UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 | |
or | |
o | 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
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.) | |
(Address of Principal Executive Offices) | 89130 (Zip Code) | |
(702) 940-9940 (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
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[X] Yes o[ ] No
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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[X] Yes o[ ] 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[X] No
On May 19, 2012,March 11, 2013, there were 26,423,47039,938,166 shares of common stock outstanding.
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| PART I. FINANCIAL INFORMATION | ||
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| PART II. OTHER INFORMATION | ||
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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, 2011.2012. 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 ninethree and six months ended April 30,January 31, 2013 and 2012 and 2011, are not necessarily indicative of the results for the entire fiscal year or for any other period.
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| April 30, | July 31, | |||||||
| 2012 | 2011 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 127 | $ | 5,118 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $517,128 and $0, respectively | - | - | ||||||
| Notes receivable, net of allowance for doubtful accounts of $2,448,208, and $762,327, respectively | - | 1,750,000 | ||||||
| Inventories | 244,947 | 380,558 | ||||||
| Other current assets | 53,657 | 193,893 | ||||||
| Total current assets | 298,731 | 2,329,569 | ||||||
| Property and equipment, net | 1,804,119 | 1,983,739 | ||||||
| Deferred patent and trademark costs | 37,263 | 35,858 | ||||||
| Total assets | $ | 2,140,113 | $ | 4,349,166 | ||||
| Liabilities and Stockholders' Equity (Deficiency) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 1,673,278 | $ | 1,156,136 | ||||
| Current portion of long-term debt | 572,829 | 399,407 | ||||||
| Customer deposits | 102,188 | 102,287 | ||||||
| Deferred license agreement revenue | 216,661 | 324,333 | ||||||
| Total current liabilities | 2,564,956 | 1,982,163 | ||||||
| Long-term liabilities: | ||||||||
| Long-term debt, less current portion | 923,280 | 939,608 | ||||||
| Deferred license agreement revenue, less current portion | 1,239,589 | 1,370,833 | ||||||
| Total liabilities | 4,727,825 | 4,292,604 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholders' equity (deficiency) | ||||||||
| Preferred stock, $.001 par value, 5,000,000 shares authorized, 0 issued and outstanding | - | - | ||||||
Common stock, $.001 par value, 60,000,000 shares authorized, 26,423,470 and 26,423,470 issued and 26,423,470 and 6,423,470 outstanding at April 30, 2012 and July 31, 2011, respectively. | 26,423 | 26,423 | ||||||
| Additional paid-in capital | 62,619,444 | 62,639,444 | ||||||
| Accumulated deficit | (65,224,775 | ) | (62,580,108 | ) | ||||
| Accumulated other comprehensive loss | (8,804 | ) | (9,197 | ) | ||||
| (2,587,712 | ) | 76,562 | ||||||
| Less: Treasury stock, 20,000,000 shares at cost at July 31, 2011 | - | (20,000 | ) | |||||
| Stockholders' equity (deficiency) attributable to Li-ion Motors Corp. | (2,587,712 | ) | 56,562 | |||||
| Non-controlling interests | - | - | ||||||
| Stockholders' equity (deficiency) | (2,587,712 | ) | 56,562 | |||||
| Total stockholders' equity (deficiency) | (2,587,712 | ) | 56,562 | |||||
| Total liabilities and stockholders' equity (deficiency) | $ | 2,140,113 | $ | 4,349,166 | ||||
(Formerly Li-ion Motors Corp.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Revenue: | ||||||||||||||||
| Sales | $ | (217,000 | ) | $ | 2,041 | $ | 259,696 | $ | 6,513 | |||||||
| License agreement revenue | 168,750 | 285,416 | 506,250 | 535,417 | ||||||||||||
| Total revenue | (48,250 | ) | 287,457 | 765,946 | 541,930 | |||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of sales | (36,871 | ) | 587 | 221,176 | 17,240 | |||||||||||
| General and administrative | 82,334 | 420,563 | 2,702,993 | 1,302,933 | ||||||||||||
| Loss on disposal of property and equipment | 128,702 | - | 133,390 | - | ||||||||||||
