NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2016, the Company’s current liabilities exceeded the current assets by approximately $72.4 million and its equity deficiency was $15.7 million, which raise substantial doubt about the Company’s ability to continue as a going concern. In addition, the Company has recurring net losses. Given the Company’s expected capital expenditure in the foreseeable future, the Company has comprehensively considered its available sources of funds as follows:

Financial support and credit guarantee from related parties; and

Other available sources of financing from domestic banks and other financial institutions given its credit history.

The Company does not currently have sufficient cash or commitments for financing to sustain its operations for the next twelve months. The Company plans to substantially increase its cash flows from operations and revenue derived from its products. If the Company’s revenues do not reach the level anticipated in its plan and the Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all, the Company may be unable to implement its current plans for expansion, repay its debt obligations or respond to competitive pressures, any of which would have a material adverse effect on its business, prospects, financial condition and results of operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In assessing the Company’s liquidity, the Company monitors and analyzes its cash on-hand, and its operating and capital expenditure commitments. The Company’s principal liquidity needs are to meet its working capital requirements, operating expenses and capital expenditure obligations.

In June 2015, the Company was approved for up to an aggregate of $6.9 million of a credit line from China Everbright Bank with 50% restricted cash deposited and credit exposure of $3.5 million The Company renewed the agreement in June 2016. The renewed agreement approved for up to an aggregated of $6.0 million of a credit line with 50% restricted cash deposited and credit exposure of $3.0 million. The renewed credit line expires in June 2017. The credit line is secured by a land use right and a building with a total carrying amount of $2.1 million. Three shareholders and the Chief Executive Officer (“CEO”) Alex Wang also personally guaranteed on this credit line. As of June 30, 2016, $6 million was drawn down as notes payable from Everbright Bank. The amount of restricted cash deposited with the bank was $3.0 million. As of June 30, 2016, the renewed credit line has been fully utilized.

In March 2014, the Company has obtained up to an aggregate of $15.1 million of credit line with the credit exposure of $5.6 million from CITIC Sanmen Branch through Jonway Auto. The credit line was extended for one more year and expires on November 2016. The credit line is secured by land and building owned by Jonway Auto and guaranteed by the related party – Jonway Group. The shareholder and CEO Alex Wang also personally guaranteed this credit line. As of June 30, 2016, the Company borrowed aggregated $5.6 million loans with various due dates in March 25, 2017 to April 26, 2017 from CITIC Sanmen Branch. The loans carried at annual interests of 6.0%. The Company has also drawn down $7.0 million in the form of notes payable as of June 30, 2016. The Company deposited $7.0 million restricted cash as collateral for these notes payable. These notes are due from July 2016 to September, 2016. As of June 30, 2016, the line of credit has been fully utilized.

In March 2014, the Company was approved up to an aggregate of $5.0 million of a credit line from ICBC. This credit line was secured by land and buildings owned by Jonway Auto and guaranteed by related parties. The credit line expires on March 2017. As of June 30, 2016, the total outstanding loan under this credit line was $4.5 million. The annual interest rates are from 4.36% to 6.66%. The loans are due in various dates from July 24, 2016 to June 22, 2017. As of June 30, 2016, the unused line of credit was approximately $0.5 million.

Jonway Auto intends to utilize the above 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. Also the Company’s principal shareholder, Jonway Group, has agreed to provide the necessary support to meet the Company’s financial obligations through December 31, 2016 in the event that the Company requires additional liquidity. In addition, China Electric Vehicle Corporation (“CEVC”), a related party, has renewed the convertible note with an extension through December 31, 2016 (see Note 8).

The Company will require additional capital to expand its current operations. In particular, the Company requires additional capital to continue development of its electric vehicle business, to continue strengthening its dealer network and after-sale service centers and expanding its market initiatives. The Company also requires financing the investment for the continued roll-out of new products and to add qualified sales and professional staff to execute on its business plan and pursue its efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias, the electric and other fuel efficient vehicles.

The Company intends to fund its long term liquidity needs related to operations through the incurrence of indebtedness, equity financing or a combination of both. The Company’s ability to fund these needs will depend on its future performance, which will be subject in part to general economic, financial, regulatory and other factors beyond its control, including trends in its industry and technological developments.

Jonway Group has continued to provide support in financing the capital requirements of Jonway Auto. For the year ended December 31, 2015, Alex Wang, the CEO and Jonway Group injected $5.4 million to the Company and plan to inject additional capital to support the critical on-going manufacturing operations to meet the delivery of the EV minivans and SUV orders in the pipeline.