Deferred Tax Asset Realization

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

BUSINESS DEVELOPMENT

Founded in 1994, ZAP has invented, designed, manufactured, and marketed numerous innovative products since the Company’s inception. In 1995, ZAP began marketing electric transportation on the Internet through our website, www.zapworld.com. ZAP has been a pioneer in developing and marketing electric vehicles such as a zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998, we continued to add to our product line; in 1999, ZAP added electric motorbikes; in 2001, it added electric dive scooters; in 2003, ZAP announced its first electric automobiles, including the first-ever production electric automobile imported from its manufacturing partner in China; in 2004 ZAP introduced electric all-terrain vehicles and the fuel-efficient Smart Car; and in 2005 ZAP introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline. To date, we have delivered more than 100,000 electric vehicles and consumer products to customers in more than 75 countries, which we believe establishes us as one of the leaders in the alternative transportation marketplace.

Today, ZAP is continuing its focus as one of the pioneers of advanced transportation technologies and leveraging its place in the market as a magnet for new technologies. The Company believes there is a growing and underrepresented market for fuel efficient transportation vehicles and we are capitalizing on the opportunities enhanced by heightened environmental awareness, climate changes and economic pressures. The technology is available to deliver transportation solutions that are practical and affordable. With our products such as the XEBRA, ZAP Truck, ZAP Shuttle Van and ZAPPY 3, ZAP is already delivering such solutions to the market. Our goal is to become one of the largest and most complete brand and distribution portals in the United States for advanced technology vehicles and 100% plug-in electrics.

To distribute our practical, affordable and advanced transportation technologies, we have established and are growing both our portal of qualified automotive dealers and our relationships with specialty dealers/distributors for our power system products. Through these distribution channels, coupled with the continued establishment of partnerships with select manufacturers, we intend to expand our market recognition by building awareness of the evolving technologies available for automotive transportation and in reducing our nation’s dependency on foreign oil.

20

---

PRODUCT SUMMARY

Our existing product line, which includes completed, market ready products and planned introductions, is as follows:

ZAP AUTOMOTIVE

ZAP believes it is positioned to become one of the leading distributors of fuel efficient alternative energy vehicles in the United States. We believe that we are one of only a few companies distributing a 100% production electric vehicle capable of speeds up to 40 mph. Within the next twelve to thirty-six months, we hope to have distribution agreements in place with vehicle manufacturers whose products fit ZAP’s mission. To distribute our product to end consumers and fleets, we have established more than 50 licensed automotive dealers and intend to grow this base significantly over the next several years.

In 2006, ZAP Automotive introduced the following automobile products:

o	the 100% electric XEBRA sedan with an MSRP of approximately$11,000;

o	the 100% electric XEBRA utility vehicle truck with an MSRP of approximately $12,000; and

In 2007, ZAP Automotive introduced a new electric scooter, the ZAPINO, with an advanced 3,000 watt brushless DC hub motor, perfect for city commuting and able to reach speeds of 30 MPH with an MSRP of $3,500.

In 2009, we introduced the ZAP Truck XL, which is a low speed 4 wheel utility truck and having a MSRP of approximately $14,900. The ZAP Shuttle Van was also introduced, which is  designed for passenger transport or cargo. The seats are removable so it can convert into a cargo vehicle

Our future offerings that are currently in the developmental stage include:

o	The ZAP Alias, which has a target price of $32,500 per vehicle and an estimated range of 100 miles per charge. This vehicle launch date is for 2010.

We are also in discussions with other foreign manufacturers and hope to establish additional relationships within the next twelve to thirty-six months for other vehicle platforms.

XEBRA

We believe that XEBRA is the only series production electric vehicle in the United States that can legally travel faster than 25 mph. The car’s suggested retail price of $11,000 is significantly less expensive than most of its competitors, some of which cost more than $100,000 and are not yet widely available today. XEBRA has three wheels and is being imported as a motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA is enclosed with windows and a roof, affording it protection from inclement weather.

21

---

XEBRA Sedan (ZAPCAR (R))

ZAP launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The sedan has a seating capacity for four and is being targeted for city/commuter use. Based on initial feedback, ZAP will be marketing the XEBRA sedan to government and corporate fleets as well as to families with two or more cars, but with plenty of occasion to use their vehicles for short, city drives.