| Research and development | 73,986 | (81,712 | ) | 485,637 | 947,493 | |||||||||||
| Total costs and expenses | 248,151 | 339,438 | 3,543,196 | 2,267,666 | ||||||||||||
| Loss from operations | (296,401 | ) | (51,981 | ) | (2,777,250 | ) | (1,725,735 | ) | ||||||||
| Other (expenses) income: | ||||||||||||||||
| Interest expense | (34,220 | ) | (105,504 | ) | (108,062 | ) | (408,226 | ) | ||||||||
| Other income | 89,602 | 103,528 | 240,645 | 2,656,506 | ||||||||||||
| Net earnings (loss) before provision for (benefit from) income taxes | (241,019 | ) | (53,957 | ) | (2,644,667 | ) | 522,544 | |||||||||
| Provision for (benefit from) income taxes | - | - | - | - | ||||||||||||
| Net earnings (loss) | (241,019 | ) | (53,957 | ) | (2,644,667 | ) | 522,544 | |||||||||
| Less: Net earnings (loss) attributable to non-controlling interest | - | - | - | - | ||||||||||||
| Net earnings (loss) attributable to Li-ion Motors Corp | $ | (241,019 | ) | $ | (53,957 | ) | $ | (2,644,667 | ) | $ | 522,544 | |||||
| Earnings (loss) per share - basic and diluted: | ||||||||||||||||
| Earnings (loss) per common share attributable to Li-ion Motors Corp. common shareholders | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 0.09 | |||||
| Weighted average number of shares outstanding - basic and diluted | 26,423,470 | 6,065,817 | 26,423,470 | 6,028,250 | ||||||||||||
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net earnings (loss) | $ | (241,019 | ) | $ | (53,957 | ) | $ | (2,644,667 | ) | $ | 522,544 | |||||
| Other comprehensive income | ||||||||||||||||
| Currency translation adjustment | (118 | ) | 180 | 393 | 44 | |||||||||||
| Comprehensive income (loss) | (241,137 | ) | (53,777 | ) | (2,644,274 | ) | 522,588 | |||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | - | - | - | - | ||||||||||||
| Comprehensive income (loss) attributable to Li-ion Motors Corp | $ | (241,137 | ) | $ | (53,777 | ) | $ | (2,644,274 | ) | $ | 522,588 | |||||
| For the Nine Months Ended | ||||||||
| April 30, | ||||||||
| 2012 | 2011 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net earnings (loss) | $ | (2,644,667 | ) | $ | 522,544 | |||
| Adjustments to reconcile net earnings (loss) to net cash utilized by operating activities | ||||||||
| Depreciation | 41,816 | 50,857 | ||||||
| Loss on disposal of property and equipment | 133,390 | - | ||||||
| Provision for doubtful accounts | 2,071,639 | 8,110 | ||||||
| Interest income | - | (74,315 | ) | |||||
| Licensing fees | (398,577 | ) | (160,417 | ) | ||||
| Non-cash sale of inventories | (255,000 | ) | - | |||||
| Increase (decrease) in cash flows from changes in operating assets and liabilities | ||||||||
| Inventories | 135,611 | (355,765 | ) | |||||
| Employee advances | - | 9,537 | ||||||
| Prepaid expenses and other current assets | 140,236 | (40,004 | ) | |||||
| Deferred patent and trademark costs | (1,405 | ) | (14,867 | ) | ||||
| Bank overdraft | - | (14,104 | ) | |||||
| Accounts payable and accrued expenses | 517,141 | (310,433 | ) | |||||
| Customer deposits | (99 | ) | 2,188 | |||||
| Deferred revenue | (232,673 | ) | (376,287 | ) | ||||
| Net cash used in operating activities | (492,588 | ) | (752,956 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to property and equipment | - | (140,704 | ) | |||||
| Net cash used in investing activities | - | (140,704 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Advances on notes receivable | (71,364 | ) | (176,959 | ) | ||||
| Payments received on notes receivable | 22,991 | 168,849 | ||||||
| Proceeds from issuance of debt | 575,555 | 2,002,423 | ||||||
| Payments on debt | (39,978 | ) | (1,102,298 | ) | ||||
| Net cash provided by financing activities | 487,204 | 892,015 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 393 | (133 | ) | |||||
| CHANGE IN CASH AND CASH EQUIVALENTS | ||||||||
| Net increase (decrease) in cash and cash equivalents | (4,991 | ) | (1,778 | ) | ||||
| Cash and cash equivalents at beginning of period | 5,118 | 2,113 | ||||||
| Cash and cash equivalents at end of period | $ | 127 | $ | 335 | ||||
| SUPPLEMENTAL CASH FLOW DISCLOSURES | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 18,008 | $ | 321,407 | ||||
