UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)
[x]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended April 30, 2013
or
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                      to

Commission file number 000-33391

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Terra Inventions Corp. (Formerly Li-Ion Motors Corp.)
(Name of Registrant as Specified in Its Charter)

Nevada (State or Other Jurisdiction of Incorporation or Organization)		88-0490890 (I.R.S. Employer Identification No.)
4894 Lone Mountain #168, Las Vegas, Nevada (Address of Principal Executive Offices)		89130 (Zip Code)
(702) 425-4289 (Issuer’s Telephone Number, Including Area Code)

 

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par value $0.01 per share

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Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.  [X] Yes   [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File 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). [X] Yes   [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. (Check One):

 

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

(Do not check if a smaller reporting company)

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

[ ] Yes [X] No

On June 14, 2013, there were 39,945,517 shares of common stock outstanding.

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TABLE OF CONTENTS
		Page No.
PART I. FINANCIAL INFORMATION		2
ITEM I – Unaudited Financial Statements		2
Balance Sheets as of April 30, 2013 and July 31, 2012 (Unaudited)		3
Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2013 and 2012 (Unaudited)		4
Consolidated Statement of Comprehensive Income (Loss) for the Three and Nine Months Ended April 30, 2013 and 2012 (Unaudited)		5
Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2013 and 2012 (Unaudited)		6
Statement of Stockholders Deficiency (Unaudited)		7
Notes to Unaudited Consolidated Financial Statements		8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.		17
ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk		21
ITEM 4– Controls and Procedures.		21
PART II. OTHER INFORMATION		22
ITEM 6 - Exhibits		23

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that the following consolidated financial statements be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended July 31, 2012. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. The results of operation for the three and nine months ended April 30, 2013 and 2012, are not necessarily indicative of the results for the entire fiscal year or for any other period.

 

 

Terra Inventions Corp.
(Formerly Li-ion Motors Corp.)
Consolidated Balance Sheets
(unaudited)
			April 30,				July 31,
			2013				2012
Assets
Current assets:
Cash and cash equivalents		$	22			$	64
Accounts receivable, net of allowance for doubtful accounts of $0 and $561,237, respectively			—				—
Notes receivable, net of allowance for doubtful accounts of $0 and $2,458,602, respectively			—				—
Inventories			1,500				1,500
Building and building improvements, net			—				1,049,146
Other current assets			—				3,190
Total current assets			1,522				1,053,900
Property and equipment, net			3,880				5,785
Deferred patent and trademark costs			38,063				37,413
Total assets		$	43,465			$	1,097,098
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable and accrued expenses		$	1,559,012			$	1,538,060
Current portion of long-term debt			418,480				1,460,189
Customer deposits			102,188				102,188
Total current liabilities			2,079,680				3,100,437
Long-term liabilities:
Long-term debt, less current portion			250,000				250,879
Total liabilities			2,329,680				3,351,316
Commitments and contingencies			—				—
Stockholders' deficiency
Preferred stock, $.001 par value, 5,000,000 shares authorized, 0 issued and outstanding			—				—
Common stock, $.001 par value, 40,000,000 shares authorized, 39,938,166 and 20,642,347 issued and outstanding at April 30, 2013 and July 31, 2012, respectively.			39,938				20,642
Additional paid-in capital			62,905,729				62,625,225
Accumulated deficit			(65,223,168	)			(64,892,123	)
Accumulated other comprehensive loss			(8,714	)			(7,962	)
Stockholders' deficiency attributable to Terra Inventions Corp.			(2,286,215	)			(2,254,218	)
Non-controlling interests			—				—
Stockholders' deficiency			(2,286,215	)			(2,254,218	)
Total stockholders' deficiency			(2,286,215	)			(2,254,218	)
Total liabilities and stockholders' deficiency		$	43,465			$	1,097,098
See accompanying notes to unaudited consolidated financial statements

Terra Inventions Corp.
(Formerly Li-ion Motors Corp.)
Consolidated Statements of Operations
(unaudited)
		For the Three Months Ended								For the Nine Months Ended
		April 30,								April 30,
		2013				2012				2013				2012
Revenue:
Sales		$	—			$	(217,000	)		$	—			$	259,696
License agreement revenue			—				168,750				—				506,250
Total revenue			—				(48,250	)			—				765,946
Costs and expenses:
Cost of sales			—				(36,871	)			—				221,176
General and administrative			64,710				82,334				233,984				2,702,993
(Gain) loss on disposal of property and equipment			—				128,702				5,552				133,390
Research and development			—				73,986				1,297				485,637
Total costs and expenses			64,710				248,151				240,833				3,543,196
Loss from operations			(64,710	)			(296,401	)			(240,833	)			(2,777,250	)
Other (expenses) income:
Interest (expense)			(18,443	)			(34,220	)			(59,551	)			(108,062	)
Loss on extinguishment of debt			—				—				(119,140	)			—
Other income			—				89,602				88,479				240,645
Loss before provision for (benefit from) income taxes			(83,153	)			(241,019	)			(331,045	)			(2,644,667	)
Provision for (benefit from) income taxes			—				—				—				—
Net loss			(83,153	)			(241,019	)			(331,045	)			(2,644,667	)
Less: net loss attributable to non-controlling interest			—				—				—				—
Net loss attributable to Terra Inventions Corp.		$	(83,153	)		$	(241,019	)		$	(331,045	)		$	(2,644,667	)
Loss per share - basic and diluted:
Loss per common share attributable to Terra Inventions Corp. common shareholders		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.13	)
Weighted average number of shares outstanding - basic and diluted			39,938,166				20,642,347				27,270,403				20,642,347
See accompanying notes to unaudited consolidated financial statements

 

Terra Inventions Corp.
(Formerly Li-ion Motors Corp.)
Consolidated Statement of Comprehensive Loss
(unaudited)
		For the Three Months Ended								For the Nine Months Ended
		April 30,								April 30,
		2013				2012				2013				2012
Net loss		$	(83,153	)		$	(241,019	)		$	(331,045	)		$	(2,644,667	)
Other comprehensive income
Currency translation adjustment			(410	)			(118	)			(752	)			393
Comprehensive loss			(83,563	)			(241,137	)			(331,797	)			(2,644,274	)
Comprehensive loss attributable to noncontrolling interest			—				—				—				—
Comprehensive loss attributable to Terra Inventions Corp		$	(83,563	)		$	(241,137	)		$	(331,797	)		$	(2,644,274	)
See accompanying notes to unaudited consolidated financial statements

 