XEBRA PK (ZAPTRUCK(R))

ZAP launched its utility pick-up truck version of the XEBRA, the XEBRA ZAPTRUCK, on August 24, 2006. This electric vehicle seats two with a multi-purpose platform behind the passenger compartment that serves as a hauler, dump truck or flatbed. The XEBRA ZAPTRUCK is targeted to municipalities, maintenance facilities, universities, ranches and warehouses. Since its launch, we have received overwhelming inquiries for test drives. To date, we have focused on our west coast market and sales have exceeded our initial distribution and sales plans.

ZAP XL TRUCK

 

ZAP's new XL Truck was designed with a roomy cab for two and a sturdy bed platform capable of transporting 800 lbs. for on-road use and up to 1,600 lbs. capacity for private roads and facilities. This 100 percent electric workhorse has convertible, drop-side bed construction to convert to a flatbed. ZAP's XL Truck can be ordered with options like air conditioning, enclosed weatherproof cargo box, solar charger, above-bed utility rack and rapid charging system. MSRP is $14,500.

 

ZAP SHUTTLE VAN

 

ZAP's new Shuttle was designed for passenger transport or cargo. The seats are removable so it can convert into a cargo vehicle with 108 cubic feet and a 900 lb. total carrying capacity. Large slider doors on both sides and a rear lift hatch provide convenient access to the rear compartment, which is weatherproof and secure. At 138 inches, its length is just shy of most mini-vans and at 6 ft 2 inches it has plenty of headroom. The ZAP Shuttle was designed for transportation around large campuses, to and from parking lots, and, because it produces zero emissions, through factories, warehouses and other indoor uses. Air conditioning, solar panels and a rapid charger are available options. MSRP: $14,700.

 

LOTUS

In 2007, we announced and entered into a development and feasibility contract with Lotus Engineering to develop an electric all-wheel drive crossover high performance vehicle for the U.S. market.

We are also developing a $32,000 all electric vehicle with a targeted 100 mile range, the ZAP Alias (TM), which is expected second quarter 2010.

Future Automotive Offerings

Over the next 36 months, we hope to establish relationships with additional manufacturers who can supply automobiles and related vehicles that meet our mission of affordable, advanced transportation technologies that are socially responsible and environmentally sustainable. In 2009, we have identified the following products as potential future offerings for the Company: (1) an affordable 100% electric two-seater sports coupe and a high performance highway all electric vehicle.

ZAP Power Systems

 

We launched the Company in 1994 with the invention of the ZAPPY electric scooter and quickly established a presence as one of the market leaders in the electric “personal” transportation product segment. Since inception, the Company has been able to maintain a steady business and committed buyers in this segment. In keeping with our initial product offerings, at the beginning of 2006, we revitalized our consumer products line (recently renamed “Power Systems”), including an updated version of the electric scooter. As part of the segment’s revitalization, we reduced the number of suppliers and placed more emphasis on upgrading existing models with newer component technology and more robust features in order to provide a higher quality consumer experience and product.

22

---

Our current product offerings include:

o	Three-wheeled personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3 EZ);

 

o	Off-road vehicles (electric quads and motorcycles); and

 

The ZAPPY 3 Personal Transporters

Seaway’s highly publicized “human transporter to change the world” unearthed a growing need for a “scooter for adults,” better known as personal electric transportation. The Company responded to this demand by designing the ZAPPY3. Unlike the Segway, the ZAPPY3’s 3-wheeled vehicle design provides stability and maneuverability allowing just about anyone to ride this vehicle without training. It has a top speed of 15 mph, and the Pro has the farthest range of any personal transporter available today at 25 miles range per charge.

The Company initially thought that the ZAPPY3 would be great for the consumer market. Over the past year, the Company has revisited its sales strategy and come to recognize that the largest market opportunities are in the industrial and commercial applications. The Company’s primary sales channels are now more clearly defined as security, sporting goods and material handling.

With the increased emphasis on homeland security, there are several product competitors in the security and police market segment. Segway, the most well known, can be found in select police departments and airports and sells for about $5,500. American Chariot, which is a chariot-like transporter, has entered the market selling between $1,500 to $2,500. Newest to the security transporter business is T3Motion, which is built like a small tank and priced at up to $8,000. The ZAPPY3 meets the need of a majority of the security transportation needs and with a selling price range of $530 to $900, depending on the model purchased, which we believe is the most economical of all offerings.

The ZAPPY3 retail focus has continued strong in 2009. As the product line has gained momentum and market acceptance, we plan to grow distribution in the retail channel through larger regional and specialized chain stores.

