total equity


41,169



55,595Total liabilities and equity

$
129,219


$
121,488





See accompanying notes to unaudited condensed consolidated financial statements




1




ZAP AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(In thousands, except per share data)(Unaudited)




For the Three

Months ended

September 30,


For the Three

Months ended

September 30,


For the Nine

months ended

September 30,


For the Nine

months ended

September 30,2012


2011


2012


2011Restated





RestatedNet sales

$
10,527


$
14,088


$
35,413


$
42,062Cost of goods sold


10,578



11,951



33,732



37,335Gross profit (Loss)


(51
)


2,137



1,681



4,727Operating expenses:Sales and marketing


2,319



2,633



7,900



7,978General and administrative


3,402



3,574



8,698



11,256Research and development


856



1,037



1,949



2,917Total operating expenses


6,577



7,244



18,547



22,151Loss from operations


(6,628
)


(5,107
)


(16,866
)


(17,424
)Other income (expense):Interest expense, net


(691
)


(4,904
)


(2,134
)


(13,732
)Loss from equity in Joint Venture


(25
)


(64
)


(296
)


(225
)Loss on financial instruments


--



--



--



(349
)Other income (expense), net


467



221



933



1,001Total other income (expense)


(249
)


(4,747
)


(1, 497
)


(13,305
)Loss before income taxes


(6,877
)


(9,854
)


(18,363
)


(30,729
)Income tax benefit (provision)


14



(5
)


144



10Net loss


(6,863
)


(9,859
)


(18,219
)


(30,719
)Net loss attributable to non controlling interest


(1,811
)


(1,428
)


(5,164
)


(2,696
)Net loss attributable to Zap

$
(5,052
)

$
(8,431
)

$
(13,055
)

$
(28,023
)Net loss

$
(6,863
)

$
(9,859
)

$
(18,219
)

$
(30,719
)Other Comprehensive income (loss)Foreign currency translation gain (loss)


25



1,126



(128
)


2,289Net unrealized gain (loss) on securities available for sale


133



(286
)


(408
)


(517
)Total comprehensive loss


(6,705
)


(9,019
)


(18,755
)


(28,947
)Comprehensive loss attributable to non controlling

interest


(1,799
)


( 876
)


(5,227
)


(1,574
)Comprehensive loss attributable to ZAP

common shareholders

$
(4,906
)

$
(8,143
)

$
(13,528
)

$
(27,373
)Net loss per share attributable to common

shareholders:Basic and diluted

$
(0.02
)

$
(0.04
)

$
(0.06
)

$
(0.14
)Weighted average number of common shares

outstanding:Basic and diluted


300,156



219,097



299,316



215,044





See accompanying notes to unaudited condensed consolidated financial statements




2




ZAP AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)  For the Nine Months ended September 30,2012


2011RestatedCASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(18,219
)

$
(30,719
)Adjustments to reconcile net loss to net cash used in

operating activities:Stock-based employee compensation


2,154



1,956Depreciation and amortization


5,704



5,689Provision for doubtful accounts


253



--Recovery of Inventory Reserve


(106
)


(11
)Loss from joint venture and other investments


293



224(Gain) loss on disposal of equipment


13



(55
)Management fee due to related party


--



1,875Convertible debt discount


794



12,523Deferred tax benefit


(144
)


(28
)Changes in assets and liabilitiesNotes receivable


301



3,597Accounts receivable


(1,169
)


(813
)Inventories


(3,865
)


4,237Prepaid expenses and other current assets


(650
)


(591
)Due from related parties


(3,549
)


--Accounts payable


5,154



(2,157
)Accrued liabilities and warranty cost


580



2,200Other payables


564



(3,174
)Advances from customers


1,040



(850
)Taxes payable


(368
)


--Net cash used in operating activities


(11.220
)


(6,097
)CASH FLOWS FROM INVESTING ACTIVITIESAcquisition of 51% Interest in Zhejiang Jonway Automobile , net


--



(18,477
)Acquisition of property and equipment


(1,838
)


(1,093
)Proceeds from sale of equipment


79



110Net cash used in investing activities:


(1,759
)


(19,460
)CASH FLOWS FROM FINANCING ACTIVITIESChange in restricted cash


(9,027
)


(161
)Proceeds from notes payable


35,026



3,630Repayment of notes payable


(15,515
)


(3,469
)Proceeds from insurance financing


--



174Loan receivable from shareholder


--



(331
)Proceeds from issuance of common stock


--



3,236Proceeds from related parties


1,957



--Repayment to related parties


(1,886
)


(2,580
)Proceeds from issuance of convertible debt


--



19,000Proceeds from stock subscription agreement


--



2,000Proceeds from short term loans


3,141



4,799Repayment of short term loans


(6,004
)


(848
)Net cash provided by financing activities


7,692



25,450Effect of exchange rate changes on cash and cash equivalents


(5
)


55NET DECREASE IN CASH AND CASH EQUIVALENTS


(5,292
)


(52
)CASH AND CASH EQUIVALENTS, beginning of period


5,859



1,503CASH AND CASH EQUIVALENTS, end of period

$
567


$
1,451Supplemental disclosure of cash flow information:Cash paid during period for interest

$
1,117


$
--Cash paid during period for taxes

$
--


$
4


See accompanying notes to unaudited condensed consolidated financial statements


3





ZAP AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)














NOTE 1 - ORGANIZATION AND OPERATIONS:





ZAP was incorporated in California in September 1994 (together with its subsidiaries, “the Company,” or “ZAP”). ZAP markets advanced transportation, including alternative energy and fuel efficient automobiles, motorcycles, bicycles, scooters, personal watercraft, hovercraft, neighborhood electric vehicles and commercial vehicles. The Company’s business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which the Company believes have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. In pursuit of a manufacturing plant and a partner with an existing product line, a distribution and customer support network in China and experience in vehicle manufacturing, ZAP acquired a majority of the outstanding equity in Zhejiang Jonway Automobile Co., Ltd. (“Jonway”).




On January 21, 2011, the Company completed the acquisition of 51% of the equity shares of Jonway for a total purchase price of $31.75 million consisting of approximately $29 million in cash and 8 million shares of ZAP common stock valued at $2.7 million.  The Company believes that the acquisition will allow it to expand its electric vehicle (“EV”) business and distribution network around the world, give it access to the rapidly growing Chinese market for electric vehicles and have competitive production capacity in an ISO 9000 certified manufacturing facility with the capacity and resources to support production of ZAP’s electric vehicles and new product line of mini vans and new SUVs.




Jonway is a limited liability company incorporated in Sanmen County, Zhejiang Province of the People’s Republic of China (“the PRC”) on April 28, 2004 by Jonway Group Co., Ltd. (“Jonway Group”). Jonway Group is under the control of three individuals, Wang Huaiyi, Alex Wang (the son of Wang Huaiyi) and Wang Xiao Ying (the daughter of Wang Huaiyi and all three individuals collectively referred to as the “Wang Family”).




Jonway’s approved scope of business operations includes the production and sale of vehicle spare parts, and the sale of UFO licensed SUV vehicles.  The principal activities of Jonway are the production and sale of automobile spare parts and the production and distribution of SUVs in China using the consigned UFO license from an affiliate of Jonway Group.




With the completion of the acquisition of a majority interest in Jonway, the combined companies’ new product lines include the A380 SUV EV and the minivan EV. Both products leverage the production moldings, the manufacturing engineering infrastructure and facilities currently in place for the gasoline models of these vehicles. Since the acquisition, the companies have been working on developing the joint product line, marketing and sales plans for the 2012 EV product lines.
  Jonway is preparing for certification of the EV production line by the Chinese electric vehicle authorities, which we expect to occur in the last half of 2012, since we anticipate that the EV production facilities in Jonway will be ready for the certification process in the second half of 2012.  Meanwhile, the engineering teams from both companies are undertaking extensive testing of the A380 SUV EV at Jonway Auto and ZAP Hangzhou EV research and development center.
  Our target is to deliver the China type approved EV A380 SUV and EV minivan in the last half of 2012, with the purpose of generating sales by taking advantage of the Chinese central government electric vehicle incentives of up to RMB 60,000 or over $9,680 per vehicle.  ZAP intends to use the existing manufacturing plant from Jonway that is being upgraded for the production of the electric vehicles and utilizing the existing Jonway models to gain economy of scale and reduce molding investment costs. ZAP also intends to leverage Jonway’s distribution and customer support centers in China to support the sales and marketing of its new EV product line. In May 2012, we launched the gasoline-powered minivan models into China market.  We expect this gasoline minivan series can contribute our business expansion across the world. In the 2ndquarter of 2012, Jonway auto established its two wholly owned subsidiaries, namely, Taizhou Fuxing Vehicle Sale Co., Ltd. focusing on minivan marketing and distribution in China and Taizhou Vehicle Leasing Co., Ltd. focusing on the vehicle leasing business in Taizhou, China.




4




ZAP plans to focus on developing new international markets such as Brazil, South Africa, Russia and some of the Central America countries such as Costa Rica, Ecuador and Mexico.  These countries are looking for affordable gasoline and electric SUVs and minivans with a competitive price and qualities.




BASIS OF PRESENTATION




The accompanying unaudited consolidated financial statements include the financial statements of ZAP, and its subsidiaries: Jonway Automobile, Voltage Vehicles and ZAP Stores and are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”).  In these financial statements, “subsidiaries” are companies that are over 50% controlled, the financial statements of which are consolidated with those of the Company.  Significant inter-company transactions and balances are eliminated in consolidation; profits from inter-company sales, are also eliminated; non –controlling interests are included in equity.




The accompanying unaudited condensed consolidated 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 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, 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, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012 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, 2011 filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2012 (our “10-K”).


Liquidity and Capital Resources





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




Our principal sources of liquidity consist of our existing cash on hand, bank facilities from China-based banks for Jonway Auto, our investment in securities with Samyang Optics, Ltd. and transactions with Luo Hua Liang, the brother-in-law of Alex Wang, the Co-CEO and a director of ZAP.  In 2011, we entered into a private placement subscription agreement with Mr. Luo for the purchase of ZAP common stock for the aggregate purchase price of $7 million, of which we received $2 million as of the quarter ended March 31, 2011.  The private placement subscription agreements were then superseded and terminated by a stock purchase agreement with Mr. Luo in August 2011. Pursuant to the stock purchase agreement, Mr. Luo agreed to purchase ZAP common stock for an aggregate purchase price of $2 million in multiple closings. On September 8, 2011, we issued approximately 2.3 million shares of ZAP common stock in connection with the initial closing of $771,000. We received an additional $1.025 million in subsequent closings for which we have issued approximately 3.35 million shares of ZAP common stock. During 2011, we issued 7.7 million shares to Mr. Liang for cash of $3.8 million.