Terra Inventions Corp.
(Formerly Li-ion Motors Corp.)
Consolidated Statements of Cash Flows
(unaudited)
		For the Nine Months Ended
		April 30,
		2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(331,045	)		$	(2,644,667	)
Adjustments to reconcile net earnings (loss) to net cash utilized by operating activities
Depreciation			1,905				41,816
Loss on disposal of property and equipment, net			5,552				133,390
Provision for doubtful accounts			—				2,071,639
Licensing fees			—				(398,577	)
Non-cash sale of property and equipment			—				—
Non-cash sale of inventories			—				(255,000	)
Non-cash sale of electric vehicles			—
Loss on extinguishment of debt			119,140				—
Increase (decrease) in cash flows from changes in operating assets and liabilities
Inventories			—				135,611
Prepaid expenses and other current assets			3,190				140,236
Deferred patent and trademark costs			(650	)			(1,405	)
Bank overdraft			—				—
Accounts payable and accrued expenses			92,210				517,141
Customer deposits			—				(99	)
Deferred revenue			—				(232,673	)
Net cash used in operating activities			(109,698	)			(492,588	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment			—				—
Net cash used in investing activities			—				—
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on notes receivable			—				(71,364	)
Payments received on notes receivable			—				22,991
Proceeds from issuance of debt			110,408				575,555
Payments on debt			—				(39,978	)
Net cash provided by financing activities			110,408				487,204
Effect of exchange rate changes on cash and cash equivalents			(752	)			393
CHANGE IN CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents			(42	)			(4,991	)
Cash and cash equivalents at beginning of period			64				5,118
Cash and cash equivalents at end of period		$	22			$	127
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest		$	—			$	18,008
Income taxes		$	—			$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Assignment of note receivable with Clean Enviro Tech Corp. to Frontline Asset Management debt		$	70,860			$	112,500
Shares issued for debt		$	299,800			$	—
Property and equipment, inventories and electric vehicles exchanged for payment on debt		$	—			$	259,415
Assignment of debt from Frontline Asset Management to Cameo Properties, LLC		$	—			$	250,000
See accompanying notes to unaudited consolidated financial statements

Terra Inventions Corp.
(Formerly Li-ion Motors Corp.)
Consolidated Statement of Stockholders' Equity (Deficiency)
For the Periods Ended As Noted
(unaudited)
			Number of Common Shares				Common Shares $0.01 Par Value				Additional Paid in Capital				Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Treasury Stock at Cost				Non-Controlling Interest				Total
Balance - August 1, 2011			642,347			$	642			$	62,645,225			$	(62,580,108	)		$	(9,197	)		$	(20,000	)		$	—			$	36,562
Common stock issued as collateral on loan released to lender			20,000,000				20,000				(20,000	)			—				—				20,000				—				20,000
Foreign currency translation			—				—				—				—				1,235				—				—				1,235
Net earnings			—				—				—				(2,312,015	)			—				—				—				(2,312,015	)
Balance - July 31, 2012			20,642,347				20,642				62,625,225				(64,892,123	)			(7,962	)			—				—				(2,254,218	)
Common stock issued on conversion of debt			19,295,819				19,296				280,504				—				—				—				—				299,800
Foreign currency translation			—				—				—				—				(752	)			—				—				(752	)
Net earnings			—				—				—				(331,045	)			—				—				—				(331,045	)
Balance - April 30, 2013			39,938,166			$	39,938			$	62,905,729			$	(65,223,168	)		$	(8,714	)		$	—			$	—			$	(2,286,215	)
See accompanying notes to unaudited consolidated financial statements

Note 1. Financial Statement Presentation

 

The balance sheet as of April 30, 2013 and the statement of operations, stockholders’ deficiency and the cash flows for the periods presented have been prepared by Terra Inventions Corp. and are unaudited. The financial statements are prepared in accordance with the requirements for unaudited interim periods and consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position, results of operations, change in stockholders’ deficiency and cash flows for the periods presented have been made. The information for the balance sheet as of July 31, 2012, are derived from audited financial statements of the Company.

 

History and Nature of Business

 

Li-ion Motors Corp. was incorporated under the laws of the State of Nevada on April 12, 2000. On November 30, 2012, Li-ion Motors merged with its wholly owned subsidiary, Terra Inventions, Corp. (the “Company” or “Terra”) and as a result of the merger the name of the Company was changed. The name Terra was effective for trading purposes on December 21, 2012. The Company is currently pursuing the development and marketing of electric powered vehicles and products based on the advanced lithium battery technology it has developed.

 

Effective April 15, 2008, the Company entered into a License Agreement (“License Agreement”) with Sky Power Solutions, now Clean Enviro Tech Corp. (“CET”), CET providing for their license to CET of their patent applications and technologies for rechargeable lithium ion batteries for electric vehicles and other applications (“Licensed Products”). Under the License Agreement, the Company has the right to purchase their requirements of lithium ion batteries from CET, and their requirements of lithium ion batteries shall be supplied by CET in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of CET. The Company’s cost for lithium ion batteries purchased from CET shall be CET’s actual manufacturing costs for such batteries for the fiscal quarter of CET in which the Company’s purchase takes place. On May 25, 2010, the license agreement was amended to reflect Clean Enviro Tech’s territory would only be the United States and US possessions and territories and we can license to other companies in other parts of the world. The Company issued a license to a firm for the rights in Canada in 2010.

 

Under the terms of the license agreement, CET had agreed to invest a minimum of $1,500,000 in each of the following two years(2009 and 2010) in development of the technology for the Licensed Products. To date, CET has not met the minimum requirements in the development of technology, and therefore, is not in compliance with its obligations under this covenant of the license agreement.  The Company has advised CET that it will not give notice of default against them for their failure to comply with this covenant over the term of the License Agreement.

 

The Company entered into a ten year license agreement with Lithium Electric Vehicle Corp. (“LEVC”) on May 28, 2010, providing for the Company to license to LEVC certain of the Company’s patent applications and technologies for electric vehicles and other applications. The purpose of the license was to expand sales of the Company’s current line of products by the manufacture and sale of such products in Canada, which is LEVC’s exclusive territory under the license agreement.

 

The license agreement consisted of an annual fee of $500,000 for ten years and an additional $1,750,000 based on a valuation report prepared by an independent third party.  LEVC was required to pay $1 million of the license fee during year one for the initial two years and $500,000 each additional year.  The Company had received $732,666 from LEVC with a balance due of $267,334 as of July 31, 2012.  The Company reflected the delinquent amount due from LEVC in its accounts receivable and had established a reserve for doubtful accounts for the entire amount. In addition, the note of $1,750,000 had been reflected on the books of the Company. Due to LEVC having no assets to secure the note, the Company recorded a reserve for doubtful accounts for the entire note amount of $1,750,000.

 

On February 19, 2013, the Company and LEVC amended the License Agreement and both parties have agreed that; (1) Terra Inventions will own 49% of LEVC in exchange for the balance of any funds due to Terra in connection with the license agreement; (2) LEVC intends to further develop Terra’s technology in Canada. In exchange for this agreement Terra will have full access to these developments made by LEVC for Terra’s use, including further development in the United States; (3) LEVC will retain ownership of further developments only; (4) Terra and LEVC also agree that LEVC will be doing R&D and develop free energy technology and wind turbine technology to achieve higher efficiency for electric vehicles. By Terra providing the platform, technology and BMS system for electric vehicles to LEVC, LEVC will also allow Terra to further develop these technologies in the United States; and (5) both parties understand that LEVC will own these technologies accept for rights hereby granted to Terra for the USA.