| Income taxes | $ | - | $ | - | ||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES | ||||||||
| Property and equipment and inventories exchanged for payment on debt | $ | 259,415 | $ | - | ||||
| Assignment of debt from Frontline Asset Management to Cameo Properties, LLC | $ | 250,000 | $ | - | ||||
| Assignment of note receivable with Sky Power Solutions Corp. to Frontline Asset Management debt | $ | 112,500 | $ | - | ||||
| Shares issued for debt | $ | - | $ | 5,857,309 | ||||
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 | Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||
| Balance - August 1, 2010 | 6,015,227 | $ | 6,015 | $ | 56,782,543 | $ | (62,699,029 | ) | $ | (8,436 | ) | $ | - | $ | - | $ | (5,918,907 | ) | ||||||||||||||||||
| Issuance of stock for conversion of promissory notes | 408,243 | 408 | 5,856,901 | - | - | - | - | 5,857,309 | ||||||||||||||||||||||||||||
| Common stock issued as collateral on loan | 20,000,000 | 20,000 | - | - | - | (20,000 | ) | - | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | (761 | ) | - | - | $ | (761 | ) | (761 | ) | |||||||||||||||||||||||
| Net earnings | - | - | - | 118,921 | - | - | - | 118,921 | 118,921 | |||||||||||||||||||||||||||
| Comprehensive income | $ | 118,160 | - | |||||||||||||||||||||||||||||||||
| Balance - July 31, 2011 | 26,423,470 | 26,423 | 62,639,444 | (62,580,108 | ) | (9,197 | ) | (20,000 | ) | - | 56,562 | |||||||||||||||||||||||||
| Common stock issued as collateral on loan released to lender | - | - | (20,000 | ) | - | - | 20,000 | - | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | 393 | - | - | $ | 393 | 393 | ||||||||||||||||||||||||||
| Net earnings | - | - | - | (2,644,667 | ) | - | - | - | - | (2,644,667 | ) | |||||||||||||||||||||||||
| Comprehensive income | $ | 393 | - | |||||||||||||||||||||||||||||||||
| Balance - April 30, 2012 | 26,423,470 | $ | 26,423 | $ | 62,619,444 | $ | (65,224,775 | ) | $ | (8,804 | ) | $ | - | $ | - | $ | (2,587,712 | ) | ||||||||||||||||||
January 31, 2013
Note 1. Financial Statement Presentation
History and Nature of Business
Li-ion Motors Corp. (formerly EV Innovations, Inc., the “Company”) 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 looking for funding in order to pursuepursuing 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 SPSSky Power Solutions, now Clean Enviro Tech Corp. (“CET”), CET providing for their license to SPSCET 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 SPS,CET, and their requirements of lithium ion batteries shall be supplied by SPSCET in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of SPS.CET. The Company’s cost for lithium ion batteries purchased from SPSCET shall be SPS’sCET’s actual manufacturing costs for such batteries for the fiscal quarter of SPSCET in which the Company’s purchase takes place. On May 25, 2010, the license agreement was amended to reflect Sky Power’sClean Enviro Tech’s territory would only be the United States and U.S.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, SPS hasCET had agreed to invest a minimum of $1,500,000 in each of the nextfollowing two years years(2009 and 2010)in development of the technology for the Licensed Products. To date, SPSCET 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 SPSCET 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. SPS is currently working on developing a stand-alone solar generation system, and not pursuing the battery development system.
Effective May 28, 2010, the Company entered into a ten year license agreement with Lithium Electric Vehicle Corp. (“LEVC”) 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 licensee is 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 consists 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 is 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 has received $732,666 from LEVC with a balance due of $267,334 as of April 30,July 31, 2012, which is now delinquent. The Company has reflected the delinquent amount due from LEVC in its accounts receivable and has established a reserve for doubtful accounts for the entire amount. The Company has recorded the amount received and the receivable as deferred revenue and has amortized the license fee income ratably over the life of the agreement.