In 2011, we were approved up to an aggregate of $6.2 million of bank facility from the Taizhou Branch of China Merchants Bank (“CMB”) through our majority-owned subsidiary, Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by lands owned by Jonway and guaranteed by Jonway Group.




5




Under the above mentioned credit line of $6.2 million granted by CMB on August 19, 2011, Jonway entered into a Credit Agreement with CMB for a revolving short term bank loan in the aggregate amount of approximately US$3.2 million which was drawn down in 2011.  The annual interest rate is 7.22% and is due on August 18, 2012. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CMB dated August 11, 2011 in which land use rights over two parcels of land owned by Jonway at Sanmen Factory have been pledged as security for this loan. As of September 30, 2012, the Company had repaid the $3.2 million.


.In December 2011, Jonway established additional short term bank loans amounting to approximately $2.2 million from three small-size banks based in Taizhou City, which are subject to a Jonway Group guarantee with $790,000 of such loans also secured by bank notes received from Jonway dealers. The $2.2 million was repaid on March 31, 2012.
  On March 31, 2012, to support the monthly business performance target of CMB, Jonway entered into another credit agreement with this bank for a sum of short term bank loan in the aggregate amount of approximately $520,000 which was drawn down on March 31, 2012, and repaid on April 1, 2012.
  In May 2012, we were approved up to an aggregate of $ 7.1 million of bank facility from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by land and buildings on this land owned by Jonway and guaranteed by Jonway Group.
  Under the above mentioned credit line of $7.1 million granted by CITIC, Jonway entered into a Credit Agreement with CITIC for a revolving short term bank loan in the aggregate amount of approximately US$ 1.6 million which was drawn down on May 25, 2012.  The annual interest rate is 8.33% and is due on December 28, 2012. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CITIC dated May 25, 2012 in which land use right over one parcels of land and the buildings on this land owned by Jonway at Sanmen Factory have been pledged as security for this loan. The remaining $5.6 million of the credit line was executed through the issuance of bank acceptance notes by CITIC to Jonway suppliers for the due payables.
  During the quarter ended June 30, 2012, Jonway entered into additional short term loan agreements with both banks based in Taizhou city for the aggregating amount of approximately $1 million. Such bank loans are secured by Jonway Group, certain individuals and Jonway’s property, plant and equipment.
 As of September 30, 2012, Jonway had $2.5 million in short term bank loans outstanding, which are borrowed from the above stated China-based banks with interest rates ranging from 8.33% to 9. 0% per annum and are due within December 2012.
 
 Jonway intends to utilize the credit lines to expand its electric vehicle business as well as other future vehicle models.  This includes on-going working capital needs, electric vehicle production equipment requirements, testing, homologation and new EV product molds. These credit lines will also be used to support the company’s expansion plans, with emphasis on its electric vehicle production line facilities in China. The credit will also help advance new electric vehicle initiatives, launch new strategic global sales and marketing operations, bolster infrastructure, and finance working capital.
  On September 4, 2012, ZAP entered into a letter agreement with Jonway Group, Jonway Auto and Cathaya to borrow $5 million from Jonway Auto. Jonway Auto will fund ZAP based on the schedule set in the agreement. Zap shall repay Jonway Auto on or before March 3, 2016.
 In the event that we require additional liquidity, one of our shareholders, Jonway Group have agreed to provide the necessary support to meet our financial obligations through September 30, 2013.




NOTE 2-RESTATEMENT OF MARCH  2011 UNAUDITED QUARTERLY FINANCIAL STATEMENTS




On January 21, 2011(the “Closing Date”), the Company completed the acquisition of 51% of the equity shares of Jonway.  The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in the unaudited financial statements for the three and nine months ended September 30, 2011 represented management’s best estimate of fair values as of the Closing Date.




As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, management conducted a review for the year ended December 31, 2011 to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for Closing Date recognition of the fair value of net assets acquired.




6




The revaluationof the fair value at December 31, 2011, of the various assets acquired and liabilities assumed, resulted in restated financial information in this quarterly report. The table below illustrates the calculation of the adjustments.




Account

Provisional

amount as of

January 21, 2011


Adjustment based

on final valuation

report


Revised amount

recorded as of

January 21, 2011Inventory

$
12,715


$
25


$
12,740Property and Equipment


46,322



10,749



57,071Other  liabilities assumed


(14,524
)


166



(14,358
)Goodwill and Intangible Assets


23,794



(18,412
)


5,382Purchase option


2,695



(310
)


2,385Non controlling interest


(31,875
)


3,662



(28,213
)$
39,127


$
(4,120
)

$
35,007As reported at

September 30,

2011


Adjustments to the

Nine months ended

September 30,

2011


As restated at

September 30,

2011Cost of goods sold

$
37,310


$
25


$
37,335Amortization and Depreciation


8,496



(2,807
)


5,689$
45,806


$
(2,782
)

$
43,024






As a result, the Company restated its 2011 first quarter financial information to reflect the final measurement of the fair value of the assets acquired. The financial information in this quarterly report reflects the restated financial information.







Amounts in (‘000s)

September 30, 2011Net assets  as reported

$
61,807Adjustments


(7,384
)Restated net assets

$
54,423









Three Months Ended

September 30, 2011


Nine months Ended

September 30, 2011Net loss as reported

$
(9,888
)

$
(33,501
)Adjustments


29



2,782Restated loss

$
(9,859
)

$
(30,719
)





7




NOTE 3- SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES




Use of Estimates




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




Concentration of Credit Risk




The Company’s operations are all carried out in the PRC.  Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy.  The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe.  These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange.  The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.




Financial instruments which subject the Company to potential credit risk consist of its cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with several high credit quality financial institutions. Deposits may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes the financial risks associated with these financial instruments are minimal. The Company has not experienced any losses to date on its deposits.


The Company performs ongoing credit evaluations of its customers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.




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




Revenue Recognition




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




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




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




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




8




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




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




Stock-based Compensation




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




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




Income Taxes




The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent a deferred tax asset cannot be recognized under the preceding criteria, allowances are established.




Foreign Currency Translation




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




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




The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions, any significant revaluation of RMB may materially affect our financial condition in terms of US$ reporting.




9




Loss per Share




Basic and diluted net loss per share is computed by dividing consolidated net loss by the weighted-average number of common shares outstanding during the period. The Company’s potentially dilutive shares, which include outstanding stock options, convertible debt and warrants, have not been included in the computation of diluted net loss per share for all periods presented as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. Outstanding common stock options, warrants and debentures totaled 66.3 million shares and 99.6 million shares at September 30, 2012 and 2011, respectively. ZAP also had outstanding convertible debt, which is convertible into 188 million shares of ZAP common stock at September 30, 2012.




Cash and Cash Equivalents




The Company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the Company and are comprised of investments having maturities of three months or less when purchased.  The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents




Restricted Cash




The Company has cash restricted in connection with the issuance of bank acceptance notes to various suppliers of spare parts which were issued through Jonway’s banks.  To issue these bank acceptance notes to Jonway’s suppliers, the banks require a deposit of approximately 40-60% of the full amount of such notes which are payable within 6 months from issuance.  Upon the maturity date, restricted funds will be used to settle the bank acceptance notes.




Marketable Securities




The Company has an investment that is comprised of marketable equity securities, which are classified as available-for-sale and recorded at fair value, the value of which fluctuates with the stock market value.   The securities are shares of Samyang Optics Co., Ltd., which shares are traded on the Korean stock exchange.  ZAP’s ownership is not material to Samyang Optics Co., Ltd. Net unrealized holding gains and losses, net of tax, are reported as a separate component of shareholders’ deficit, except where holding losses are determined to be “other-than-temporary”, whereby the losses are reported in gains and losses on investments in the consolidated statement of operations.  Gains and losses on disposals of marketable equity securities are determined using the specific identification method.




Accounts and Notes Receivable




Accounts receivable consist mainly of receivables from our established dealer network.  Notes receivable balances consist of bank acceptance notes received from various Jonway dealers to finance such dealer’s purchase of our vehicles products.  These bank acceptance notes can be endorsed to settle the payables to Jonway suppliers or discounted to fund cash flows. These notes are a means of financing working capital for orders that were placed by these dealers.A credit review is performed by the Company before the dealer is approved to purchase vehicles form the Company. The Company performs ongoing credit evaluations of its dealers, and generally does not require collateral on its accounts receivable. The Company estimates the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and records a provision for uncollectible accounts when collection is uncertain. The Company has not experienced significant credit related losses to date.   The allowance for doubtful accounts was $286,000 and $9,000 at September 30, 2012 and December 31, 2011, respectively.




10




Fair Value of Financial Instruments




The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Accounting standards establish a three level valuation hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair values. For certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. The three levels of inputs are defined as follows:


Level 1: Observable inputs such as quoted prices in active markets;
  Level 2: Inputs other than quoted prices in active markets that are directly or indirectly observable;
  Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions and methodologies that result in management’s best estimate of fair value.
  The change in fair value of derivative liabilities is classified in other income (expense) in the Company’s statement of operations for the nine months ended September 30, 2011.  The fair value of the Company’s derivative liabilities related to stock purchase warrants was determined using the Black-Scholes option pricing model – a Level 3 input.
 Derivative Financial Instruments
  The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
  The Company accounts for derivative instruments and debt instruments in accordance with the interpretative guidance of ASC 815 (“Derivatives and Hedging”).   It is necessary for the Company to make certain assumptions and estimates to value derivatives and debt instruments.
  During the nine months ended September 30, 2011, derivative liabilities were converted into 4.3 million shares of ZAP stock. At September 30, 2011 and September 30, 2012, the Company did not have any derivative liabilities.
  The following table set forth a summary of changes in the fair value of Level 3 liabilities for the three and nine months ended September 30, 2011 (in thousands):


Balance


Exercise


Change in


Balance3/31/2011


of warrants


fair value


9/30/2011Derivative Liabilities

$
201


$
(70)


$
10


$
0







The following table summarizes those assets and liabilities measured at fair value on a recurring basis (in thousands)




September 30, 2012Assets

Level 1


Level 2


Level 3


Fair Value

MeasurementsMarketable Securities (1)

$
1,422



-



-


$
1,422





11




December 31, 2011Assets

Level 1


Level 2


Level 3


Fair Value

MeasurementsMarketable Securities (1)

$
1,830



-



-


$
1,830







(1)
Marketable securities consist of common stock of a related party. The fair value of marketable securities is based upon market value quoted by Korean stock exchange




The Company’s other financial instruments at September 30, 2012 consist of cash and cash equivalents, accounts and notes receivable, accounts payable and debt. For the period ended September 30, 2012 the Company did not have any derivative financial instruments. The Company believes the reported carrying amounts of its accounts receivable and accounts payable approximate fair value, based upon the short-term nature of these accounts. The carrying value of the Company’s loan agreements approximate fair value as each of the loans bears interest at a floating rate.