 

During the three months ended April 30, 2013, the Company reversed the receivable for the license fees of $267,334 and the note receivable of $1,750,000 by offsetting the reserve for doubtful accounts. These transactions did not have an effect on the Company’s financials. See Note 3.

Basis of Presentation

 

Going Concern

 

The Company’s financial statements for the nine months ended April 30, 2013, have been prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business.  The Company did not have any cash revenue from vehicle sales in the nine months ended April 30, 2013.  Management recognized that the Company’s continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and revenue to cover expenses, as the Company continues to incur losses from operations.

 

Since its incorporation, the Company financed its operations through advances and loans from its controlling shareholders.  The Company expects to finance operations through the sale of equity or other investments as well as continued advances from shareholders for the foreseeable future, as the Company does not expect to receive significant revenue from vehicle sales until the required certifications have been received.  There is no guarantee that the Company will be successful in arranging financing on acceptable terms.

 

The Company’s facility in Mooresville, North Carolina was financed through Bayview Loan Servicing, LLC (“Bayview”). Frontline Asset Management, Inc. (“Frontline”), had a second lien on the property. Li-ion became delinquent with the mortgage payments, and, following a prior foreclosure filing and new agreement as to payments under the mortgage, on July 12, 2012, Bayview refiled a notice of hearing on foreclosure on its deed of trust and security agreement for a hearing on August 21, 2012, the outstanding amount of the loan at July 31, 2012 being $946,279.   A similar notice of foreclosure pursuant to the Frontline deed of trust was filed by the Trustee with the same court on July 25, 2012, noticing a hearing for August 22, 2012, the amended notice of default in the amount of $660,546 having been given on July 23, 2012. The Trustee for Frontline also filed on July 25, 2012, a notice of foreclosure and sale to take place on August 22, 2012.  The Trustee under the Bayview deed of trust on August 21, 2012, filed its notice of foreclosure and sale to take place on September 18, 2012, of the real and personal property securing the deed of trust.   On September 14, 2012, the sale of the property pursuant to the Frontline August 22, 2012 foreclosure and sale was completed, and Frontline assigned its rights to its foreclosure bid to A&S Holdings Inc., a related holding company, subject to the rights of Bayview, as the holder of the first mortgage on the property.

 

As of the filing of this Report, the Company does not have any substantive plan on where its facilities will be or how it will continue the manufacturing process of its electric vehicles.

 

The Company’s ability to raise additional capital is affected by trends and uncertainties beyond its control.  The Company does not currently have any arrangements for financing and it may not be able to find such financing if required.  Obtaining additional financing would be subject to a number of factors, including investor sentiment.  Market factors may make the timing, amount, terms or conditions of additional financing unavailable to it.  These uncertainties raise substantial doubt about the ability of the Company to continue as a going concern.  The accompanying financial statements do not include adjustments that might result from the outcome of these uncertainties. The Company has reduced the workforce to a few consultants, even if financing is obtained qualified engineers and technicians that would need to be hired may not be readily available.

 

Common Stock

 

On December 13, 2011, the Board of Directors unanimously approved an amendment to the Company’s Articles of Incorporation to decrease the authorized number of shares of common stock from 300 million shares, par value $.001 per share, to 60 million shares, par value $.001 per share.  The Company filed the amendment with the Secretary of State of Nevada on December 14, 2011.

 

Effective January 26, 2012, the Financial Industry Regulatory Authority (“FINRA”) approved a one-for-five reverse split of the common stock.  

 

Our Board of Directors unanimously approved an amendment to our Articles of Incorporation to increase the authorized number of shares of common stock from 60,000,000 shares, par value $.001 per share, to 400,000,000 shares, par value $.001 per share, on July 20, 2012. On the same date we received the written consent from shareholders of our company holding a majority (75.69%) of the outstanding shares of our common stock. We filed the amendment with the Secretary of State of Nevada on August 30, 2012, and the amendment was effective on that date.

 Our Board of Directors unanimously approved an amendment to our Articles of Incorporation to decrease the authorized number of shares of common stock from 400,000,000 shares, par value $.001 per share, to 40,000,000 shares, par value $.001 per share, on November 29, 2012. On the same date we received the written consent from shareholders of our company holding a majority (75.69%) of the outstanding shares of our common stock. We filed the amendment with the Secretary of State of Nevada on November 29, 2012, and the amendment was effective on that date.

 

Effective December 31, 2012, FINRA approved a one-for-ten reverse split of the common stock. All share and per share amounts have been restated to reflect the one-for-ten reverse stock split.

 

All shares and per share information has been revised to give retroactive effect to the reverse stock splits.

 

Note 2. Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are summarized in Note 1 of the Company’s Annual Report on Form 10-K for the year ended July 31, 2012. There were no significant changes to these accounting policies during the three months ended April 30, 2013 and the Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

 

Note 3. Notes Receivable

 

As of July 31, 2012, the Company had a note receivable balance with CET of $708,602. On October 2, 2012 the Company sold its interest in the receivable to Frontline Asset Management (“Frontline”) for $0.10 on the dollar which reduced the Company’s debt with Frontline to $70,786. The entire note receivable had previously been reserved for in its entirety; therefore, we had a $70,786 credit in our bad debt expense which is included in the general and administrative expenses on the Company’s consolidated statement of operations for the nine months ended April 30, 2013.

 

During the nine months ended April 30, 2013, the Company advanced $0 and $0 was repaid by CET. During the nine months ended April 30, 2012 the Company advanced CET $71,364 of which $22,991was repaid in payments through a reimbursement for a leased employee and $112,500 through an assignment of debt to Frontline. As of April 30, 2013 and July 31, 2012, an allowance for doubtful accounts in the amount of $0 and $708,602, respectively, was recorded against the note receivable, reducing the amount to $0.

 

On November 26, 2010, LEVC issued the Company a Secured Promissory Note (“LEVC Note”) in the amount of $1,750,000 in accordance with the license agreement. The LEVC Note bore an interest of ten (10%) percent per annum on the outstanding amount of the loan and accrued for the first 12 months during which the outstanding amount, or any portion thereof is outstanding. Commencing for the first month following the first year and for all subsequent months during which any portion of the amount is outstanding, LEVC would monthly interest payments in arrears on the first day of the month following the month for which the interest payment is made on the outstanding amount of the LEVC Note, including any accrued unpaid interest thereon. The outstanding amount and any accrued but unpaid interest thereon would be repaid in full by LEVC within sixty (60) days of receiving written demand for repayment by the Company. LEVC would have the right to repay the LEVC Note in whole or in part, at any time without notice, bonus or penalty. The LEVC Note is secured by LEVC’s (1) inventory; (2) equipment, other than inventory; (3) receivables; and (4) all other property, including leasehold interests, chattel paper, documents of title, securities, instruments, money and intangibles. In addition, the LEVC Note included a conversion right in which the Company could convert the LEVC Note if LEVC began trading on the TSX Venture Exchange. The conversion clause stipulated that the LEVC Note would be converted at a price the greater of fifteen cents ($0.15) per share or ninety percent (90%) of the average ten (10) day trading price and if the conversion of the LEVC Note resulted in a fractional share, LEVC would, in lieu of issuing such fractional share, pay to the Company an amount equal to the conversion value of the fractional share. The Company had recorded a reserve for doubtful accounts for the entire note amount of $1,750,000.