The note of $1,750,000 has been reflected on the books of the Company and the fee is being amortized over the life of the ten-year agreement.Company. Due to the uncertainty of LEVC’s ability to complete the public registration in Germany and with LEVC having no assets to secure the note, the Company has recorded a reserve for doubtful accounts for the entire note amount of $1,750,000.
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Basis of Presentation
Going Concern
The Company’s financial statements for the ninesix months ended April 30, 2012,January 31, 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 six months ended January 31, 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 and in 2010, the Company received approximately $2.5 million as an award from Automotive XPrize.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.
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 Securities and Exchange CommissionFinancial 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.
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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-fiveone-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, 2011.2012. There were no significant changes to these accounting policies during the three months ended April 30, 2012January 31, 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. Fair Value Measurements
The Company utilizes the accounting guidance for fair value measurements and disclosures for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based upon the best use of the asset or liability at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers are defined as follows:
Level 1 - Observable inputs such as quoted market prices in active markets
Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3 - Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of January 31, 2013, the Company held certain financial assets that are measured at fair value on a recurring basis. These consisted of cash and cash equivalents. The fair values of the cash and cash equivalents is determined based on quoted market prices in public markets and is categorized as Level 1. The Company does not have any financial assets measured at fair value on a recurring basis as Level 3 and there were no transfers in or out of Level 1, Level 2 or Level 3 during the six months ended January 31, 2013, and 2012.
The following table sets forth by level, within the fair value hierarchy, the Company’s financial assets accounted for at fair value on a recurring basis as of January 31, 2013, and July 31, 2012.
| Assets at Fair Value Using | ||||||||||||||||
| Quoted Prices in Activated Markets for Identical Assets | Significant Other Observable Inputs | Significant Observable Inputs | ||||||||||||||
| Total | (Level 1) | (Level 2) | (Level 2) | |||||||||||||
| January 31, 2013 | ||||||||||||||||
| Cash and cash equivalents | $ | 14 | $ | 14 | $ | — | $ | — | ||||||||
| July 31, 2012 | ||||||||||||||||
| Cash and cash equivalents | $ | 64 | $ | 64 | $ | — | $ | — | ||||||||
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Note 3.4. Notes Receivable
As of July 31, 2012, the Company advanced Sky Power Solutions Corp. (“SPS”) $71,364. The advances were reduced by $22,991had a note receivable balance with CET of $708,602. On October 2, 2012 the Company sold its interest in payments through a reimbursement for a leased employee and $112,500 through an assignment of debtthe 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 six months ended January 31, 2013.
During the ninesix months ended April 30, 2011,January 31, 2013, the Company advanced SPS $176,959$0 and $0 was repaid by CET. During the six months ended January 31, 2012 the Company advanced CET $54,539 of which $168,849$22,984 was repaid ($74,000 in the form of cash and $94,849 in reimbursement for a leased employee). The entire amount was reserved as an allowance for doubtful accounts .repaid. As of April 30, 2012January 31, 2013 and July 31, 2011,2012, an allowance for doubtful accounts in the amount of $698,208$0 and $762,327,$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 bears interest at ten (10%) percent per annum on the outstanding amount of the loan and shall accrue 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 shall make 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 shall be repaid in full by LEVC within sixty (60) days of receiving written demand for repayment by the Company. LEVC shall 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 includes a conversion right in which the Company can convert the LEVC Note if LEVC should begin trading on the TSX Venture Exchange. The conversion clause stipulates that the LEVC Note will 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 results in a fractional share, LEVC shall, in lieu of issuing such fractional share, pay to the Company an amount equal to the conversion value of the fractional share.
LEVC is currently attempting to complete a public registration in Germany. The Company has the option, upon the completion of the registration, of converting the note into LEVC common stock. Due to the uncertainty of LEVC’s ability to complete the public registration in Germany and with LEVC having no assets to secure the note, the Company has recorded a reserve for doubtful accounts for the entire note amount of $1,750,000.
The Company recognized interest income of $131,370,$88,645 and $88,219, none of which has been received, in accordance to the terms of the LEVC Note for the ninesix months ended April 30, 2012.January 31, 2013 and January 31, 2012, respectively. The Company has reflected the amount due from LEVC in its accounts receivable and has established a reserve for doubtful accounts for the entire amount.
