NOTE 2 – LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2016, the Company’s current liabilities exceeded the current assets by approximately $70.9 million and its equity deficiency was $23.0 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 unaudited 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.

Jonway Auto intends to utilize its existing credit lines (see Note 7) 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 September 30, 2017 in the event that the Company requires additional liquidity. In addition, China Electric Vehicle Corporation (“CEVC”) has renewed the convertible note with an extension through December 31, 2016 (see Note 8). The Company does not intend to extend the term of this CEVC convertible note when it matures on December 31, 2016, and will most likely repay CEVC with Jonway Auto shares as per the terms and condition originally stipulated in the Convertible Note agreement. With the conversion of the CEVC Convertible Note, the additional equity investment into Jonway Auto would reduce ZAP’s majority equity ownership in Jonway Auto. As a result, the qualification for ZAP to consolidate Jonway Auto would have to be reassessed based on ZAP’s financial control, board and management control of Jonway Auto.

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 short and 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.