 

 The Company recognized interest income of $88,645 and $88,219, none of which has been received, in accordance to the terms of the LEVC Note for the nine months ended April 30, 2013 and April 30, 2012, respectively. The Company had reflected the amount due from LEVC in its accounts receivable and had established a reserve for doubtful accounts for the entire amount and is included in general and administrative expenses on the Company’s consolidated statement of operations.

Due to the execution of the amended License Agreement on February 19, 2013 with LEVC, the Company reversed the accounts and note receivables of $382,123 and $1,750,000, respectively, by offsetting it with the established reserve for doubtful accounts. This a zero effect on the Company’s Consolidated Balance Sheet.

 

Note 4. Property and Equipment

 

Property and equipment consist of:

		April 30,				July 31,
		2013				2012
Building and Improvements		$	—			$	552,276
Equipment and Furniture and Fixtures			4,827				4,827
Vehicles			66,429				66,429
Land			—				700,000
			71,256				1,323,532
Less Accumulated Depreciation			(67,376	)			(268,601	)
Less Current Portion			—				(1,049,146	)
Net Property and Equipment		$	3,880			$	5,785

 

Depreciation expense for the three months ended April 30, 2013 and 2012, was $628 and $10,100, respectively. Depreciation expense for the nine months ended April 30, 2013 and 2012, was $1,905 and $41,816, respectively, and is included in general and administrative expenses on the Company’s consolidated statement of operations.

 

On September 14, 2012, the sale of the property pursuant to the Frontline August 22, 2012 foreclosure and sale was completed. Due to the foreclosure of the property and the loss of rights to the facility, the Company wrote-off the building and its improvements, which caused a loss of $5,552 and is reflected on the Company’s consolidated statement of operations.

 

Note 5. Accounts Payable and Accrued Expenses

 

Accounts payable, accrued expenses and other current liabilities at April 30, 2013 and July 31, 2012 consisted of:

 

		April 30,				July 31,
		2013				2012
Accounts Payable		$	316,672			$	291,156
Accounts Payable - Related Parties			13,177				4,682
Wages, Paid Leave and Payroll Related Taxes			1,022,492				948,410
Accrued Interest			52,871				120,067
Legal Settlements			152,976				152,976
Other			824				20,769
Total		$	1,559,012			$	1,538,060

 

Accounts payable due to related parties are reimbursable general and administrative expenses paid by the Company’s President.

 

 

 

Note 6. Long-Term Debt

 

Long-term debt consists of:

 

		April 30,				July 31,
		2013				2012
5% Note payable to Bayview Loan Servicing, LLC, payable in monthly installments of $5,433 including interest, collateralized by real property.  Due to foreclosure of the building, the entire balance has been eliminated.  (1)		$	—			$	946,279
12% Note  payable to Frontline Asset Management, payable in monthly installments of interest only, due in full on March 1, 2014 (2)			412,183				508,492
48.956% Note payable to Amicus Funding Group, LLC, payable in monthly installments of approximately $467, collateralized by real property due in full on September 1, 2013 (3)			6,297				6,297
10% Note payable to Cameo Properties, LLC payable in monthly installments of interest only, due in full on December 27, 2014 (4)			250,000				250,000
			668,480				1,711,068
Less Current Portion			(418,480	)			(1,460,189	)
		$	250,000			$	250,879

 

Principal maturities for long-term debt are as follows for the third quarters ended April 30:

 

	2013			$	418,480
	2014				250,000
	2015				—
	2016				—
	2017				—
	Thereafter				—
				$	668,480

 

(1) In November 2007, the Company refinanced the first mortgage loan on its Mooresville, North Carolina building (the “property”) with Bayview. On July 25, 2012, Frontline, the junior lien holder noticed a foreclosure hearing and sale to take place on August 22, 2012, and the sale of the property to an assignee of Frontline, which was the only bidder, was completed on September 14, 2012.  The Company debt to Bayview was reduced to zero upon the completion of the sale.

 

(2) On February 26, 2010, the Company entered into a loan agreement with Frontline. The loan provides for payments to the Company of $2,000,000 with interest at a fixed annual rate of 12%.  On March 1, 2012, an Addendum to the original Promissory Note, dated February 26, 2010, was entered into which amended the term of the note to  provide for interest only payments, due on the last day of every month until maturity date March 1, 2014, when all principal and accrued interest shall be due and payable.  On April 11, 2011, Frontline assigned $850,279 of its debt to Windsor Capital, Inc. (“Windsor”). On April 19, 2011, Frontline partially assigned $437,309 to Kisumu S.A. (“Kisumu”) and Kisumu immediately converted the assigned note for 1,041,212 shares of Common fStock at a fair value price of $0.42 per share.  On April 19, 2011, Frontline assigned $420,000 to Eurolink Corporation (“Eurolink”) and Eurolink immediately converted the assigned note for 1,000,000 shares of Common Stock at a fair value price of $0.42 per share.  On December 27, 2011, Frontline purchased two electric vehicles for $255,000.  On the same day Frontline assigned $250,000 to Cameo Properties, LLC.  On April 26, 2012, the Company assigned $112,500 of its note receivable with CET to Frontline which reduced the balance due to Frontline by $112,500. On September 13, 2012, Frontline converted $39,000 of accrued interest for 1,300,000 shares of Common Stock at a discounted value price of $0.30 per share. On October 2, 2012, Frontline purchased our receivable with CET at $0.10 on the dollar for $70,786, which reduced the Company’s accrued interest by $43,726 and debt by $27,060. On October 2, 2012, Frontline converted $12,180 for 1,450,000 shares of Common Stock at a discounted value price of $0.0084 per share. On November 13, 2012, Frontline partially assigned $17,280 to Kisumu and Kisumu immediately converted the assigned note for 3,200,000 shares of Common Stock at a discounted value price of $0.0054 per share. On December 26, 2012, Frontline partially assigned $112,200 to Kisumu and Kisumu converted the assigned note for 18,700,000 shares of Common Stock at a discounted price of $0.006 per share.

 

Loans under the Frontline loan agreement are secured by a junior deed of trust on the Company’s  property located at 158 Rolling Hill Road, Mooresville, North Carolina.  On August 22, 2012, the foreclosure by Frontline of the property took place, pursuant to a notice of foreclosure and sale dated July 25, 2012, and the foreclosure sale to an assignee of Frontline, which was the only bidder, was completed on September 14, 2012.  Frontline received $50,000 upon the sale of the foreclosed property and this amount reduced the debt to Frontline.