The material handling, warehousing, fabrication, and construction industries are the ideal markets for the ZAPPY3 Pro. We are not currently aware of any major competitors in this market. The traditional solution for short distance transportation has been bicycles. The ZAPPY Pro offers the perfect utility vehicle for shuttling, picking and packing and getting into small areas like elevators. While the Company’s entrance into this market is still in the early stages, the product response has been very favorable, demonstrated by our newly established relationship with Indoff, the largest distributor of material handling equipment in the United States.

The Zapino is an electric scooter that is a great link between ZAP’s personal transporters and electric cars. Not only economical and eco-friendly, the Zapino is powerful with an advanced 3000-watt brushless DC hub motor, perfect for city commuting. Able to reach speeds of 30 MPH, the Zapino is able to keep up with city traffic without contributing to city pollution. The rear wheel hub motor on the Zapino creates more room on board for additional batteries and performance. This innovative drive system eliminates the need for belts or chains with lower overall maintenance. It also delivers a more enjoyable ride because it is nearly silent, accelerates smoothly with no shifting, has no engine vibration, no tailpipe or heat exhaust -- just good, clean fun.

23

---

Off-Road Vehicles

All terrain vehicle (“ATV”) manufacturers recognized in excess of $5.0 billion in revenues in 2006 with the market for ATVs. In the United States alone, approximately 800,000 units were sold in 2006. To date, all of the ATV’s on the market are gas-powered. We believe electric ATV’s have practical environmental benefits over their gas-powered counterparts: they are silent and generate no emissions. Moreover, there are now over 8,000 organic farms in the United States which are committed to reducing pollutants that may put organic certification at risk. The electric ATVs can provide the ruggedness of the traditional ATV in areas never before accessible, while being more versatile than golf carts.

We entered the electric ATV market in 2006 with our ZAP Buzz mini ATV. The Buzz has a 450 watt geared-motor and a top speed of 15 mph with a range of approximately 20 miles. In the 1st quarter of 2007, we introduced the 800 watt “mid size” ATV for sale in the United States and some of our existing ZAP dealers already have placed preorders. We hope to launch a heavy duty ATV in the 3rd quarter 2008 with product features and styling comparable to existing gas-models. We believe our position as an innovator in the electric vehicle market, coupled with first-mover advantage in the electric ATV market, will allow us to capitalize on this market segment. If we are able to capture 1% of the all terrain vehicle market share, it could equate to over $40 million in revenues per year. However, there can be no assurances that we will be able to achieve such market share.

Risk factors

 

We have a history of losses and our future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on our business and the value of ZAP’s common stock.

We incurred net losses of $4.6 million, $9.8 million, $28 million, for the six months  ended June 30, 2009 and the years ended December 31, 2008, 2007 respectively.  We can give no assurance that we will be able to operate profitably in the future.  

We face intense competition which could cause us to lose market share.  

In the advanced technology vehicle market in the United States, we compete with large manufacturers, including Honda, Toyota, and Nissan, have more significant financial resources, established market positions, long-standing relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, manufacturing, distribution, financial and other resources than we do.  Each of these companies is currently working to develop, market, and sell advanced technology vehicles in the United States market.  The resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to us.  We also face competition from smaller companies with respect to our consumer products, such as our electric bicycle and scooter.  We expect to face competition from the makers of consumer batteries and small electronics with respect to the ZAP Portable Energy line.  This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop, maintain, and extend our current technology and market position.  

Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.  

The electric vehicle industry is in its infancy and has experienced substantial change in the last few years.  To-date, demand for and interest in electric vehicles have been sporadic.  As a result, growth in the electric vehicle industry depends on many factors, including:

 

·	continued development of product technology;
·	the environmental consciousness of customers;

·	the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines;
·	widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and

·	whether future regulation and legislation requiring increased use of nonpolluting vehicles is enacted.

 

We cannot assure you that growth in the electric vehicle industry will continue.  Our business may suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.  

24

---

We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position.  

Our current products are designed for use with, and are dependent upon, existing electric vehicle technology.  As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology.  However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or create necessary technology.  As a result, our potential inability to adapt and develop the necessary technology may harm our competitive position.  

The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.  

We rely on a small group of suppliers to provide us with components for our products, some of whom are located outside of the United States.  If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them.  Changes in business conditions, wars, governmental changes, and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers.  Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products.  A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.  

Product liability or other claims could have a material adverse effect on our business.  

The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles.  Although we have product liability insurance for our consumer products for risks of up to an aggregate of $5,000,000, that insurance may be inadequate to cover all potential product claims.  We also carry liability insurance on our automobile products.  Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition.  We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed.  A successful product liability claim against us could require us to pay a substantial monetary award.  Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.  We cannot assure you that such claims and/or recalls will not be made in the future.  