Inventories




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




Property and Equipment




Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements. Property and equipment is stated at cost, net of accumulated depreciation and amortization, and is depreciated or amortized using straight-line method over the asset’s estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized.  Leasehold improvements are amortized over 10 years using the straight-line method.




Land use Rights




Under PRC law, all land in the PRC is permanently owned by the government and cannot be sold to an individual or company but companies can purchase the land use rights for the specified period of time, as in our industry the industrial purpose has a useful life of 50 years.  The government grants individuals and companies the right to use parcels of land for specified periods of time.  These land use rights are sometimes referred to informally as “ownership”.  Land use rights are stated at cost less accumulated amortization.  Amortization is provided over the respective useful lives, using the straight –line method.  Estimated useful life is 50 years, and is determined in the connection with the term of the land use right.




Long-lived Assets




Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.




12




Intangible Assets-Finite




Intangible assets consist of patents, trademarks, land use rights, government approvals and customer relationships (including client contracts). For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of seven years for the EPA license and 2 years for the customer relationships. Costs incurred by the Company in connection with patent, trademark applications and approvals from governmental agencies such as the Environmental Protection Agency, including legal fees, patent and trademark fees and specific testing costs, are expensed as incurred. Purchased intangible costs of completed developments are capitalized and amortized over an estimated economic life of the asset, generally seven years, commencing on the acquisition date. Costs subsequent to the acquisition date are expensed as incurred.




Goodwill and Intangible Assets – Indefinite




Goodwill and intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually.  Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance applicable accounting principles.  The Company assesses annually whether there is an indication that goodwill is impaired, or more frequently if events and circumstances indicate that the asset might be impaired during the year.  The Company performs its annual impairment test in the fourth quarter of each year.   Calculating the fair value of the reporting units requires significant estimates and assumptions by management.  To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, there is an indication that the reporting unit goodwill may be impaired and a second step of the impairment test is performed to determine the amount of the impairment to be recognized, if any.




Non-Controlling Interests




Accounting Standard Codification (ASC) 810-10 “consolidation” establishes accounting and reporting standards that require non-controlling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be re-measured at fair value, with any gain or loss recognized in earnings.
  On January 21, the Company acquired 51% of Zhejiang Jonway Automobile Co. Ltd from Jonway Group, a related party, who holds a 49% of the remaining interest in Jonway Auto (See Note 4), Pursuant to the Jonway AcquisitionAgreement;ZAP had the right to acquire the remaining 49% of Jonway at the same valuation, which expired on March 31, 2011.  To account for the expired option,we recorded a reduction of common stock.


Product warranty Costs




The Company provides 30 to 90 day warranties on its personal electric products, including the ZAPPY3 and the Zapino scooters, six month warranties for the Xebra®, the ZAPTRUCK XL, the ZAPVAN Shuttle vehicles, and a six month warranty for Xebra® vehicles repaired by ZAP pursuant to its product recall.  The Company records the estimated cost of the product warranties at the time of sale using the estimated costs of products warranties based on historical results. The estimated cost of warranties has not been significant to date. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required.




The Company provides a 2-year or 60,000 kilometer mileage warranty for its Jonway SUV products. The Company records the estimated cost of the product warranties at the time of sale using the estimated cost of product warranties based on historical results. The estimated cost of warranties has not been significant to date. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required




13




Comprehensive loss




Comprehensive loss represents the net loss for the period plus the results of certain changes to shareholders’ equity that are not reflected in the consolidated statements of operations. The Company’s comprehensive loss consists of net losses, foreign currency translation adjustments and unrealized net losses on investments.




Reclassifications




Certain amounts from prior period have been reclassified to conform to the current period’s presentation.




NOTE 4-ACQUISITION




In December 2009, ZAP issued 4 million shares of ZAP common stock to Jonway Group’s designee, Alex Wang, which was attributed towards $1 million of the purchase price under the amendment to the Jonway Acquisition Agreement.  In June 2010, ZAP issued 40 million shares of stock to Cathaya Capital, L.P., or Cathaya, in order to pay $10 million of the purchase price under the Jonway Acquisition Agreement.




On January 21, 2011(the “Closing Date”), the Company completed the acquisition of 51% of the equity shares of Jonway.  The transaction was accounted for in accordance with the provisions of ASC 805-10, Business Combinations. The Company retained independent appraisers to advise management in the determination of the fair value of the various assets acquired and liabilities assumed. The values assigned in these financial statements and represent management’s best estimate of fair values as of the Closing Date.




As required by ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Non controlling Interest, management conducted a review to reassess whether they identified all the assets acquired and all the liabilities assumed, and followed ASC 805-20’s measurement procedures for Closing Date recognition of the fair value of net assets acquired. As part of the measurement process, a third party valuation firm was used to assist in estimating the fair value of the intangible assets received in the acquisition of the 51% equity of Jonway Automobile. The valuation was not completed until December 31, 2011, and therefore a provisional amount was recognized in the period ended March 31, 2011.




The following are the estimated fair value of assets acquired and liabilities assumed as of the Closing Date (in thousands):




Cash and cash equivalents

$
993Restricted cash


3,088Inventories, net


12,740Property & equipment


57,071Other tangible assets


11,472Accounts payable


(14,549)Notes payable


(4,261)Deferred tax liability


(166)Other liabilities assumed


(14,192)Net tangible assets acquired


52,196Goodwill and intangible assets


5,382Net assets acquired


57,578Non controlling interest - fair value


(28,213)Option to purchase remaining 49%


2,385Purchase price

$
31,750





14




The fair value of the major components of the intangible assets acquired and their estimated useful lives is as follows (dollars in thousands):




Date of

Acquisition

Fair Value


Weighted Average

Useful Life

(in Years)Customer relationships

$
745



8Developed technology


2,076



7Tradename


2,078


(a)In-process research and development costs


175


(b)Total


5,074Goodwill


308$
5,382







(a)
The Jonway trade name has been determined to have an indefinite life.


(b)
In-process research and development is accounted for as an indefinite life intangible asset until the completion or abandonment of the associated research and development efforts.


Under ASC 805-10, acquisition-related costs (i.e., advisory, legal, valuation and other professional fees) are not included as a component of consideration transferred, but are accounted for as expenses in the periods in which the costs are incurred. Acquisition-related costs were $318,300 for the period ended September 30, 2011. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill.


The following unaudited pro forma condensed financial information presents the combined results of operations of ZAP and Jonway as if the acquisition had occurred as of the beginning of the period presented (in thousands except per share amounts):




For the Nine months

ended September

30, 2011

Restated


For the Three Months

ended September 30,

2011

RestatedNet sales

$
49,903


$
14,088Net loss


(27,004
)


(8,837
)Net loss per common share, basic and diluted

$
(0.12
)

$
(0.04
)Shares outstanding, basic and diluted


215,044



219,097





The unaudited pro forma condensed financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the period presented.




Any pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma results of operations do not include the potential post-acquisition effects of any restructuring, impairment or integration costs related to the combined operations nor of any revenue opportunities, operating synergies or cost savings anticipated as eventual benefits of the acquisition.





15




NOTE 5– INVENTORIES





Inventories are summarized as follows (in thousands):


September 30, 2012


December 31, 2011Advanced technology vehicles

$
604


$
713Vehicles-conventional


8,428



4,630WIP  Jonway SUV’s


2,030



2,234Parts and supplies


5,310



4,879Finished goods


150



24016,522



12,696Less-inventory reserve


(1,471
)


(1,578
)$
15,051


$
11,118





NOTE 6 – PROPERTY, PLANT AND EQUIPMENT




Property, plant and equipment are summarized as follows (in thousands):




September 30, 2012


December 31, 2011Buildings and improvements

$
20,420


$
21,649Machinery and equipment


52,325



39,566Office furniture and equipment


485



415Leasehold improvements


36



37Vehicles


798



74574,064



62, 412Less - accumulated depreciationand amortization


(17, 410
)


(15,459
)$
56,654


$
46,953




Four pieces of land were acquired from the acquisition of Jonway auto in 2011, all land in the People’s Republic of China is government owned and cannot be sold to any individual or company. However, the government grants the user a “land use right” (the Right) to use the land. The Company has the right to use the land for 50 years and amortized the Right on a straight-line basis over the period of 50 years.  Intangible assets consist of the following:




September 30, 2012


December 31, 2011Land use right

$
10,433


$
10,518Software


97



9210,530



10,610Less: accumulated amortization


(722
)


(535
)$
9,808


$
10,075





16




Depreciation and amortization expense was $4.1 and $4.0 million for the nine months and $1.8 and $2 million for the three months ended September 30, 2012 and 2011, respectively.
 NOTE 7 –INTANGIBLE ASSETS
 
 The intangible assets other than goodwill at September 30, 2012 are summarized as follows:


Useful Life

(InYears)


Net Book

Value


Amortization for 
the nine 
months ended


Net Book

Value12/31/2011


9/30/2012


9/30/2012Patents and Trademarks


7


$
75


$
(17
)

$
58Customer Relationships


8.5



692



(69
)


623Developed Technology


7



1,879



(238
)


1,641In Process Technology






183



(0
)


183Trade name






2,173



(6
)


2167Intangibles





$
5,002


$
(330
)

$
4,672






Amortization was $330 and $430 for the nine months ended September 30, 2012 and 2011, and $249 and $229 for the three months ended September 30, 2012 and 2011, respectively.







NOTE 8 – DISTRIBUTION AGREEMENTS




Distribution agreements are presented below (in thousands):


September 30, 2012


December 31, 2011Better World Products

$
2,160


$
2,160Jonway Products


14,400



14,40016,560



16,560Less amortization


(4,741
)


(3,121
)$
11,819


$
13,439




Amortization was $1.62 million for both the nine months ended September 30, 2012 and 2011, and $540,000 for both the three months ended September 30, 2012 and 2011, respectively.