 

Interest expense for the three months ended April 30, 2013 and 2012, was $12,006 and $15,227, respectively . Interest expense for the nine months ended April 30, 2013 and 2012, was $39,430 and $48,131, respectively.

 

(3) On March 11, 2011, the Company financed $7,992 for office equipment with Amicus Funding Group, LLC (“Amicus”) and monthly payments including interest of 48.956% are approximately $477. During the three months ended April 30, 2013 and 2012, the Company repaid $0 and $0, respectively. During the nine months ended April 30, 2013 and 2012, the Company repaid $0 and $895, respectively. The Company is in default on this note.

 

Interest expense for the three months ended April 30, 2013 and 2012, was $341 and $745, respectively. Interest expense for the nine months ended April 30, 2013 and 2012, was $1,369 and $2,448, respectively.

 

(4) The Company entered into a Loan Agreement, dated as of July 14, 2011, with Cameo Properties LLC (“Cameo”) and was amended on October 14, 2011 (the “Amended Loan Agreement”). Each Note issued under the Amended Loan Agreement is due three years from the date of its issuance. The Amended Loan Agreement provides for loans to the Company of up to $750,000 (the “Loan”), with a minimum initial loan of $250,000 within 60 days of the date of the Loan Agreement, and up to an additional $500,000 within the first year and a half from execution of the Amended Loan Agreement. This is not a revolving facility, and any principal repaid by the Company will not be available for additional advances to the Company under the Amended Loan Agreement. The Company cannot, without the Lender’s consent, prepay all or part of the Loan. The notes evidencing the installments of the loans bear interest payable monthly in arrears at the rate of 10% per annum, and mature and are due and payable three years from the date of issuance. On December 27, 2011, Frontline assigned $250,000 of its receivable to Cameo. 

 

Interest expense for the three months ended April 30, 2013 and 2012, was $6,096 and $5,624, respectively. Interest expense for the nine months ended April 30, 2013 and 2012, was $18,699 and $8,562, respectively.

 

Note 7. Stockholders’ Equity (Deficiency)

 

On July 14, 2011, the Company entered into a Loan Agreement with Cameo Properties LLC (“Cameo”). The loans under the Loan Agreement are secured, over the life of the loan, by 20 million shares of our common stock.  If the Company should default on the loan, Cameo will retain all of the 20 million shares of common stock.  In the event of a reverse stock split or combination of shares, the number of shares of common stock constituting the Share Collateral will, immediately following such reverse stock split or combination of shares, be increased by a new issuance of common stock of the Company to that number of shares constituting the Share Collateral immediately prior to such reverse stock split or combination of shares. The certificates representing any share dividends that the Company pays during the term of the Loan with respect to the Shares being held in escrow shall be credited and delivered to the Lender and held by the Lender pursuant to the terms of the Loan Agreement.

 

Effective January 26, 2012, the Securities and Exchange Commission approved a one-for-five reverse split of the common stock.  Pursuant to the anti-dilution provisions in the Cameo Properties loan agreement the Company issued 16,000,000 shares to Cameo Properties, so they again held 20,00,000 post reverse stock split shares.

 

Effective December 31, 2012, the Securities and Exchange Commission approved a one-for-ten reverse split of the common stock.  Pursuant to the anti-dilution provisions in the Cameo Properties loan agreement the Company issued 18,000,000 shares to Cameo Properties, so they again held 20,00,000 post reverse stock split shares.

 

On September 13, 2012, Frontline converted $39,000 of accrued interest for 1,300,000 shares of Common Stock at a discounted value price of $0.30 per share. The Company recorded a loss on extinguishment of debt in the amount of $26,000 in connection with the conversion.

 On October 2, 2012, Frontline converted $12,180 for 1,450,000 shares of Common Stock at a discounted value price of $0.0084 per share. The Company recorded a loss on extinguishment of debt in the amount of $5,220 in connection with the conversion.

 

On November 13, 2012, Frontline partially assigned $17,280 to Kisumu and Kisumu immediately converted the assigned note for 3,200,000 shares of Common Stock at a discounted value price of $0.0054 per share. The Company recorded a loss on extinguishment of debt in the amount of $13,120 in connection with the conversion.

 

On December 26, 2012, Frontline partially assigned $112,200 to Kisumu and Kisumu converted the assigned note for 18,700,000 shares of Common Stock at a discounted price of $0.006 per share. The Company recorded a loss on extinguishment of debt in the amount of $74,800 in connection with the conversion.

Changes to Authorized Common Stock

 

On June 24, 2011, the Board of Directors unanimously approved an amendment to the Articles of Incorporation to increase the authorized number of shares of common stock from 100 million shares, par value $.001 per share, to 300 million shares, par value $.001 per share. The Company filed the amendment with the Secretary of State of Nevada on August 10, 2011, after mailing a Definitive Information Statement to the Company’s stockholders and the amendment was effective August 10, 2011.

 

On December 13, 2011, the Board of Directors unanimously approved an amendment to the Company’s Articles of Incorporation to change the authorized number of shares of common stock from 300 million shares, par value $.001 per share, to 60 million shares, par value $.001 per share, and to effect a reverse split in the outstanding common stock in the same ratio.  The Company filed the amendment with the Secretary of State of Nevada on December 14, 2011.

 

Our Board of Directors unanimously approved an amendment to our Articles of Incorporation to increase the authorized number of shares of common stock from 60,000,000 shares, par value $.001 per share, to 400,000,000 shares, par value $.001 per share, on July 20, 2012. On the same date we received the written consent from shareholders of our company holding a majority (75.69%) of the outstanding shares of our common stock. We filed the amendment with the Secretary of State of Nevada on August 30, 2012, and the amendment was effective on that date.

 

On November 29, 2012, our Board of Directors unanimously approved an amendment to our Articles of Incorporation to increase the authorized number of shares of common stock from 400,000,000 shares, par value $.001 per share, to 40,000,000 shares, par value $.001 per share. On the same day we received the written consent from shareholders of our company holding a majority (75.69%) of the outstanding shares of our common stock. We filed the amendment with the Secretary of State of Nevada on November 29, 2012, and the amendment was effective on that date.

 

Note 8. Net Earnings (Loss) Per Common Share

 

The following table sets forth the reconciliation of the basic and diluted net earnings (loss) per common share computations for the three months ended April 30, 2013 and 2012.

 

		Three Months Ended								Nine Months Ended
		April 30,								April 30
		2013				2012				2013				2012
Basic and Diluted Earnings (Loss) Per Share
Net Earnings (Loss) Ascribed to Common Shareholders - Basic and Diluted		$	(83,153	)		$	(241,019	)		$	(331,045	)		$	(2,664,667	)
Weighted Average Shares Outstanding - Basic and Diluted			39,938,166				20,642,347				27,270,403				20,642,347
Basic and Diluted Net Earnings (Loss) Per Common Share		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.13	)

Net loss per common share for the nine months ended April 30, 2012, has been revised. All share and per share amounts have been restated to reflect the one-for-five reverse stock split as discussed in Note 10.