We must devote substantial resources to implementing a product distribution network.  

Our dealers are often hesitant to provide their own financing to contribute to our product distribution network.  As a result, we anticipate that we may have to provide financing or other consignment sale arrangements for dealers who would like to participate as our regional distribution centers.  

The further expansion of our product distribution network will require a significant capital investment and will require extensive amounts of time from our management.  A capital investment such as this presents many risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable.  Our inability to collect receivables from our dealers could cause us to suffer losses.  Lastly, the amount of time that our management will need to devote to this project may divert them from performing other functions necessary to assure the success of our business.  

 

 

25

---

Failure to manage our growth effectively could adversely affect our business.  

We plan to increase sales and expand our operations substantially during the next several years through internally-generated growth and the acquisition of businesses and products.  

To manage our growth, we believe we must continue to implement and improve our operational, manufacturing, and research and development departments.  We may not have adequately evaluated the costs and risks associated with this expansion, and our systems, procedures, and controls may not be adequate to support our operations.  In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis.  The success of our future operating activities will also depend upon our ability to expand our support system to meet the demands of our growing business.  Any failure by our management to effectively anticipate, implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations.  We cannot assure you that we will be able to successfully operate acquired businesses, become profitable in the future, or effectively manage any other change.  An inability to successfully operate recently acquired businesses and manage existing business would harm our operations.  

 

The loss of certain key personnel could significantly harm our business.  

The Company’s performance is substantially dependent upon the services of its executive officers and other key employees, as well as on its ability to recruit, retain, and motivate other officers and key employees. Competition for qualified personnel is intense and there are a limited number of people with knowledge of and experience in the advanced technology vehicle industry. The loss of services of any of our officers or key employees, or our inability to hire and retain a sufficient number of qualified employees, will harm our business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer or Mr. Starr, our co-founder, whose specialized knowledge of the electric vehicle industry is essential to our business, would be detrimental. We have employment agreements with Mr. Schneider and Mr. Starr that provide for their continued service to the Company until October 1, 2013.

Regulatory requirements may have a negative impact upon our business.

While our products are subject to substantial regulation under federal, state, and local laws, we believe that the products we have sold are materially in compliance with all applicable laws.  However, to the extent the laws change, or if we introduce new products in the future, some or all of our products may not comply with applicable federal, state, or local laws.  Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment.  Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future.  Compliance with this regulation could be burdensome, time consuming, and expensive.

Our automobile products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, and Air Resource Board of the State of California, and compliance certification is required for each new model year.  The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial

Manufacturing overseas may cause problems for us.

We have been shifting our manufacturing overseas. There are many risks associated with international business.  These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements, and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur.  A failure to successfully mitigate any of these potential risks could damage our business.  

 

 

26

---

We may not be able to protect our internet address.

We currently hold the internet address, http://www.zapworld.com, a portal through which we sell our products.  We may not be able to prevent third parties from acquiring internet addresses that are confusingly similar to our address, which could adversely affect our business.  Governmental agencies and their designees generally regulate the acquisition and maintenance of internet addresses.  However, the regulation of internet addresses in the United States and in foreign countries is subject to change.  As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business.

Our success is heavily dependent on protecting our intellectual property rights.  

We rely on a combination of patent, copyright, trademark, and trade secret protections to protect our proprietary technology.  Our success will, in part, depend on our ability to obtain trademarks and patents.  We hold several patents registered with the United States Patent and Trademark Office.  These registrations include both design patents and utility patents.  In addition, we have recently submitted provisional patents which may or may not be afforded the limited protection associated with provisional patents.  We have also registered numerous trademarks with the United States Patent and Trademark Office, and have several pending at this time.  We cannot assure you that the trademarks and patents issued to us will not be challenged, invalidated, or circumvented, or that the rights granted under those registrations will provide competitive advantages to us.  

We also rely on trade secrets and new technologies to maintain our competitive position.  Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets.  Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

We may be exposed to liability for infringing intellectual property rights of other companies.  

Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others.  Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur.  We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party.  

Risk of Unregistered Securities Offering.

In the past, we have had numerous sales of our securities which were not registered under federal or state securities laws.  We have strived to comply with all applicable Federal and state securities laws in connection with our issuances of unregistered securities.  However, to the extent we have not complied, there may be liability for the purchase price of the securities sold together with interest and the potential of regulatory sanctions.

Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.

The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities.  The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition.  In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur.  We have experienced significant volatility in the price of our stock over the past few years.  We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations.