17




Distribution Agreement with Better World, Ltd
  On January 15, 2010, ZAP entered into a Stock Purchase Agreement with Better World, Ltd., a British Virgin Islands company, whereby the Company issued 6 million shares of its common stock valued at $2.16 million in exchange for an agreement on terms relating to rights to the distribution of Better Worlds products for three years, such as charging stations for electric vehicles both in the U.S. and internationally.  Priscilla Lu, Chairman of the Board of Directors of ZAP, is also General Partner of Cathaya Capital, an investor of Better World International, Ltd.


Distribution Agreement with Goldenstone Worldwide Limited for Jonway Products





On October 10, 2010, ZAP entered into a ten year  International Distribution Agreement with Goldenstone Worldwide Limited as the distributor of Jonway products such as gas SUV’s and gas and electric motor scooters, both in the U. S. and internationally. In connection with the distribution agreement the Company also issued 30 million shares of ZAP common stock valued at $14.4 million.  The Jonway Group had previously granted exclusive worldwide distribution of Jonway products to Goldenstone Worldwide Limited.   ZAP acquired a 51% equity interest in Jonway Auto but this equity interest did not include the world wide distribution rights for Jonway Products.  Therefore, it was necessary for ZAP to acquire distribution rights for Jonway Products.




Distribution Agreement with Samyang Optics





On January 27, 2010, ZAP entered into an International Distribution Agreement (the “Distribution Agreement”) with Samyang Optics Co. Ltd. (“Samyang”) pursuant to which ZAP appointed Samyang as the exclusive distributor of certain ZAP electric vehicles including the Jonway A380 5-door electric sports utility vehicle equipped with  ZAP’s electric power train, in the Republic of Korea.  In addition, the Distribution Agreement provides that ZAP and Samyang will negotiate to enter into additional agreements related to the manufacture and assembly of ZAP vehicles by Samyang in Korea.  The Distribution Agreement shall be in effect for one year and may be extended annually by Samyang provided that Samyang has satisfied sales quotas determined by ZAP and Samyang is otherwise in 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, 2012.




NOTE 9 – INVESTMENT IN JOINT VENTURES




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.  Priscilla Lu, Ph.D., who is the current Chairman of the Board of ZAP, is also a director and General Partner of Cathaya Capital, which is a shareholder of Better World. In January of 2011, Holley Group’s interest in ZAP Hangzhou was purchased by Alex Wang, Co-CEO and director of ZAP. ZAP and Better World eachown 37.5% of the equity shares of ZAP Hangzhou, and Alex Wang owns 25% of the equity shares of ZAP Hangzhou. 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 $1.1 million.


In November 2011, Jonway and ZAP Hangzhou jointly set up Shanghai Zapple Electric Vehicle Technologies Co., Ltd. (Shanghai Zapple) with registered capital of RMB 20 million. Jonway and ZAP Hangzhou each own 50% of the equity share of Shanghai Zapple.  Jonway injected RMB 5 million into this joint venture and ZAP Hangzhou injected RMB 3 million. Shanghai Zapple’s approved scope of business includes: technical advice, technical development, technical services, technology transfer regarding electric vehicle technology, auto technology, energy technology, material science and technology, sale of commercial vehicle and vehicle for nine seats or more, auto parts, auto supplies, lubricant, mechanical equipment and accessories, business management consulting, industrial investment, exhibition services, business marketing planning, car rental (shall not be engaged in financial leasing), import and export of goods and technologies.




The carrying amount of the joint ventures is as follows:




ZAP Hangzhou


Shanghai Zapple


TotalBalance as of December 31, 2011

$
554


$
736


$
1,290Less: investment loss


(92
)


(204
)


(296
)Balance as of September 30,2012

$
462



532



994





18




The Company recorded a loss of $92,000and $161,000 in ZAP Hangzhou, and a loss of $204,000 and $0 in Shanghai Zapple for the periods ended September 30, 2012 and 2011 respectively. These losses relate to the investment in a non-consolidated joint ventures accounted for under the equity method of accounting because the company does not have control.




NOTE 10 - LINE OF CREDIT, SHORT TERM DEBT AND BANK ACCEPTANCE NOTES




Line of credit




In 2011, we were approved for a line of credit up to an aggregate of $6.2 million from the Taizhou Branch of China Merchants Bank through our majority-owned subsidiary, Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by lands owned by Jonway and guaranteed by Jonway Group.




In May 2012, we were approved up to an aggregate of $ 7.1 million of bank facility from the Sanmen Branch of CITIC Bank (“CITIC”) through Jonway. Although we have been approved for the credit line, there are no legal obligations or rights to the credit line until we execute agreements with the lender to borrow funds under the credit line. When drawn down, the credit line will be secured by land and buildings on this land owned by Jonway and guaranteed by Jonway Group.








Short term debt




Under the above mentioned credit line of $6.2 million granted by CMB on August 19, 2011, Jonway entered into a Credit Agreement with CMB for a revolving short term bank loan in the aggregate amount of approximately US$3.2 million which was drawn down in 2011.  The annual interest rate is 7.22% and was due on August 18, 2012. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CMB dated August 11, 2011 in which land use rights over two parcels of land owned by Jonway at Sanmen Factory have been pledged as security for this loan. As of September 30, 2012, the Company had repaid $3.2 million.
 Under the above mentioned credit line of $7.1 million granted by CITIC, Jonway entered into a Credit Agreement with CITIC for a revolving short term bank loan in the aggregate amount of approximately US$ 1.6 million which was drawn down on May 25, 2012.  The annual interest rate is 8.33% and is due on December 28, 2012. The loan is secured by a Maximum Amount Mortgage Contract by and between Jonway and CITIC dated May 25, 2012 in which land use right over one parcels of land and the buildings on this land owned by Jonway at Sanmen Factory have been pledged as security for this loan. The remaining $5.6 million of the credit line was executed through the issuance of bank acceptance notes by CITIC to Jonway suppliers for the due payables.






In December 2011, Jonway established additional short term bank loans amounting to over $2.22 million from three small-size banks based in Taizhou City, which are subject to Jonway Group guarantee, of which $790 of such loans were secured by bank notes received from Jonway dealers. These loans were repaid on March 31, 2012.


19




On March 31, 2012, to support the monthly business performance target of Taizhou Branch of China Merchants Bank, Jonway entered into another credit agreement with this bank for a sum of short term bank loan in the aggregate amount of approximately $520 which was drawn down on March 31, 2012, and repaid on April 1, 2012.




During the quarter ended June 30, 2012, Jonway entered into additional short term loan agreements with both banks based in Taizhou city for the aggregating amount of approximately $1 million. Such bank loans are secured by Jonway Group.
  As of September 30, 2012, Jonway had approximately $2.6 million in short term bank loans outstanding which are borrowed from the above stated China-based banks with interest rates ranging from 8.33% to 9% per annum and are due within December 2012.


September 30, 2012


December 31, 2011Loan from China Merchant Bank

$
-


$
3,174Loan from Taizhou Bank


633



1,428Loan from Zhejiang Tailong Commercial Bank


316



794Loan from CITIC Bank


1,583



-Short term financing insurance premiums


80



89Total

$
2,612


$
5,485






On December 6, 2011, Jonway entered into a bank acceptance note Agreement with Taizhou Branch of China Everbright Bank for a revolving bank note facility in the aggregate amount of approximately US$3.17 million. Such bank note facility were issued to Jonway Auto’s suppliers  under the Credit Agreement and are secured by a Maximum Amount Mortgage Contract by and between Jonway and this bank dated December 6, 2011 in which land use right over one parcel of land owned by Jonway at Sanmen  Factory has been pledged as security for this facility. Except for the bank acceptance notes payable to China Everbright Bank, other bank acceptance notes payable to other banks were granted through the below mentioned cash deposit practice.




As of September 30, 2012, the Company has bank acceptance notes payable in the amount of $29.97million. The notes are guaranteed to be paid by the banks and usually for a short-term period of six (6) months. The Company is required to maintain cash deposits at a minimum 40%-60% of the notes payable with these banks, in order to ensure future credit availability. As of September 30, 2012, the restricted cash for the notes was $15.1 million.




Bank acceptance notes- 6 month term for each note issued




September 30, 2012


December 31, 2011a)Bank acceptance notes payable to Taizhou Bank

$
5,064


$
2,451b)Bank acceptance notes payable to China Merchant Bank


4,241



3,316c)Bank acceptance notes payable to China Everbright Bank


6,325



4,761d)Bank acceptance notes payable to Zhejiang Tailong Commercial Bank


475



-e)Bank acceptance notes payable to Zhejiang Sanmen Yin Zuo Village Bank


1,266



-f)Bank acceptance Notes payable to Shanghai Pudong Development Bank


676



-g) Bank acceptance Notes payable to CITIC Bank


11,929



-$
29,976


$
10,528




On December 11, 2011, Zhejiang Jonway Automobile Co., Ltd. (“Jonway”), a majority owned subsidiary of ZAP, entered into a Promissory Note with Jonway Group Co. Ltd. (“Jonway Group”) pursuant to which Jonway borrowed $3 million to be repaid on demand. The unpaid principal amount of the note bears interest at a rate per annum equal to 8%, calculated on the basis of a 365 day year and the actual number of days lapsed. All unpaid principal, together with any then unpaid and accrued interest is due and payable within ten (10) calendar days following demand by Jonway Group. Payment shall be made in the form of cash. As of December 31, 2011, a total of $1.6 million had been advanced to Jonway Automobile under the Promissory note arrangement and such borrowing was repaid in January 2012.




20





NOTE 11 – SENIOR CONVERTIBLE DEBT


8% SENIOR CONVERTIBLE NOTE - China Electric Vehicle Corporation (“CEVC”) Note




On January 12, 2011, the Company entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Agreement”) with China Electric Vehicle Corporation (“CEVC”), a British Virgin Island company whose sole shareholder is Cathaya Capital, L.P., a Cayman Islands exempted limited partnership (“Cathaya”).  Priscilla Lu is the chairman of the board of directors of ZAP, a managing partner of Cathaya and a director of CEVC.




Pursuant to the Agreement, (i) CEVC purchased from the Company a Senior Secured Convertible Note (the “Note”) in the principal amount of US$19 million, as amended, (ii) the Company issued to CEVC a warrant (the “Warrant”) exercisable for two years for the purchase up to 20 million shares of the Company’s Common Stock at $0.50 per share, as amended  (iii) the Company, certain investors and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009 that was previously granted to Cathaya Capital L.P., (iv) the Company, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certain Registration Rights Agreement, dated as of August 6, 2009, that was previously granted to Cathaya Capital L.P which grants certain registration rights relating to the Note and the Warrant, and (v) the Company and CEVC entered into a Security Agreement that secures the Note with all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.