 

The amounts previously reported for the nine and three months ended April 30, 2012, were as follows:

 

 

		Three Months Ended				Nine Months Ended
		April 30, 2012				April 30, 2012
Basic and Diluted Loss Per Common Share		$	(0.01	)		$	(0.10	)
Weighted Average Number of Shares
Outstanding -Basic and Diluted			26,423,270				26,423,270

 

Note 9. Commitments and Contingencies

 

Legal Proceedings

 

The Company is currently involved in various claims and legal proceedings. Quarterly, the Company reviews the status of each significant matter and assesses its potential financial exposure and if the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss.

 

Caudle & Spears has obtained a default judgment against the Company in Mecklenberg County, North Carolina, General Court, in the amount of $17,686. This law firm represented us in our litigation against Martin Koebler, a former employee, whom we successfully sued for return of Company property and other damages. The Company is in settlement negotiations with Caudle & Spears, since its judgment against Martin Koebler is still in the collection process. A payment agreement has been reached in the amount of $2,500 per month with no interest until paid.  The Company is not current with its payment arrangements and has a balance of $4,263 still due.

 

Internal Revenue Service (“IRS”) served the Company with a tax lien dated March 3, 2010 in the total amount of $251,928. Third quarter 2009 taxes are approximately $117,000, which are included in total due.  The Company has been served with an additional tax lien dated January 19, 2011, in the amount of $2,925. The Company had a payment plan in place with IRS; however, the Company is arrears in payments as of July 31, 2012. Management is working with the local IRS office to try and revise the payment agreement.  The balance due on the most recent statement from the IRS is $590,634.

 

Tallman Hudders & Sorrentino has obtained a judgment in Lehigh County, Pennsylvania, on behalf of their client Javad Hajihadian, an individual.  Mr. Hajihadian had ordered and paid for, the first super car to be produced by Li-ion Motors in November 2008. The car was in the design stage when it was ordered.  Mr. Hajihadian’s attorney subsequently contacted the Company to cancel his contract and have his payment refunded. The parties had reached a settlement agreement and the payment was being refunded with interest. The settlement agreement was for $102,500 and stipulated monthly payments of $10,250 commencing in July 2010.  Payments were made through November 2010, totaling $51,250, leaving a balance of five payments or $51,250 still due; which is reflected on the Company’s balance sheet under current liabilities. The Company became delinquent and Mr. Hajihadian proceeded with litigation and on February 4, 2011, a judgment was issued in his favor for $51,750.

 

The Company’s facility in Mooresville, North Carolina was financed through Bayview and Frontline, which had a second lien on the property. Li-ion became delinquent with the mortgage payments, and, following a prior foreclosure filing and new agreement as to payments under the mortgage, on July 12, 2012, Bayview  refiled a notice of hearing on foreclosure on its deed of trust and security agreement for a hearing on August 21, 2012, the outstanding amount of the loan at July 31, 2012 being $946,279.   A similar notice of foreclosure pursuant to the Frontline deed of trust was filed by the Trustee with the same court on July 25, 2012, noticing a hearing for August 22, 2012, with an amended notice of default, the amount of $508,492 being outstanding under the loan as of July 31, 2012. The Trustee for Frontline also filed on July 25, 2012, a notice of foreclosure and sale to take place on August 22, 2012.  The Trustee under the Bayview deed of trust on August 21, 2012, filed its notice of foreclosure and sale to take place on September 18, 2012, of the real and personal property securing the deed of trust.   On September 14, 2012, the sale of the property pursuant to the Frontline August 22, 2012 foreclosure and sale was completed, and Frontline assigned its rights to its foreclosure bid to A&S Holdings Inc., subject to the rights of Bayview, as the holder of the first mortgage on the property.

 

Fine Mobile and Li-ion Motors entered into a confession of judgment in relation to X-Prize winnings.  The parties agreed to a payment arrangement of $10,000 per month for a period of eight (8) months.  If a default were to occur, the debtor would then be entitled to exercise confession of judgment in the amount of $120,000 without further delay.  The initial payment was wired on December 15, 2011; however, the Company was unable to make any additional payments.  On June 18, 2012 Fine Mobile executed the judgment with the Iredell County Sheriff’s Office and on July 2, 2012, the Sherriff took possession of the building located at 158 Rolling Hill Road, Mooresville, NC, seizing all remaining assets.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward Looking Statements

 

This quarterly report contains forward-looking statements that involve risks and uncertainties.  We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements.  Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this section.

 

Results of Operations for the Three and Nine months Ended April 30, 2013

 

Electric Vehicle Operations

 

Sales of our electric powered vehicles for the three months ended April 30, 2013 were $0. We had negative sales of our electric powered vehicles for the three months ended April 30, 2012 of $217,000 due to a return of merchandise which took place during the Company’s second quarter of fiscal 2012 with Frontline Asset Management.

Sales of our electric powered vehicles for the nine months ended April 30, 2013 and 2012 were $0 and $255,000, respectively. Vehicle parts sold during the nine months ended April 30, 2013 and 2012 were $0 and $4,696, respectively.

 

With the licenses of our lithium battery and electric vehicle technology described below, we are concentrating on sales of our vehicles.

 

Clean Enviro Tech Corp. License Agreement

 

We entered into a License Agreement (“Clean Enviro Tech License Agreement”) with Clean Enviro Tech Corp. (formerly Sky Power Solutions) in April 2008, providing for our license to Clean Enviro Tech Corp. (“CET”) of our patent applications and technologies for rechargeable lithium ion batteries for hybrid vehicles and other applications (“Licensed Products”). Under the CET License Agreement, we have the right to purchase our requirements of lithium ion batteries from CET, and our requirements of lithium ion batteries shall be supplied by CET in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of CET. Our cost for lithium ion batteries purchased from CET shall be CET’s actual manufacturing costs for such batteries for the fiscal quarter of CET in which our purchase takes place. On May 25, 2010, the CET License Agreement was amended to reflect CET’s territory would be the United States, U.S. possessions and territories only, and the Company can license other companies in other parts of the world.

 

CET agreed to invest a minimum of $1,500,000 in 2008 and 2009, in development of the technology for the Licensed Products. To date, CET has not met the minimum requirements in the development of technology, and therefore, is not in compliance with its obligations under this covenant of the license agreement. The Company has advised CET that it will not give notice of default against them for their failure to comply with this covenant over the term of the License Agreement.

 

On May 25, 2010 the CET License Agreement was amended to limiting the license granted to CET to only the United States, permitting Terra to grant other licenses to companies in other parts of the world.