We have not paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We have not achieved profitable operations and if we do realize a profit in the future, we anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business.  Accordingly, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future.  Payment of any future dividends will be at the direction of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion.

27

---

Seasonality and Quarterly Results

The Company’s business is subject to seasonal influences for consumer products. Sales volumes in this industry typically slow down during the winter months, November to March in the U.S. The Company’s auto distribution network is affected by the availability of cars ready to sell to dealers.

Inflation

Our raw materials and finished products and automobiles are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our product sources.

 

 

 

Item 4T.      Controls and Procedures

Disclosure Controls and Procedures

 

Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports filed, furnished or submitted under the Exchange Act. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

  

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

28

---

PART II - OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS.

In the normal course of business, we may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows. The Company estimates the amount of potential exposure it may have with respect to litigation claims and assessments.

Voltage Vehicles v. Rajun Cajun, et al., Superior Court of California, County of Sonoma, Case No. SCV 240179, filed February 9, 2007. In its Complaint, Voltage Vehicles requests Declaratory Relief against Rajun Cajun, asking the Court to declare that the License Agreement between those two parties does not grant Rajun Cajun an exclusive dealership in northern Nevada to distribute Voltage Vehicle products and that Voltage Vehicles has performed its obligations under the License Agreement.  On April 19, 2007, Rajun Cajun filed a Motion to Quash and/or for Dismissal or Stay.  On May 7, 2007 Rajun Cajun voluntarily withdrew its Motion to Quash and/or for Dismissal or Stay.  On May 24, 2007 Rajun Cajun filed both an Answer to Voltage Vehicles’ Complaint and a Cross-Complaint against Voltage Vehicles adding ZAP, Elliot Winfield, Steven Schneider, Phillip Terrazzi, Max Scheder-Breschin, and Renay Cudie [sic] as cross-defendants, and adding Robert and Mary Chauvin as cross-complainants.  The Cross-Complaint alleged breach of contract, breach of the covenant of good faith and fair dealing, breach of warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit or unjust enrichment, civil conspiracy, violation of Securities and Exchange Act/federal securities law, deceptive trade practices, and declaratory relief pursuant to a License Agreement (for a distribution license) entered into between Rajun Cajun, Inc. (dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks) and Voltage Vehicles. The Cross-Complaint sought general damages in an amount in excess of $25,000, special damages in an amount in excess of $25,000, punitive damages in an amount in excess of $25,000, attorneys' fees and cost of suit, for judgment in an amount equal to treble actual damages, and rescission in the amounts of $397,900 and $120,000, plus interest.  Cross-Complainants thereafter filed a First Amended Cross-complaint and Third Party Complaint (“First Amended Cross-complaint”).  On February 11, 2008 ZAP and Voltage Vehicles filed a demurrer to Cross-complainants’ third through fifteenth causes of action.  In its tentative ruling on that demurrer, the Court ruled in ZAP and Voltage Vehicles’ favor and granted Rajun Cajun leave to file a Second Amended Cross-Complaint.  Rajun Cajun did not contest the ruling, which then became the order of the Court.  In the interim, the individual third party defendants were served with the First Amended Cross-Complaint.  On July 16, 2008 the individual cross-defendants (Steven Schneider, Renay Cudie [sic], Elliott Winfield, Phillip Terrazzi, and Max Scheder-Breschin) were dismissed from the action in its entirety.  On August 7, 2008 Rajun Cajun filed a Second Amended Cross-complaint and Third Party Complaint  (“Second Amended Cross-complaint”) against ZAP and Voltage Vehicles.  On September 16, 2008 ZAP and Voltage Vehicles filed a demurrer to the Second Amended Cross-complaint.  On January 8, 2009 the parties engaged in mediation, but were ultimately unsuccessful in reaching settlement.  The court issued its order on the demurrer to the Second Amended Cross-Complaint on February 10, 2009, denying the demurrer as to the twelfth cause of action for negligent misrepresentation and sustaining the demurrers to the remaining causes of action with leave to amend.  On March 6, 2009 Rajun Cajun served an Amended Cross-complaint, erroneously entitled Fourth Amended Cross-Complaint and Third Party Complaint (“Third Amended Cross-complaint”).  A Mandatory Settlement Conference was held on March 25, 2009, but the parties were ultimately unsuccessful in reaching settlement.  On April 3, 2009 ZAP and Voltage Vehicles filed a demurrer to the Third Amended Cross-complaint, and on April 22, 2009 the court sustained the demurrer and gave Cross-complainants leave to amend with an order to file and serve the amended cross-compliant by April 29, 2009.  The court also postponed the trial, which had been set for April 24, 2009.  The trial date has not yet been reset.  On April 29, 2009 Rajun Cajun served its Fourth Amended Cross-complaint and Third Party Complaint (“Fourth Amended Cross-complaint”).  The Fourth Amended Cross complaint contains six causes of action, specifically: fraudulent misrepresentation; breach of written contracts–asset purchase agreements; negligence; negligent misrepresentation; securities fraud; and contract rescission for fraud in the inducement.  The Fourth Amended Cross-complaint seeks general damages in an amount in excess of $500,000, damages for Cross-complainants’ lost earnings, both past and future, in a sum to be proven at trial, a sum in excess of $500,000 for Cross-complainants’ mental pain, a sum in excess of $500,000 for willful and wanton misconduct, rescission of the license agreement and consideration paid to Cross-complainants, with interest, costs and attorneys’ fees, and such other and further relief the court may deem just and equitable.  ZAP and Voltage Vehicles have both responded to the Fourth Amended Cross-complaint and filed a motion for summary judgment, or in the alternative summary adjudication.  The hearing on the summary judgment motion is scheduled for August 17, 2009.  The trial date has been reset for October 2009.