The Note was scheduled to mature on February 12, 2012 but was originally extended to August 12, 2012. On March 31, 2012, ZAP entered into an amendment to the note which extended the maturity date of the note from August 12, 2012 to August 12, 2013. This amendment changed the terms of the note requiring adjustment of the conversion price of the note for dilutive issuances by ZAP. In addition, the warrant issued in connection with the CEVC note was amended to change the terms of its conversion and to extend the maturity date until February 12, 2014. The interest accrued through the original maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. The total amount of the convertible note is approximately $20.7 million with a new maturity date of August 12, 2013. The note accrued interest at a rate per annum of 8% effective to February 12, 2012. After this date, the parties agreed to waive the interest. However, the Company in accordance with ASC-470-10 calculated imputed interest for the non-interest bearing loan between a related party and recorded a discount in the amount of $2.2 million. This amount will be amortized monthly through the maturity date of the note which is August 2013. The Company has amortized approximately $1.38 million for the three and nine months ended September 30, 2012.


The note is convertible upon the option of CEVC at any time, into (a) shares of Jonway capital stock owned by ZAP at a conversion rate of 0.003743% of shares of Jonway capital stock owned by ZAP for each $1,000 principal amount of the Note being converted or (b) shares of ZAP common stock at a conversion rate of 4,435 shares of common stock for each $1,000 principal amount of the Note being converted.






NOTE 12-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.




21




We have stock compensation plans for employees and directors. 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.


-

Number of

Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term

(in years)


Aggregate

Intrinsic

ValueOutstanding December 31, 2011

29,578


$0.50


6.0


--Options granted under the plan

--


--


--


--Options exercised

--


--


--


--Options forfeited and expired

(4,013)


--


--


--Outstanding September 30, 2012

25,565


$0.44


5.2


--








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, 2012 for those options for which the quoted market price was in excess of the exercise price (“in-the-money­ options”). There were no options in the money at September 30, 2012.




As of September 30, 2012, total compensation cost of unvested employee stock options is $1.8 million. This cost is expected to be recognized through September 30, 2016. We recorded no income tax benefits for stock-based compensation expense arrangements for the three and nine months ended September 30, 2012, as we have cumulative operating losses, for which a valuation allowance has been established







NOTE 13 – SEGMENT REPORTING





Operating Segments





Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”), establishes standards for the way public business enterprises report information about operating segments. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
 In accordance with ASC 280, the Company has identified four reportable segments consisting of Jonway Vehicles, Advanced Technology Vehicles, Consumer Product and Car Outlet.  The Jonway Vehicles segment represents sales of the gas fueled Jonway A380 three and five-door sports utility vehicles and spare parts principally through distributors in China. The Advanced Technology Vehicles segment represents sales and marketing outside of China of the ZAPTRUCK XL, the ZAPVAN Shuttle and the Xebra® Sedan and will transition to selling mostly Jonway’s EV A380SUV and EV minivan in 2012. The Consumer Product segment represents rechargeable portable energy products, our Zapino scooter, and our ZAPPY3 personal transporters.  Our Car Outlet segment represents operation of a retail car outlet that sells pre-owned conventional vehicles and advanced technology vehicles.  These segments are strategic business units that offer different services.  They are managed separately because each business requires different resources and strategies.  The Company’s chief operating decision making group, which is comprised of the Chief Executive Officer and the senior executives of each of ZAP’s strategic segments, regularly evaluate the financial information about these segments in deciding how to allocate resources and in assessing performance.




The performance of each segment is measured based on its profit or loss from operations to ZAP before income taxes. Segment results are summarized as follows (in thousands):


22




Jonway


Electric





AdvancedConventional


Consumer





TechnologyVehicles


Products


Car outlet


Vehicles


TotalFor the three months ended September 30, 2012:Net sales

$
10,296


$
177


$
27


$
27


$
10,527Gross profit (loss)

$
96


$
75


$
(41
)

$
(181
)

$
(51
)Depreciation and amortization

$
1,789


$
955


$
6


$
1


$
2,751Net loss

$
(4,207
)

$
(2329
)

$
(169
)

$
(158
)

$
(6,863
)Total assets

$
104,354


$
24,259


$
256


$
350


$
129,219For the three months ended September 30, 2011:Net sales

$
13,734


$
155


$
196


$
3


$
14,088Gross profit (loss)

$
1,979


$
47


$
74


$
37


$
2,137Depreciation and amortization

$
1,138


$
551


$
3


$
7


$
1,699Net loss

$
(2,064
)

$
(7,622
)

$
(12
)

$
(161
)

$
( 9,859
)Total assets

$
85,786


$
17,744


$
704


$
1,058


$
105,292For the nine months ended September 30, 2012:Net sales

$
34,666


$
562


$
142


$
43


$
35,413Gross profit (loss)

$
1,718


$
148


$
(1
)

$
(184
)

$
1,681Depreciation and amortization

$
3,775


$
2,048


$
5


$
20


$
5,848Net loss

$
(10,540
)

$
(7,035
)

$
(285
)

$
(359
)

$
(18,219
)Total assets

$
104,354


$
24,259


$
256


$
350


$
129,219For the nine months ended September 30, 2011:RestatedNet sales

$
40,402


$
457


$
810


$
393


$
42,062Gross profit

$
4,311


$
120


$
227


$
69


$
4,727Depreciation and amortization

$
3,995


$
1,664


$
7


$
23


$
5,689Net loss

$
(5,588
)

$
(23,897
)

$
(83
)

$
(1,151
)

$
(30,719
)Total assets

$
85,786


$
17,744


$
704


$
1,058


$
105,292




Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.  Jonway Automobile results have been included since the acquisition date of January 21, 2011.






Customer information





Approximately 98% or $34.6 million of our revenues for the nine months ended September 30, 2012 are from sales in China. Jonway Auto distributes its products to an established network of over 100 factory level dealers in China with some contributing more than 10% of our consolidated revenue






NOTE 14– RELATED PARTY





Due from (to) related parties




23


Amounts due from related parties are principally for advances in the normal course of business for parts and supplies used in manufacturing.






Amount due from related parties are as follows:September 30, 2012

December 31, 2011Sanmen Branch of Zhejiang UFO Automobile Manufacturing Co., Ltd

$
4,678


$
978Jonway Group


-



159Total

$
4,678


$
1,137Amount due to related parties are follows:September 30, 2012

December 31, 2011Jonway Group

$
2,012


$
2,104Zhejiang UFO Automobile


160



-Jonway Motor Cycle


15



18Total

$
2,187


$
2,122Advance payment to Jonway Group

$
-


$
11,616







Issuance of stock to Jonway Group for the Development and Production of Vehicles




On December 11, 2011, ZAP entered into a Payment Agreement with Jonway Group pursuant to which ZAP paid Jonway Group for the already completed interior and exterior design, R&D activities, testing and trial production and molding equipments etc. of the mini-van product platform, and the Alias interior and exterior design and molding, which is underway. Pursuant to the Payment Agreement, ZAP agreed to grant Jonway Group 70 million shares of ZAP’s Common Stock valued at $15.4 million. All intellectual property rights related to the work performed by Jonway Group for the mini-van and Alias shall be owned by ZAP. During the year ended December 31, 2011, $3.78 million of the payment of $15.4 million was recognized as R&D expense in ZAP, with the remaining $11.6 million, which was recorded as an advance payment to Jonway Group, has been reclassified to machinery and equipment.




Promissory notes and Down Payment on Convertible Note from Jonway Group




On December 11, 2011 Jonway entered into a Promissory Note with Jonway Group pursuant to which Jonway borrowed $3 million to be repaid on demand.  The unpaid principal amount of the note bears interest at a rate per annum equal to 8%, calculated on the basis of a 365 day year and the actual number of days lapsed.  All unpaid principal, together with any then unpaid and accrued interest, are due and payable within ten (10) calendar days following demand by Jonway Group. Payment shall be made in the form of cash.  As of December 31, 2011, $1.6 million had been advanced to Jonway Auto under the Promissory Note arrangement and was repaid in January 2012.
  On December 11, 2011, ZAP entered into a Down Payment Convertible Note agreement with Jonway Group pursuant to which ZAP may borrow $3 million for the production of seventy-five Alias electric vehicles to be delivered and sold in 2012.  The unpaid principal amount of the note bears interest at a rate per annum equal to 8%, calculated on the basis of a 365 day year and the actual number of days lapsed.  Upon the completion of selling seventy-five Alias vehicles, ZAP will repay the unpaid principal, together with any then unpaid and accrued interest, on or before December 31, 2012.  Repayment shall be made at the option of Jonway Group in the form of either cash or ZAP’s Common Stock priced as of the date the principal was deposited into Jonway’s bank account on behalf of ZAP. As of September 30, 2012, no advance has been made to ZAP from Jonway Group.




24




Transactions with Jonway Group




Jonway Group is considered a related party as the Wang Family, one of the shareholders of the Company, has controlling interests in Jonway Group. Jonway Group supplies some of the plastic spare parts to Jonway and gave guarantees on Jonway short term bank facilities from China-based banks. For the nine months ended September 30, 2012, Jonway made purchases from Jonway Group of $942.
 Rental Agreements
  The Company rented office space, land and warehouse space from its former CEO and major shareholder. Mr. Steven Schneider.  These properties were used to operate a car outlet and to store inventory. Rental expense was approximately $46,200 for the period ended September 30, 2011. The company discontinued paying rent in August, 2011.  Unpaid amounts have been accrued for on ZAP’s books.




Management Agreement with Cathaya Capital, L.P.




On August 6, 2009, Cathaya purchased 20 million shares of the Company’s Common Stock. On August 6, 2009, the Company entered into a Secured Convertible Promissory Note with Cathaya for aggregate principal advances of up to $10 million. In addition, the Company issued one warrant to Cathaya exercisable for shares of the Company’s Common Stock.




On July 9, 2010, Cathaya entered into a securities purchase agreement, pursuant to which, Cathaya purchased 44 million shares of the Company’s Common Stock at a price of $0.25 per share for an aggregate purchase price of $11 million.




Priscilla Lu, the chairman of the board of directors of ZAP, is also a general partner of Cathaya. On November 10, 2010, ZAP entered into a Management Agreement with Cathaya, for the payment of $2.5 million in exchange for Cathaya’s prior and ongoing transaction advisory, financial and management consulting services for the year ended December 31, 2010.  Pursuant to the agreement, 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 the agreement.  The agreement is renewable yearly but fees paid in subsequent periods are subject to renegotiation based on the fair market value of services rendered, with the management fee payable in cash or in common stock of ZAP at $0.50 per share.  Five million shares were issued to Cathaya Capital L.P. in payment of this fee for the year ended December 31, 2010.  No management fee payment was made for 2011.