 

Lithium Electric Vehicle Corp. License Agreement

 

The Company entered into a ten year license agreement with Lithium Electric Vehicle Corp. (“LEVC”) on May 28, 2010, providing for the Company to license to LEVC certain of the Company’s patent applications and technologies for electric vehicles and other applications. The purpose of the license was to expand sales of the Company’s current line of products by the manufacture and sale of such products in Canada, which is LEVC’s exclusive territory under the license agreement.

 

The license agreement consisted of an annual fee of $500,000 for ten years and an additional $1,750,000 based on a valuation report prepared by an independent third party.  LEVC was required to pay $1 million of the license fee during year one for the initial two years and $500,000 each additional year.  The Company had received $732,666 from LEVC with a balance due of $267,334 as of July 31, 2012.  The Company reflected the delinquent amount due from LEVC in its accounts receivable and had established a reserve for doubtful accounts for the entire amount. In addition, the note of $1,750,000 had been reflected on the books of the Company. Due to LEVC having no assets to secure the note, the Company recorded a reserve for doubtful accounts for the entire note amount of $1,750,000.

 

On February 19, 2013, the Company and LEVC amended the License Agreement and both parties have agreed that; (1) Terra Inventions will own 49% of LEVC in exchange for the balance of any funds due to Terra in connection with the license agreement; (2) LEVC intends to further develop Terra’s technology in Canada. In exchange for this agreement Terra will have full access to these developments made by LEVC for Terra’s use, including further development in the United States; (3) LEVC will retain ownership of further developments only; (4) Terra and LEVC also agree that LEVC will be doing R&D and develop free energy technology and wind turbine technology to achieve higher efficiency for electric vehicles. By Terra providing the platform, technology and BMS system for electric vehicles to LEVC, LEVC will also allow Terra to further develop these technologies in the United States; and (5) both parties understand that LEVC will own these technologies accept for rights hereby granted to Terra for the USA.

 

Cost of Sales

 

Cost of sales as a percentage of net vehicle sales for the three months ended April 30, 2013 was 0% compared to negative 17% (due to the reversal of the second quarter sale). Cost of sales as a percentage of net vehicle sales for the nine months ended April 30, 2013 was 0% compared to approximately 85% during the same period in 2012. Based on our historical review of costs, we expect that cost of sales in the future will remain in line on a percentage basis with our historic level of approximately 20%. As sales volumes and prices increase, costs should then reduce as a percentage of sales.

 

General and Administrative Expenses

 

General and administrative (“SG&A”) expenses decreased to $64,710 for the three months ended April 30, 2013, as compared to $82,334 during the same period in 2012. The decrease was attributable to the reduction of expenditures in (1) penalties of $31,058, (2) management fees of $20,498; (3) late fees of $9,925; and (4) depreciation expense of 9,472. The reductions were offset by an increase in bad debt expense of $52,523 and other various expenses of $806.

 

SG&A expenses decreased to $233,984 for the nine months ended April 30, 2013, as compared to $2,702,993 during the same period in 2012. The decrease was attributable to the reduction of expenditures in (1) bad debt expense of $2,185,650; (2) penalties of $60,142; (3) salaries and wages of $57,785; (4) depreciation expense of $39,311; (5) financing related activities of $25,000; (6) management fees of $23,611; (7) director’s fees of $21,000; (8) late fees of $19,848; (9) travel related expenditures of $12,878; and (10) utilities of $15,717. The reductions were offset by an increase in professional fees of $39,164 and other various expenses of $600.

 

Research and Development Expenses

 

No set amount has been set aside for research and development (“R&D”), however, all projects and purchases require approval prior to initiation. Salaries, payroll taxes, and benefits expensed to R&D for the three months ended April 30, 2013 and April 30, 2012, amounted to $0 and $71,719, respectively. Parts and supplies expensed to R&D was $0 and $2,267 for the three months ended April 30, 2013 and 2012, respectively.

 

Salaries, payroll taxes, and benefits expensed to R&D for the nine months ended April 30, 2013 and April 30, 2012, amounted to $0 and $475,969, respectively. Parts and supplies expensed to R&D was $1,297 and $9,668 for the nine months ended April 30, 2013 and 2012, respectively.

 

We expect that research and development expenses will continue to remain substantial and grow as we aggressively move to bring products to market.

 

Interest Expense

 

Interest expense decreased to $18,443 for the three months ended April 30, 2013 as compared to $34,220 for 2012, and $59,551 for the nine months ended April 30, 2013 as compared to $108,062 for 2012 due to the reduction of the Company’s debt. Interest expense consists primarily of interest related to borrowings.

 

Other Income

 

The Company did not have any other income for the three months ended April 30, 2013.

 

Other income for the three months ended April 30, 2012 consists of (1) accounting fees and rental income from CET for $16,325; (2) rental income from Advanced Tech of $20,784; (3) interest income from the LEVC note of $43,151; (4) reclassification of loss on disposal of property and equipment of $9,376; and (5) various other income of $130. Other income was reduced by $164 for foreign exchange transactional expense.

 

Other income for the nine months ended April 30, 2013, consisted of interest income from the LEVC Note of $88,645, which was offset by $166 for foreign exchange transactional expense.

 

Other income for the nine months ended April 30, 2012 consists of (1) accounting fees and rental income from CET for $51,687; (2) rental income from Advanced Tech of $27,712; (3) interest income from the LEVC note of $131,370; (4) forfeiture of customer deposit of $30,000; and (5) various other income of $130. Other income was reduced by $254 for foreign exchange transactional expense.

 

Net Earnings (Loss)

 

Net loss attributable to common stockholders for the three months ended April 30, 2013 was $83,153 compared to $241,019 for the previous fiscal quarter. Basic and diluted loss attributable to common stockholders per share of common stock for the three months ended April 30, 2013 was $0.00 as compared to $0.01 for the previous fiscal quarter.

 

Net earnings attributable to common stockholders for the nine months ended April 30, 2013 was $331,045 compared to a net loss of $2,644,667 for the previous fiscal quarter. Basic and diluted loss attributable to common stockholders per share of common stock for the nine months ended April 30, 2013 was $0.01 as compared to $0.13 for the previous fiscal quarter.

 

Liquidity and Capital Resources

 

Since our incorporation, we have financed our operations almost exclusively through the sale of our common shares to investors and borrowings. We expect to finance operations through borrowings and the sale of equity in the foreseeable future as we receive minimal revenue from our current business operations. There is no guarantee that we will be successful in arranging financing on acceptable terms.

 

At April 30, 2013, we had liabilities of $2,329,680, as compared with $3,351,316 at July 31, 2012; and working capital deficiency of $2,036,215 and stockholders' equity deficiency of $2,286,215.

 

Our property and equipment decreased to $3,880 at April 30, 2013, as compared with $5,785 at July 31, 2012.

 

Net cash used in operating activities was $109,698 during the nine months ended April 30, 2013, as compared to $492,588 in 2012. We did not have any investing activities during the nine months ended April 30, 2013 and 2012.