 

 

29

---

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

The following lists sales of unregistered securities during the quarter ended June 30, 2009 that were not previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.   We relied on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) for the issuance of these securities.  Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions. The offer and sale of the following securities was exempt from the registration requirements of the Securities Act under Rule 506 insofar as (1) except as stated below, each of the investors was accredited within the meaning of Rule 501(a); (2) the transfer of the securities were restricted by the company in accordance with Rule 502(d); (3) there were no more than 35 non-accredited investors in any transaction within the meaning of Rule 506(b), after taking into consideration all prior investors under Section 4(2) of the Securities Act within the twelve months preceding the transaction; and (4) none of the offers and sales were effected through any general solicitation or general advertising within the meaning of Rule 502(c).

On June 9, 2009, the Company issued 4,000,000 shares of common stock for a private placement valued at $2 million. On the same date the Company also issued 72,067 shares valued at $21,620 in exchange for leasehold improvements.

On June 19, 2009, the Company issued 223,810 shares valued at $94,000 for a public relations retainer and services.

 

Item 3.         Defaults upon Senior Securities

Related Party Dispute

Please note the indebtness is due to a related party—Al Yousuf LLC whose President Mr. Eqbal Al Yousuf is also a Director of ZAP and our current Chairman of the Board of ZAP.  We have signed a Settlement agreement (Term Sheet) to resolve the matter.

On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. All principal and interest due under the Note is secured by the corporate headquarters building in Santa Rosa, California

On May 14, 2009 we received a Notice of Delinquent Payments from Mr. Hossein Haghighi, the Chief Financial Officer of Al Yousuf LLC, notifying us that an outstanding principle for inventory advances of $2.8 million plus monthly interest payments has not been paid as required by a $10 million Promissory Note. Mr. Haghighi further indicated that AL Yousuf LLC intended to enforce the collection of the total amounts due under the terms of the note against the Company. The collateral for the note is our corporate headquarters building and land located in Santa Rosa California.  The total due on the note is approximately $4.7 million at June 30, 2009 with inventory advances totaling $2.9 million and a building loan of $1.8 million plus interest.

In lieu of modifying the note, we have signed a Settlement Agreement (Term Sheet) to transfer real property to Al Yousuf LLC to satisfy the obligation outstanding. The completion of the agreement is subject to an independent appraisal of the property and building by an outside party.  Our discussions are continuing, and we believe that we can resolve the matter with Al Yousuf LLC by the end of September of 2009. As of June 30, 2009, the Company had borrowed $2.9 million for inventory and operational funding. The total amounts due Al Yousuf per the settlement agreement including the building mortgage mentioned above is $4.7 million.

We have experienced the following transactions that strengthen our liquidity:

1)  On August 6, 2009, we completed a private placement with a new investor for a total of $5 million for 20 million shares of common stock. In conjunction with the transaction we also entered into a secured loan facility with the Investor pursuant to a Secured Convertible Promissory Note.  The Note provides for an aggregate principal amount of up to $10 million in advances to be made to the Company by the Investor prior to October 1, 2012.

2)  In June of 2009, we completed a private placement with one of our large shareholders (two of his controlled entities) for a total of $2 million for 8 million shares of common stock. One half or $1 million was received and the other $1 million is due throughout 2010 in accordance with the terms of the shareholder note receivable. In addition warrants were also issued to the investors which grant the holders the right to purchase up to 8,000,000 shares of the Registrant’s Common Stock at a price of $0.50 per share.