Jonway Agreement with Zhejiang UFO




Based on a contract by and among Zhejiang UFO, Jonway Group and Jonway dated as of January 1, 2006, Zhejiang UFO has authorized Jonway to operate its Sanmen Branch to assemble and sell UFO branded SUVs for a period of 10 years starting from January 1, 2006.


According to the contract, Jonway shall pay Zhejiang UFO a variable contractual fee which is calculated based on the number of SUVs that Jonway assembles in the Sanmen Branch every year, at the following rates:




The first 3,000 vehicles
$44 per vehicleVehicles from 3,001 to 5,000
$30 per vehicleVehicles over 5,000
$22 per vehicle
 
 Zhejiang UFO is considered a related party because the Wang Family, who are shareholders of Jonway, has certain non-controlling equity interests in Zhejiang UFO.  In December 2011, Zhejiang UFO, Jonway Group and Jonway amended the above contract, and agreed that the accumulated payable to Zhejiang UFO for the above variable contractual fees as of December 31, 2011 were not repaid. From 2012 onwards, Jonway still has obligation to pay such fees based on the number of SUVs assembled by Zhejiang UFO.  As of September 30, 2012, $200 was accrued and recorded as due to related party.


25





NOTE 15-INCOME TAXES




The Company is subject to United States of America (“US”) and People’s Republic of China (“PRC”) profit tax.




US




The Company is incorporated in the United States of America and is subject to United States federal taxation. No provisions for income taxes have been made as the Company has no taxable income for the year. The applicable income tax rate for the Company for the three and nine months ended September 30, 2012 and 2011 was 35%, respectively.  No tax benefit has been realized since a valuation allowance has offset the deferred tax asset resulting from the net operating losses.


PRC




Effective January 1, 2008, the PRC Enterprise Income Tax Law, EIT Law, and Implementing Rules impose a unified enterprise income tax rate of 25% on all domestic-invested enterprises and foreign investment enterprises in PRC, unless they qualify under certain limited exceptions. As such, the Company’s subsidiary in PRC is subject to an enterprise income tax rate of 25%.
  No provision for income taxes have been made as the Company has no taxable income for the periods.  $144 of tax benefits were recognized due to the change in the deferred tax assets.
  Loss before income taxes consisted of:







For Three Months Ended


For Nine months EndedSeptember, 30,


September, 30,2012


2011


2012


2011Restated





RestatedUS

$
(3,165
)

$
(7,833
)

$
(7,679
)

$
(25,214
)PRC


(3,712
)


(2,021
)


(10,684
)


(5,515
)$
(6,877
)

$
(9,854
)

$
(18,363
)

$
(30,729
)
 Benefit (Provision) for income taxes consisted of:For Three Months Ended


For Nine months EndedSeptember, 30,


September, 30,2012


2011


2012


2011Restated





RestatedCurrent provision:US

$
--


$
(3
)

$
--


$
(4
)PRC


--



(2
)


-



14Total current (provision)


-



(5
)


-



10Deferred benefit (provision)US


-



-



-



-PRC


14



-



144



-Total deferred benefit ( provision)


14



-



144



-Total benefit (provision) for income taxes

$
14


$
(5
)

$
144


$
10
 26


NOTE 16– LITIGATION




In the normal course of business, we may become involved in various legal proceedings.
  The Company is in dispute with its warehouse landlord regarding lease payments and other amounts claimed by the landlord. The landlord is also in dispute with ZAP over alleged office space and renovations on the 9th Street property which ZAP had vacated. Litigation was entered into on August 3, 2012.  A settlement agreement was reached on November 12, 2012.  The execution of this agreement is still pending.
 The Company is in litigation with a former contracted employee with regard to wrongful termination. A settlement agreement was reached on September 12, 2012.  The execution of this agreement is still pending.
 The Company is in litigation with two parties for professional, legal and engineering work performed.
  The company is in litigation for payment for professional fees rendered to ZAP.  This litigation was entered into on September 24, 2012.
  The Company is in litigation with two past dealers, one in California and one in Arkansas.  Both are currently asking ZAP to repurchase the vehicles.  Litigation is still ongoing.
  A letter was received in May 2012 from a shareholder regarding various prior transactions of the Company which the Company is working to address and clarify.  A tolling agreement was reached between the Company and shareholder on October 22, 2012 whereas the company, through its legal council shall provide a written summary of the actions taken during the preceding month with respect to the matters regarding the prior transactions in question by the shareholder.  These transactions include but are not limited to, a) ZAP, Jonway Group, Jonway Auto and Cathaya Capital shall each in all respects comply with their executory obligations with respect to the continued funding of ZAP, b) Resolve the litigation regarding  the former contracted employee, c) use reasonable efforts to defend, compromise and/or settle any pending and future litigations. and ZAP shall use all reasonable efforts to cause all officers, directors and such other individuals who are or were employees, agents or representatives of ZAP to fully cooperate in the defense  of future arbitrations or litigations.  This agreement is binding through December 31, 2015.
  ZAP has filed with the National Highway Transportation SafetyAgency (NHTSA) thatthe are in non compliance with Department of Transportation (DOT) requirements potential hazard may exist because the Model -Year 2008 XEBRA sedan and pickup does not stop in the required distance at 30 miles per hour and the master cylinder does not have separate brake fluid reservoirs with proper labeling and other miscellaneous non compliance issues.  A public hearing was held in Washington DC onOctober 9, 2012 that allowed the DOT to take comments from the public and from their inside officers for consideration in their determination ofwhether ZAPhas made a reasonable effort to 1) notify dealers and purchasers of the brake recall and 2) provide a remedy to the public to correct the brake problem.    There were recommendations at the public hearing  from DOT staff testifying at the hearing that ZAP should be subject to penalties and be required to repurchase the MY 2008 Xebra vehicles.   ZAP has contracted with an independent testing facility to test the remedy thatZAPbelieves willcorrect the stopping distance problem, the duel brake fluid reservoir with correct labeling and other miscellaneous non compliance issues.
 The Company has accrued for estimated expenses related to above claims.


27




NOTE 17 – COMMITMENTS AND CONTINGENCIES




Employment agreement




On June 18, 2012, the Company entered into an employment agreement with Charles Schillings as its Chief Operating Officer. The agreement provides for an annual salary of $144,000 with a three month initial term with an automatic extension of nine months. After one year, annual renewals will continue unless the agreement is terminated by either party. On August 7, 2012, Mr. Schillings was appointed as the Co-Chief Executive Officer (Co-CEO) to lead U.S. and International operations alongside Alex Wang, the Co-CEO for ZAP Jonway's China division.




Changes to the Board of Directors
  Georges-Penalver and Patrick Sevian resigned from the Board of Directors of ZAP effective October 18, 2012. for personal reasons.
  The board approved the appointment of Co Nguyen as the director replacing Georges Penalver.
  Mr. Nguyen serves as Chief Financial Officer of Cathaya Capital.  He has in-depth experience in corporate finance and corporate management.  Mr. Nguyen was previously Corporate Finance Director of Jaccar Holdings Vietnam.  Before joining Jaccar Holdings in 2008, he was Deputy Director of Corporate Strategy and Finance Department of Prudential Life Insurance (Vietnam).  Mr. Nguyen also has spent 7 years with FedEx in France as Senior Financial Advisor and 3-year professional experience with Ernst & Young as an auditor.  Mr. Nguyen received his Master in Auditing and Consulting from “Ecole Supérieure de commerce de Paris”, France and MBA in International Business in 2000.
 The Board approved the appointment of Aileen Kao as the director replacing Patrick Sevian.
  Aileen Kao is Deputy General Manager at ZAP (Hangzhou) Electric Vehicle Co., Ltd, a joint venture company with a focus on green transportation technology. Under her leadership, ZAP (Hangzhou) has built a great technical savvy team to provide know-how solutions to meet China’s emerging and dynamic new energy automobile industry.    Ms. Kao came to ZAP with broad experience in several established companies including BASF, Eastman Kodak, Bell Atlantic, Cisco and interWAVE Communications, all of which afforded her with increased responsibilities and helped transition her from a hands-on software engineer to a seasoned executive at ZAP.  She also served on the Saratoga school governing board in 1998 and then was elected to the Saratoga City Council in 2004 and served as Mayor in 2007. Ms. Kao holds a BS in Pharmacy from Taipei Medical University, Taiwan and a MS in Chemistry from University of Rhode Island, Rhode Island, USA.




Guarantees




Jonway Auto guaranteed certain financial obligations of outside third parties including suppliers to support our business and economic growth. Guarantees will terminate on payment and/or cancellation of the obligation once it is repaid. A payment by us would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. Maximum potential payments under guarantees total $1,750 through September 30, 2012. Our performance risk under these guarantees is reviewed regularly, and has resulted in no changes to our initial valuations.




28




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  
 This quarterly report of Form 10-Q, or 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:
 
  ·
our ability to establish, maintain and strengthen our brand;
  ·
our ability to successfully integrate acquired subsidiaries, particularly Jonway, into our company and business;
  ·
our ability to maintain effective disclosure controls and procedures;
  ·
our limited operating history, particularly of ZAP and Jonway on a consolidated basis;
  ·
whether the alternative energy and gas-efficient vehicle market for our electric products continues to grow and, if it does, the pace at which it may grow;
  ·
our ability to attract and retain the personnel qualified to implement our growth strategies;
  ·
our ability to obtain approval from government authorities for our products;
  ·
our ability to protect the patents on our proprietary technology;
  ·
our ability to fund our short-term and long-term financing needs;
  ·
our ability to compete against large competitors in a rapidly changing market for electric and conventional fuel  vehicles;
  ·
changes in our business plan and corporate strategies; and
  ·
Other risks and uncertainties discussed in greater detail in various sections of this report, or set forth in part I, Item 1A of our Form 10K under the heading “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.
 
 29
 
 In this quarterly report on Form 10-Q the term “ZAP” refers to ZAP, the term “Jonway” refers to Zhejiang Jonway Automobile Co. Ltd., of which ZAP owns 51% of the equity shares, “ZAP Jonway” refers to both ZAP and Jonway on a consolidated basis, and “we,” “us” and “our” refer to ZAP or ZAP Jonway, as the context indicates.
 