 

During the nine months ended April 30, 2013, from the issuance of a promissory note for a receivable, we advanced $0 to CET and were repaid $0. During the nine months ended April 30, 2013, we received net proceeds of $110,408 from the issuance of promissory notes for debt, and made repayments of $0. Total cash provided by financing activities in the nine months ended April 30, 2012 was $110,408 as compared to $487,204 in 2012.

 

Liquidity Issues

 

The Company has substantial obligations to the Internal Revenue Service and other creditors. The Company is working toward a payment plan with the Internal Revenue Service (IRS) for delinquent payroll taxes, and has a plan in place with one of two judgment creditors. There is no assurance that we will be able raise additional required capital to meet obligations arising from the settlements of these obligations and litigation matters, as well as the settlement payments with the IRS, and continue operations.

Our current operating funds are less than necessary for commercialization of our planned products, and therefore we will need to obtain additional financing in order to complete our business plan. We anticipate that up to $2,000,000 of additional working capital will be required over the next 12 months for market introduction of these products through joint venture partners or otherwise. We do not have sufficient cash on hand to meet these anticipated obligations, which are in addition to payments we will owe to judgment creditors and the IRS.

 

We do not currently have any additional arrangements for financing, and we may not be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including investor sentiment. Market factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

 

 Critical Accounting Issues

 

The Company’s significant accounting policies are summarized in Note 1 of the Company’s Annual Report on Form 10-K for the year ended July 31, 2012. There were no significant changes to these accounting policies during the nine months ended April 30, 2013, and the Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

 Interest Rate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Our interest income is sensitive to changes in the general level of U.S. interest rates. We do not have significant short-term investments, and due to the short-term nature of our investments, we believe that there is not a material risk exposure. Our debt is at fixed interest rates.

 

Credit Risk - Our accounts receivables are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result we do not anticipate any material losses in this area.

 

Item 4. Controls and Procedures.

 

As of the end of the fiscal quarter covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Principal Financial and Accounting Officer concluded that the Company’s disclosure controls and procedures were not effective in timely alerting her to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Quarterly Report on Form 10-Q. There have been no changes in the

 

Company’s internal controls over financial reporting during the Company’s last fiscal quarter 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.

 

Other than as described below, we are not a party to any material legal proceedings and to our knowledge, no such proceedings are threatened or contemplated.

 

Caudle & Spears v. EV Innovations, Inc.

 

Caudle & Spears has obtained a default judgment against the Company in Mecklenburg County, North Carolina, General Court, in the amount of $17,686. This law firm represented us in our litigation against Martin Koebler, a former employee, whom we successfully sued for return of Company property and other damages. The Company is in settlement negotiations with Caudle & Spears, since its judgment against Martin Koebler is still in the collection process. A payment agreement has been reached in the amount of $2,500 per month with no interest until paid. The Company is not current with its payment arrangements and has a balance of $4,263 still due.

 

Internal Revenue Service

 

Internal Revenue Service (“IRS”) served the Company with a tax lien dated March 3, 2010 in the total amount of $251,928. Third quarter 2009 taxes are approximately $117,000, which are included in total due. The Company has been served with an additional tax lien dated January 19, 2011, in the amount of $2,925. The Company had a payment plan in place with IRS; however, the Company is arrears in payments as of July 31, 2012. Management is working with the local IRS office to try and revise the payment agreement. The balance due on the most recent statement from the IRS is $590,634.

 

Javad Hajihadian

 

Tallman Hudders & Sorrentino has obtained a judgment in Lehigh County, Pennsylvania, on behalf of their client Javad Hajihadian, an individual. Mr. Hajihadian had ordered and paid for, the first super car to be produced by Li-ion Motors in November 2008. The car was in the design stage when it was ordered. Mr. Hajihadian’s attorney subsequently contacted the Company to cancel his contract and have his payment refunded. The parties had reached a settlement agreement and the payment was being refunded with interest. The settlement agreement was for $102,500 and stipulated monthly payments of $10,250 commencing in July 2010. Payments were made through November 2010, totaling $51,250, leaving a balance of five payments or $51,250 still due; which is reflected on the Company’s balance sheet under current liabilities. The Company became delinquent and Mr. Hajihadian proceeded with litigation and on February 4, 2011, a judgment was issued in his favor for $51,750. Management was deposed December 2011, and produced requested documents and information.

 

Bayview Loan Servicing, LLC

 

The Company’s facility in Mooresville North Carolina was financed through Bayview Loan Servicing, LLC (“Bayview”) secured by a first lien on the Company’s property located at 158 Rolling Hill Road in Mooresville. Frontline Asset Management, Inc. (“Frontline”) holds a note in the amount of $2,000,000 (current balance due of $508,492) secured by a second lien on the property.. On July 12, 2012, Bayview refiled a notice of hearing on foreclosure on its deed of trust and security agreement for a hearing on August 21, 2012, the outstanding amount of the loan at July 31, 2012 being $946,279. A similar notice of foreclosure pursuant to the Frontline deed of trust was filed by the Trustee with the same court on July 25, 2012, noticing a hearing for August 22, 2012, with an amended notice of default, the amount of $508,492 being outstanding under the loan as of July 31, 2012. The Trustee for Frontline also filed in Superior Court of Iredell County North Carolina on July 25, 2012, a notice of foreclosure and sale to take place on August 22, 2012. The Trustee under the Bayview deed of trust on August 21, 2012, filed its notice of foreclosure and sale to take place on September 18, 2012, of the real and personal property securing the deed of trust. On September 14, 2012, the sale of the property pursuant to the Frontline August 22, 2012 foreclosure and sale was completed, and Frontline assigned its rights to its foreclosure bid to A&S Holdings Inc., subject to the rights of Bayview, as the holder of the first mortgage on the property.

 

FINE Mobile

 

Fine Mobile and Li-ion Motors entered into a confession of judgment in relation to the X-Prize winnings. The parties agreed to a payment arrangement of $10,000 per month for a period of eight (8) months. If a default were to occur, the debtor would then be entitled to exercise confession of judgment in the amount of $120,000 without further delay. The initial payment was wired on December 15, 2011; however, the Company was unable to make any additional payments. On June 18, 2012 Fine Mobile executed the judgment with the Iredell County Sheriff’s Office and on July 2, 2012, the Sherriff took possession of the building located at 158 Rolling Hill Road, Mooresville, NC, seizing all remaining assets.

 

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ITEM 6. Exhibits

	31			Certification  of  Chief Executive Officer and Principal  Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002, filed herewith.
	32			Certification of Chief 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, filed herewith.

SIGNATURES

 

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Li-ion Motors Corp.
Date: June 14, 2013	By:	/s/ Stacey Fling
		Stacey Fling
		Chief Executive Officer and Principal Financial Officer

In  accordance  with the  Securities  Exchange  Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:	/s/ Stacey Fling
	Stacey Fling
	President
	(President, Chief Executive Officer
	Principal Financial Officer and Director)
Date: June 14, 2013