30

---

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

Not Applicable

 

Item 5.         Other Information

Not Applicable

 

Item 6.         Exhibits

2.1       Approved Second Amended Plan of Reorganization, dated as June 20, 2002. (5)

3.1       Amended and Restated Articles of Incorporation. (4)

3.2       Certificate of Determination of Series SA Convertible Preferred Stock. (14)

4.1       Form of common share purchase warrant of the Company held by Fusion Capital Fund II, L.P. (6)

4.2       Form of Series B common stock purchase warrant of the Company. (14)

4.3       Form of Series K common stock purchase warrant of the Company. (14)

10.1     Settlement Agreement between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders dated June 27, 2001. (3)

10.3     2004 Consultant Stock Plan. (7)

10.4     Convertible Promissory Note, dated April 26, 2004, issued to Banks Living Trust. (1)

10.5     Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP. (3)

 

10.6     Promissory Note $2,000,000 - Atocha Land LLC and ZAP. (3)

10.7     Warrant Agreement dated April 26, 2004, issued to Banks Living Trust.  (1)

10.8     Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC. (6)

10.9     Registration Rights Agreement between ZAP and Fusion Capital Fund II, LLC. (6)

10.10   Form of Common Stock Purchase Warrant between ZAP and Fusion Capital Fund II, LLC (6)

10.11   Agreement for Consulting Services with Evan Rapoport dated January 8, 2004. (1)

10.12   Asset Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of various autos (1)

10.13   Agreement for Private Placement Investment received dated April 14, 2004 with Phi-Nest Fund  LLP (1)

10.14   Consulting Agreement dated April 21, 2004 with Elexis International (1)

 

10.15   Consulting Agreement dated April 21, 2004 with Sunshine 511 Holdings (1)

 

10.16   Definitive Stock Agreement dated October 25, 2004 with Smart-Automobile, LLC (2)

31

---

10.17   Master Distribution Agreement between Apollo Energy Systems, Inc. and Voltage Vehicles Corporation, a subsidiary of ZAP. (8)

10.18   ZAP Floor Line and Dealer Development Agreement with Clean Air Motors, LLC for a $45 Million Floor Plan Line of Credit for Qualified ZAP Dealers (9)

10.19   Exclusive Purchase, License and Supply Agreement between Smart Automobile, LLC and ZAP. (10)

10.20   Amendment dated November 15, 2004 to previous consulting agreement with Sunshine Holdings 511 (14)

10.21   Secured Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP. (14)

10.22   ZAP assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest Fund, LLP as collateral on note payable (14)

10.23   Promissory note receivable dated January 6, 2005 for $1 million loan  due from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC) (14)

10.24   Security Agreement dated January 6, 2005 from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC) to secure loan above. (14)

10.25   Common Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage Fund LP (14)

10.26   Form of Common Stock Purchase Warrant between ZAP and Platinum Partners Value Arbitrage Fund LP (14)

10.27   Common Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP (14)

10.28   Form of Common Stock Purchase Warrant between ZAP and Lazarus Investment Partners LLP (14)

10.29   Termination of Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II,       LLC (11)

10.30   Financing Agreement between ZAP and Surge Capital II, LLC (12)

10.31   Exclusive Purchase, License, and Supply Agreement between ZAP and Obvio! Automotoveiculos S.P.E. Ltda (13)

10.36   Agreement dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile (15)

10.37   Amendment Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC (16)

10.38   Exclusive Distribution Agreement dated May 1, 2005, as supplemented by a letter dated June 9, 2006 (17)

10.39   ZAP Guarantee (18)

10.40   Shandong Jindalu Vehicle Co., Ltd. Guarantee (19)

10.41   Joint Venture Negotiations dated September 21, 2006 (20)

10.42   Security Purchase Agreement between ZAP and Certain Institutional Investors (21)

10.43   Purchase and Amendment Agreement between ZAP and Certain Institutional Investors (22)

10.44   Form of Convertible

10.45   Form of Warrant

10.46   Purchase order from the Electric Vehicle Company, LLC (“EVC”) for 10,000 of its Xebra 2007 model year electric vehicles

32

---

10.47   Distribution agreement this week with PML FlightLink Limited (PML) for the purchase of an advanced wheel motor and control system

10.48   Joint Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market and distribute electric a and hybrid vehicles for the worldwide passenger car, truck and bus

10.49   Form SB-2 Registration of Common Stock incorporated by reference to SEC filing on September 24, 2007 effective on October 2, 2007.