 Recent Developments
  From April 23, 2012 through May 2, 2012, we showcased our traditional gas and all-electric vehicles at the 2012 Beijing International Automotive Exhibition which was held in Beijing, China. The Beijing International Automotive Exhibition is now one of the most influential in the auto industry as China is becoming one of the most important auto markets in the world. In this exhibition, we displayed all of our vehicle models, including the new 2012 SUV gasoline models and fully-electric models.
  On May 19, 2012 we launched sales for its gasoline minivan models with the brand name of new Five Star van on May 19, including an unveiling and celebration with dealers, employees, government officials and media at our Sanmen Factory in China. The Five Star minivan is distinctively designed, economical and versatile and will open new markets for ZAP JONWAY, one of China's newest automakers since launching production in 2009.We are establishing Five Star as a new brand and separate dealer network to expand its market in dense urban areas, with families, small businesses, governments and corporations..  Our Five Star will be very competitive in China, a market that has grown with the economy and commercial vehicle subsidies. The largest seller of minivans, SGM Wuling Auto (“SGM W”), reported sales volume of 534,000 units of Sunshine minivan model in 2011. We believe that the quality and pricing of our new Five Star minivan will allow it to gain a significant share of this market. Priced from RMB37,800 (US$5,975), the Five Star model is 15 percent less than SGM W base version while sharing features like a 1.1-liter four-cylinder engine.
  In May 2012, Jonway Auto established two wholly owned subsidiaries, Taizhou Fuxing Vehicle Sale Co., Ltd. focusing on minivan marketing and distribution in China and Taizhou Vehicle Leasing Co., Ltd. focusing on the vehicle leasing business in Taizhou, China. These subsidiaries will facilitate our business diversification and new business model development.
  We operate our business in four reportable segments:  Jonway Conventional Vehicles, Advanced Technology, Consumer Product and Car Outlet. These segments are strategic business units that offer different services.  They are managed separately because each business requires different resources and strategies.   The Jonway Conventional Vehicle Segment represents the manufacture and sales of vehicles through distributors in China and abroad. The Advanced Technology segment represents the sales activity of advanced technology vehicles to ZAP dealers throughout the U.S.  The Consumer Product segment represents sales of our ZAPPY 3, a three wheeled electric scooter, and the overall corporate expenses of ZAP. Many of these expenses relate to the overall development of our core business, electric consumer products.  The Car Outlet segment represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles
  The board of ZAP has demanded that CO-CEO Alex Wang resolve the conflict of interest in Jonway Group’s purchase of the Aptera assets and the formation of the new company Aptera (same name as the product) in the USA.  Alex Wang has agreed to transfer the asset ownership of Aptera to Jonway Auto, but this currently remains unresolved.
 30
  Results of Operations
 The following table sets forth, as a percentage of net sales, certain items included in ZAP’s Statements of Operations for the periods indicated:
 Three Months

ended September 30


Nine months

ended September 302012


2011


2012


2011Statements of Operations Data:




Restated





RestatedNet sales


100.0
%


100.0
%


100
%


100
%Cost of sales


(100.5
)


(84.8
)


(95.3
)


(88.8
)Operating expenses


(62.5
)


(51.4
)


(52.4
)


(52.7
)Loss from operations


(63.0
)


(36.3
)


(47.6
)


(41.4
)Net loss attributable to ZAP


(48.0
)


(62.8
)


(36.9
)


(66.6
)
  These results of operations that have been derived from our financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America and that include the results of operations of Jonway since the date of ZAP’s acquisition of 51% of the equity shares of Jonway on January 21, 2011.
   Quarter Ended September 30, 2012 Compared to Quarter Ended September 30, 2011
  Net sales for the quarter ended September 30, 2012 were $10.5 million as compared to $14.1 million for the quarter ended September 30, 2011.
  Jonway Auto’s revenue for the third quarter ended September 30, 2012 decreased by $3.4 million from $13.7 million for the quarter ended September 30, 2011 compared to $10.3 million in third quarter ended September 30, 2012. The sales volume decreased due to  the following factors: (i)more SUV models were launched into market by China-based auto makers, which intensified the competition, (ii) Although Jonway ‘s upgraded A380, which was launched  into the market in July to compete with these competitors, the resulting sales volume ramped up in this 3rd quarter did not reach the expected volume (iii) increasing oil prices in China affected customer demand and (iv) China’s overall economic condition worsened during the quarter (the GDP increase rate for this quarter compared to same quarter in 2011 was 7.4%, which is the lowest level in the past three years).
  Our third quarter sales of our Advanced Technology segment sales increased by $24,000 from $3,000 for the period ended September 30,  2011 to $27,000 for the period ended September 30, 2012, The increase is primarily due to sale of  our LSV Xebra XL.  This is still far below our projections due to the tight United States credit market and general economic conditions negatively impacting our dealer sales in 2012. We also began the transition of moving our operations from the U.S. to China and switching suppliers for advanced technology vehicles from outside contract manufacturers to our auto manufacturing plant in China.
  Our retail car lot experienced a decrease of $169,000 in sales for the third quarter from $196,000 in 2011 to $27,000 in 2012. The car outlet was adversely affected by a supply limitation on the number of consigned vehicles for resale.
  In our Consumer Product segment third quarter sales increased from $155,000 in 2011 to $177,000 in 2012.  The increase is primarily due to a bulk sale to a major customer of our ZAPPY 3 electric scooters.
 31
 
  Gross profit decreased by $2.12 million from a profit of $2.1 million for the three months ended September 30, 2011 to a gross loss of $51,000 for the three months ended September 30, 2012.
  Jonway Auto’s gross profit decreased by $1 million from $2.0 million in the third quarter of 2011 to $960K for the third quarter ended September 30, 2012. The decrease was primarily due to a new price reduction program for the existing SUV models while the launched upgraded models with lower gross profit contributions in this third quarter.  In order to deal with the increasing competition in the SUV market in China, Jonway Auto initiated its price reduction program to end users throughout the nine months ended September 30, 2012. This resulted in a decrease of the ex-factory price to dealers by RMB 6,000 or over $950.
 Advanced Technology vehicles gross profit decreased $218,000 from a $37,000 gross profit for the period ended September 30, 2011 to a loss of $181,000 for the period ended September 30, 2012.  The decrease was primarily due to increase in the amount of reserves included for the MY 2008 Xebra brake recall.
  The Consumer Products segment experienced an increase in gross profit in the third quarter from $47,000 in 2011 to a profit of $75,000 in 2012. The increase was due to an increase in sales volume.
  Our retail car lot gross profits decreased by $115,000 from $74,000 for the quarter ended September 30, 2011 to loss of $41,000 for the quarter ended September 30, 2012. The lower profits are due to tighter margins on purchased resale versus those on consignment and an increase reserves for lower of cost or market value.
  Sales and marketing expenses decreased $314,000 from $2.6 million for the three month periods ended September 30, 2011 to $2.3 million for the three months ended September 30, 2012.  As a percentage of sales the expense increased from 18.7% for the quarter ended September 30, 2011 to 22.0% for the quarter ended September 30, 2012 due to lower sales volume compared to the same period in 2011.
  General and administrative expenses decreased by $172,000 from $3.6 million for the quarter ended September 30, 2011 to $3.4 million in 2012. The decrease was primarily a result of reductions in ZAP US operations due to the following: (i) less salaries and wages due to transferring of various functions to Jonway China, (ii) fewer professional fees in 2012 since in the prior year we experienced non –recurring professional fees in connection with the Jonway acquisition in January 2011 and (iii) the elimination of the management fee to Cathaya Capital L.P that was previously expensed in the third quarter of 2011.
  Research and development expenses decreased by $181,000 from $1.0 million for the third quarter ended September 30, 2011 to $ 856,000 for the third quarter ended September 30, 2012. The decrease was primarily due to fewer projects scheduled for the third quarter of 2012. In the prior year’s quarter ended September 30, 2011, we incurred Research and Development fees relating to refinement of the automatic transmission for Jonway’s three and five door sport utility vehicles.
  Interest expense decreased by $4.2 million from $4.9 million in third quarter 2011 to $691,000 in the third quarter of 2012. In 2011, the amortization on the previous years discount on the convertible debt was significantly more.
  Other income increased by $246,000 from $221,000 for the period ended September 30, 2011 to $467,000 for the period ended September 30, 2012.  This amount mainly represents increase in the sales of metal scrap by Jonway in 2012.
 32
  Nine months Ended September 30, 2012 Compared to Nine months Ended September 30, 2011
   Net sales decreased by $6.6 million in the nine months ended September 30, 2012 from $42.0 million for the nine months ended September 30, 2011 to $35.4 million in September 30, 2012.
  Jonway auto’s revenue for the nine months ended September 30, 2012 decreased by $5.7 million from $40.4 million for the nine months ended September 30, 2011 compared to $34.7million for the nine months ended September 30, 2011. The sales volume decreased due to  the following factors: (i) more SUV models were launched into the market by China-based auto makers, which intensified the competition, (ii) Although Jonway ‘s upgraded A380 launched into market July 2012 to compete with these competitors, the resulting sales volume in this quarter did not reach the expected volume(iii) increasing oil prices in China affected customer demand and (iv) China’s overall economic condition worsened during the periods ended September 30, 2012 (the average GDP increase rate for the periods ended September 30, 2012 compared to same quarter in 2011 was 7.7%, which is the lowest level in the past three years).
  Sales in the Advanced Technology segment decreased by $350,000 from $393,000 in 2011 to $43,000 in 2012 for the nine months ended September 30, 2012. The tight U.S. credit market and general economic conditions negatively impacted our dealer sales in the first nine months of 2012.
  We experienced an increase of $105,000 in sales of consumer products from $457,000 in 2011 to $562,000 in 2012 due to increases in ZAPPY 3 scooters sold to a single customer for resale.
  Our retail car lot experienced a decrease in sales of $668,000 from $810,000 in 2011 to $142,000 in 2012. The decrease was due to a decrease in the consignment cars available for sale and a general downturn in the economy. Due to the current recession many consumers chose lower priced pre-owned vehicles that are distributed through our retail car outlet.
  Gross profit decreased by $3.1 million from $4.8 million for the nine months ended September 30, 2011 to $1.7 million for the nine months ended September 30, 2012.  The decrease in gross profit in the nine months ended September 30, 2012 was principally related to the lower profits on manufacturing of Jonway Auto’s vehicles.
  Jonway Auto’s gross profit decreased by $2.6 million from $4.3 million for the first nine months of 2011 to $1.7 million for the nine months ended September 30, 2012. The decrease was primarily due to a new price reduction program to its existing models while the upgraded models launched this July with relatively lower gross profit contribution for the nine months ended September 30, 2012.  . In order to deal with the increasing competition in SUV market in China, Jonway auto initiated its price reduction program to end users throughout the first nine months of 2012. This resulted in a decrease of the ex-factory price to dealers by RMB 6,000 or over $950.
  In our Advanced Technology segment our profit decreased by $213,000 from a gross profit of $69,000 for the nine months ended September 30, 2011 to a loss of $ 184,000 for the nine months ended September 30, 2012.  The decrease was due to fewer sales of the XL models that were designed for fleets and an increase in the inventory reserve.
  In our Consumer Products segment, we experienced an increase of $28,000 in profit from a profit of $120,000 in 2011 to a profit of $148,000 in 2012. The increase was due to sales of the Zappy 3 Pro to a major customer.
 33
 
