Related Parties

9 Months Ended

Sep. 30, 2011

Related Parties [Abstract]

Related Parties

 NOTE 11 – RELATED PARTIES

Sale of Stock to a Party Related to ZAP's CO-CEO and Director

As previously disclosed in our 10-Q filed for the period ended March 31, 2011, we entered into private placement subscription agreements with Luo Hua Liang, the brother-in-law of Alex Wang, the Co-CEO and director of ZAP. As previously disclosed in our 10-Q filed for the period ended March 31, 2011, we entered into private placement subscription agreements with Mr. Luo for the purchase of ZAP's 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 The private placement subscription agreements were superseded and terminated by a stock purchase agreement with Mr. Luo in August 2011. Pursuant to the stock purchase agreement, Mr. Luo will purchase ZAP's 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. We anticipate an additional closing for approximately $203,000.

Rental Agreements

The Company rents office space, land and warehouse space from Mr. Steven Schneider, its CEO and a major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense was approximately $46,200 and $68,600 for the nine months ended September 30, 2011 and 2010.

8% Senior Convertible Debt Due to China Electric Vehicle Corporation

On January 12, 2011, ZAP 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.  Priscilla Lu, the chairman of the board of directors of ZAP, is also a general 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, subject to adjustments as set forth therein, as amended, (ii) the Company issued to CEVC a warrant (the "Warrant") exercisable for two years for the purchase up to 20,000,000 shares of the Company's Common Stock at $0.50 per share, subject to adjustments as set forth therein, 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, (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, 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 matures on February 12, 2012, accrues interest at a rate per annum of 8%, and 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. Effective March 31, 2011, the Company and ZAP entered into an amendment to the Note and Warrant to remove certain price-based anti-dilution features.

Since the value of the common stock into which the above-mentioned note is convertedis greater than the proceeds for such issuance, a beneficial conversion feature totaling $19 million was recorded and is amortized over 13 months. We amortized $4.4 million and $12.5 million of the beneficial conversion feature in the three and nine months ended September 30, 2011, respectively. In addition, the Company recorded $1 million in accrued interest on the convertible note of $19 million, at 8% per annum through the first nine months ended September 30, 2011.

Management Agreement with Cathaya Capital, L.P.

As previously disclosed in the Company's Current Report on Form 8-K filed on August 10, 2009, on August 6, 2009, Cathaya 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 two warrants 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.  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 and the management fee was payable in cash or in common stock of ZAP at $0.50 per share.  Five million shares were issued to Cathaya Capital L.P. on behalf of Cathaya Management Co. Ltd. in payment of this fee.  As of September 30, 2011, ZAP has accrued $1.87 million for management fees due to Cathaya.

Joint Venture ZAP Hangzhou

On December 11, 2009, the Company entered into a Joint Venture Agreement to establish a new US-China company incorporated as ZAP Hangzhou to design and manufacture electric vehicle and infrastructure technology with Holley Group, the parent company of a global supplier of electric power meters and Better World.  Priscilla Lu, Ph.D. who is the current Chairman of the Board of ZAP is also a director and 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 each own 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.

We account for 37.5% interest in the ZAP Hangzhou Joint Venture by the equity method of accounting.  For the three and nine months ended September 30, 2011 and 2010, the joint venture incurred an operating losses of $170,445 and $599,675, of which $63,917 and $224,878 are our share.

Jonway Agreement with Zhejiang UFO

Based on a contract by and among the 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 vehicle
Vehicles from 3,001 to 5,000	$30 per vehicle
Vehicles over 5,000	$22 per vehicle

Zhejiang UFO is considered a related party because the Wang Family, who are shareholders of Jonway, have certain non-controlling equity interests in Zhejiang UFO.  The balance due to Zhejiang UFO at September 30, 2011 is $721,000. The parties have agreed to defer payment without interest indefinitely.

               Transactions with Jonway Group

Jonway Group is considered as a related party as Wang Family, one of the shareholders of the Company, has controlling interests in Jonway Group. Jonway Group supplies some of plastics spare parts to Jonway and gave guarantees on Jonway short term bank loans from China-based banks.