10.50   Settlement and Mutual Release Agreement with Gemini Master Fund,LTD and Gemini Strategies,LLC dated May 7, 2008.(22)

 

10.51   Note Purchase Agreement with Al Yousuf dated May 8, 2008. (22)

10.52   Promissory Note in favor of AlYousuf LLC,dated July 30, 2008 and Deed of Trust, Assignment of Leases, Rents and Security Agreement and Fixture Filing by ZAP in favor of Al Yousuf LLC, dated July 30, 2008.(23)

10.53   Subscription Agreement dated June 9, 2009 from The Banks Group, LLC. (24)

 

10.54   Subscription Agreement dated June 9, 2009 from The Banks Development Trust. (24)

 

10.55   Warrant to Purchase Common Stock dated June 9, 2009 issued to The Banks Group,LLC. (24) 

 

10.56   Warrant to Purchase Common Stock dated June 9, 2009 issued to The Banks  Development  Trust (24)

 

10.57   Employment Agreement with Gary Dodd President of ZAP (25)

10.58   Securities Purchase Agreement dated August 6, 2009 with Cathaya Capital L.P (26)

10.59   Secured Convertible Promissory Noted dated August 6, 2009 with Cathaya Capital L.P (26)

10.60   Security  Agreement dated August 6, 2009 with Cathaya Capital L.P (26)

10.61   Warrant (First) to Purchase  Common Stock dated August 6, 2009 with Cathaya Capital L.P (26)

10.62   Warrant (Second) to Purchase Common  Stock dated August 6, 2009 with Cathaya Capital L.P (26)

10.63   Registration Rights Agreement dated August 6, 2009 with Cathaya Capital L.P (26)

10.64   Voting Agreement dated August 6, 2009 with Cathaya Capital L.P (26)

10.65   Indemnification Agreement dated August 6, 2009 with Priscilla Lu (26)

10.66   Amendment to Prior Employment  Agreements dated August 6, 2009 with Steven Schneider (26)

 

21.1     List of subsidiaries. (3)

31.1     Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(22)

31.2     Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (22)

32.1     Certification of Principal Executive Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (22)

32.2     Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (22)

33

---

(1)     Previously filed as an exhibit to the Registrant’s Form 8-K for the quarter ended March 31, 2004 and incorporated by reference.

(2)     Previously filed as an exhibit to the Registrant’s Form 8-K of November 6, 2004 and incorporated by reference.

(3)     Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference.

(4)     Previously filed with Pre-effective Amendment Number 3 to Form SB-2 registration statement filed with the Securities and Exchange Commission on October 3, 2001.

(5)     Previously filed as an exhibit to the Registrant’s Form 8-K of October 20, 2002 and incorporated by reference.

(6)     Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K dated July 22, 2004 and incorporated by reference.

(7)     Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-117560) on July 22, 2004.

(8)     Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on October 6, 2004 and incorporated herein by reference.

(9)     Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10QSB for the period ended September 30, 2004 and incorporated herein by reference.

(10)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on April 21, 2004 and incorporated herein by reference.

(11)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on February 25, 2005 and incorporated herein by reference.

(12)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on September 16, 2005 and incorporated herein by reference.

(13)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on September 21, 2005 and incorporated herein by reference.

(14)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on July 20, 2006 and incorporated herein by reference.

(15)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on September 6, 2006 and incorporated herein by reference.

(16)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.

(17)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.

(18)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.

(19)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference.

(20)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on December 11, 2006 and incorporated herein by reference.

(21)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on February 26, 2007and incorporated herein by reference.

(22)   Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10Q for the period ended June 30, 2008 and incorporated herein by reference.

(23)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on August 5, 2008and incorporated herein by reference.

(24)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on June 11, 2009 and incorporated herein by reference.

(25)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on June 18, 2009 and incorporated herein by reference.

(26)   Previously filed as an exhibit to the Registrant’s Current Report on Form 8K filed with the Securities and Exchange Commission on  August 10, 2009 and incorporated herein by reference.

 

 

 

 

 

 

 

 

 

34

---

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.

 

 

	ZAP
Dated:   August 13, 2009	By:	/s/ Steven Schneider
		Name:   Steven Schneider
		Title:     Chief Executive Officer       (Principal Executive Officer)

 

Dated:   August 13, 2009	By:	/s/ William Hartman
		Name:   William Hartman
		Title:     Chief Financial Officer               (Principal Financial and Accounting Officer)

 

35

---