  Gross profits in our retail car lot decreased by $228,000 from $227,000 for the nine months ended September 30, 2011 to a loss of $1,000 for the Nine months ended September 30, 2012. The decrease in profits was due to lower sales volumes, a decline of consignment cars available for sale and an increase in the inventory reserve.
 Sales and marketing expenses in the first nine months of 2012 decreased by $100,000, from $8.0 million in 2011 to $7.9 million in 2012.  As a percentage of sales, the expense increased from 19.1% for the nine months ended September 30, 2011 to 22.3% for the nine months ended September 30, 2012 due to lower sales volume compared to the same period in 2011.
  General and administrative expenses for the nine months ended September 30, 2012 decreased by approximately $2.6 million, from $11.3 million in 2011 to $8.7 million in 2012. The decrease was due to the following : The decrease was primarily a result of reductions in ZAP US operations due to the following: (i) less salaries and wages due to transferring of various functions to Jonway China, (ii) fewer professional fees in 2012 since in the prior year we experienced non –recurring professional fees in connection with the Jonway acquisition in January of 2011 and (iii) the elimination of the management fee to Cathaya Capital L.P that was previously expensed in the first nine months of 2011.
  Research and development expenses decreased by $1.0 million from $2.9 million in 2011 to $1.9 million in 2012. The decrease was the result of fewer projects scheduled for the first nine months of 2012.
  Interest expense, net decreased by $11.6 million from an interest expense of $13.7 million for the first nine months of 2011 to interest expense of $2.1 million in the nine months ended September 30, 2012.The decrease was due to the amortization on the previous years discount on the convertible debt was significantly more.
  Other income (expense) increased $68,000 from $1.1 million for the first nine months of 2011 to other income of $933,000in the third quarter of 2012.  The increase was due to an increase in the loss in the joint venture and a decrease in sales of scrap metal by Jonway Auto.
 Liquidity and Capital Resources
   In assessing our liquidity, we monitor and analyze our cash on-hand, liquidation value of our investment in related party securities, and our operating and capital expenditure commitments.  Our principal liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations.  At September 30, 2012, we believe that we will have sufficient liquidity required to conduct operations through September 30, 2013.
 
 In January 2011, ZAP issued $19 million of convertible debt to China Electric Vehicle Corporation (“CEVC”) to make a partial payment in connection with the Jonway Acquisition.  On March 31, 2012, ZAP entered into an amendment to the note which extended the maturity date of the note from August 12, 2012 to August 12, 2013. This amendment changed the terms of the note requiring adjustment of the conversion price of note for dilutive issuances by ZAP. In addition, the warrant issued in connection with the CEVC note was amended to change the terms of conversion and to extend the maturity date until February 12, 2014. The interest accrued through the maturity date of February 12, 2012 in the amount of $1.7 million has been added to the existing principal. The total amount of the convertible note is approximately $19.3 million with a new maturity date of August 12, 2013.
 
 At present, the Company will require additional capital to expand our current operations.  In particular, we require additional capital to expand our presence into Asia, to continue development of our methodology for converting gasoline vehicles to electric and to continue building our dealer network and expanding our market initiatives.  We also require financing to purchase consumer inventory for the continued roll-out of new products to add qualified sales and professional staff to execute our efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias and other fuel efficient vehicles.
  34
  We intend to fund our long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both.  Although we believe that these sources will provide sufficient liquidity for us to meet our future liquidity and capital obligations, our ability to fund these needs will depend on our future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond our control, including trends in our industry and technological developments.  However, we may not be able to obtain this additional financing on terms acceptable to us or at all.
 
 In the nine months of 2012, net cash used for operating activities was $11.2 million.  Cash used in the nine months of 2012 was comprised of the net loss incurred for the nine months of $18.2 million plus net non-cash expenses of $9.1 million and the net increase of $2.4 million in operating assets and liabilities. In the nine months of 2011, net cash used for operating activities was $6.1 million. Cash used in the nine months of 2011 was comprised of the net loss incurred for the nine months of $30.7 million plus net non-cash expenses of $22.2 million and the net decrease of $2.4 million in operating assets and liabilities
 
 Investing activities used cash of $1.8 million and $19.4 million in the nine months ended September 30, 2012 and 2011, respectively. In 2011, $18.5 million was utilized for the 51% acquisition of Jonway Automobile. In addition, $1.8 million and $1.1 million was used for the purchase of equipment for the period ended September 30, 2012 and 2011, respectively.
 Financing activities for the nine months ended September 30, 2012 provided cash of $7.7million compared with financing activities that provided cash of $25.0 million in 2011. During the first nine months of 2012, we used cash of $6.0 million to repay short term loans, we provided cash of  $3.1 million in short term borrowings, we provided cash of $71,000 from proceeds from related parties and restricted cash of $9.0 million.
 
 In the nine months of 2011, we issued $19 million in convertible debt to China Electric Vehicle Corporation, a related party to ZAP. The proceeds were utilized to complete the acquisition of the 51% interest in Jonway.
 
 The Company had cash of $567,000 at September 30, 2012 as compared to $5.86 million at December 31, 2011. The Company had working capital deficits of $47 million and $15 million for the periods ended September 30, 2012 and December 31, 2011 respectively.
  On September 4, 2012, ZAP entered into a letter agreement with Jonway Group, Jonway Auto and Cathaya to borrow $5 million from Jonway Auto. Jonway Auto will fund ZAP based on the schedule set in the agreement. Zap shall repay Jonway Auto on or before March 3, 2016.
 In the event that we require additional liquidity, one of our shareholders, Jonway Group, have agreed to provide the necessary support to meet our financial obligations throughSeptember 2013.
  Critical Accounting Policies and Use of Estimates
 
 Estimates
 
 The preparation of the unaudited condensed consolidated financial statements in conformity with United States generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates
  35
  Stock Based Compensation
 
 The Company accounts for stock-based compensation which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes-Merton option pricing model (the “Black-Scholes model”). The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. We estimate forfeitures at the time of grant and revise our estimate in subsequent periods if actual forfeitures differ from those estimates.
 
 The Company accounts for stock-based compensation awards and warrants granted to non-employees by determining the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
 
 Derivative Financial Instruments
 
 The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
 
 The Company accounts for derivative instruments and debt instruments in accordance with the interpretative guidance of ASC 815 and associated pronouncements related to the classification and measurement of warrants and instruments with conversion features. It is necessary for the Company to make certain assumptions and estimates to value derivatives and debt instruments.
 
  Allowance for Doubtful Accounts
 
 The Company provides an allowance for doubtful accounts when management estimates collectability to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience.
 
 Inventories
 
 Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out basis) or market (net realizable value or replacement cost). The Company maintains reserves for estimated excess, obsolete and damaged inventory based on projected future shipments using historical selling rates, and taking into account market conditions, inventory on-hand, purchase commitments, product development plans and life expectancy, and competitive factors. If markets for the Company’s products and corresponding demand were to decline, then additional reserves may be deemed necessary. Any changes to the Company's estimates of its reserves are reflected in cost of goods sold within the statement of operations during the period in which such changes are determined by management.
 
 Off-Balance Sheet Arrangements
 
 None.
 36
 
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
  A smaller reporting company is not required to provide disclosure pursuant to this Item 3.
  Item 4.  Controls and Procedures
  Material weakness previously disclosed
 
 Material weakness previously disclosed
  As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011, we identified a lack of sufficient control in the area of technical competency in review and approval of financial reporting processes. This control weakness allowed for reconciliations, reports and other documents to be insufficiently reviewed prior to being approved by management and audit adjustments to be identified by our auditors as part of their year-end audit work. This material weakness resulted in errors in the recording of non-routine and complex accounting transactions in the preparation of our annual consolidated financial statements and disclosures. The Company is considering utilizing outside accounting experts to assist us in accounting for future complex transactions. During the first Quarter 2012 we have arranged with another independent accounting firm to assist us in accounting for non-recurring complex accounting transactions
  Disclosure Controls and Procedures
  Under the supervision and with the participation of our management, including our Co- Chief Executive Officers and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Co-Chief Executive Officers and our Chief Financial Officer concluded that the Company’sdisclosure controls and procedures wereineffective as of the end of the period covered by this report.
 Changes in internal control over financial reporting
  No significant changes were made in our internal control over financial reporting during the Company’s third quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 PART II – OTHER INFORMATION
 
 
 Item 1.  Legal Proceedings
  We are subject to various legal proceedings from time to time in the ordinary course of business.
  Item 1A. Risk Factors
 
 There have been no material changes to the Company’s risk factors which are included and described in the annual report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on April 16, 2012.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
  37
  Item 1B. Unresolved Staff Comments
  None
  
 Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 None
 
 
 Item 3.  Defaults upon Senior Securities
 
 None
 
 
 Item 4.  Mine safety disclosure
 
 Not Applicable
 
 
 Item 5.  Other Information
 
 
 
 Item 6.  Exhibits
 
 (b) Exhibits.
  Exhibit

Number

Description31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14/15d-14 of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.3

Certification of Principal Financial Officer pursuant to 13a-14/15d-14 of the Exchange Act as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.1

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  In accordance with SEC Release 33-8238, Exhibit 32.1 is being furnished and not filed.
  Furnished herewith, XBLR (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
  38
  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.
   
 Dated: November 14, 2012
By: /s/ Alex WangName: Alex WangTitle: Co-Chief Executive Officer(Co-Principal Executive Officer).Dated: November 14, 2012
By: /s/ Charles SchillingsName: Charles SchillingsTitle: Co-Chief Executive Officer(Co-Principal Executive Officer).Dated: November 14, 2012
By: /s/ Benjamin ZhuName: Benjamin ZhuTitle: Chief Financial Officer(Principal Financial Officer)
 
   39