Note 4.5. Inventories
Inventories consist of the following:
| April 30, | July 31, | |||||||
| 2012 | 2011 | |||||||
| Raw Materials | $ | 1,103 | $ | 1,103 | ||||
| Work-In-Progress | 208,844 | 344,455 | ||||||
| Finished Goods | 35,000 | 35,000 | ||||||
| $ | 244,947 | $ | 380,558 | |||||
| January 31, | July 31, | |||||||
| 2013 | 2012 | |||||||
| Finished Goods | $ | 1,500 | $ | 1,500 | ||||
| $ | 1,500 | $ | 1,500 | |||||
Raw materials, work in progress and finished goods for the quarter ended April 30, 2012,January 31, 2013, and year ended July 31, 2011,2012, are related to the Company’s planned sales of electric powered vehicles.
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Note 5.6. Property and Equipment
Property and equipment consist of:
| April 30, | July 31, | |||||||
| 2012 | 2011 | |||||||
| Building and Improvements | $ | 1,292,276 | $ | 1,292,276 | ||||
| Equipment and Furniture and Fixtures | 4,827 | 328,663 | ||||||
| Vehicles | 66,429 | 66,429 | ||||||
| Software Costs | - | 28,913 | ||||||
| Land | 700,000 | 700,000 | ||||||
| 2,063,532 | 2,416,281 | |||||||
| Less Accumulated Depreciation | (259,413 | ) | (432,542 | ) | ||||
| Net Property and Equipment | $ | 1,804,119 | $ | 1,983,739 | ||||
| January 31, | 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 | (66,748 | ) | (268,601 | ) | ||||
| Net Property and Equipment | $ | 4,508 | $ | 1,054,931 | ||||
Depreciation expense for the three months ended April 30,January 31, 2013 and 2012, was $639 and 2011, was $10,100 and $12,010,$8,643, respectively. Depreciation expense for the ninesix months ended April 30,January 31, 2013 and 2012, was $1,277 and 2011, was $41,816and $50,857,$31,716, respectively, and is included in general and administrative expenses on the Company’s consolidated statement of operations. During the three months ended April 30,
On September 14, 2012, the Company evaluated its current fixed asset inventorysale of equipment, furniturethe property pursuant to the Frontline August 22, 2012 foreclosure and fixtures,sale was completed. Due to the foreclosure of the property and software and wrote off $137,804 duethe loss of rights to being obsolete. This was offset by $4,415the facility, the Company received from Frontline for various equipment.
Note 6.7. Other Current Assets
| April 30, | July 31, | |||||||
| 2012 | 2011 | |||||||
| Retainers and Deposits | $ | 3,657 | $ | 4,957 | ||||
| Deferred Product Asset | - | 4,958 | ||||||
| Prepaid Expenses | 50,000 | 65,553 | ||||||
| Interest Receivable | - | 118,425 | ||||||
| Total | $ | 53,657 | $ | 193,893 | ||||
| January 31, | July 31, | |||||||||
| 2013 | 2012 | |||||||||
| Deposits | $ | — | $ | 3,190 | ||||||
| Total | $ | — | $ | 3,190 | ||||||
Note 7.8. Accounts Payable and Accrued Expenses
Accounts payable, accrued expenses and other current liabilities at April 30,January 31, 2012 and July 31, 2011 consisted of:
| April 30. | July 31, | |||||||
| 2012 | 2011 | |||||||
| Accounts Payable | $ | 917,574 | $ | 608,623 | ||||
| Accounts Payable - Related Parties | 27,971 | 28,029 | ||||||
| Wages, Paid Leave and Payroll Related Taxes | 482,059 | 259,122 | ||||||
| Accrued Interest | 86,723 | 8,403 | ||||||
| Legal Settlements | 158,951 | 171,750 | ||||||
| Other | - | 80,209 | ||||||
| Total | $ | 1,673,278 | $ | 1,156,136 | ||||
| January 31, | July 31, | |||||||
| 2012 | 2012 | |||||||
| Accounts Payable | $ | 310,532 | $ | 291,156 | ||||
| Accounts Payable - Related Parties | 10,177 | 4,682 | ||||||
| Wages, Paid Leave and Payroll Related Taxes | 998,235 | 948,410 | ||||||
| Accrued Interest | 34,428 | 120,067 | ||||||
| Legal Settlements | 152,976 | 152,976 | ||||||
| Other | 2,945 | 20,769 | ||||||
| Total | $ | 1,509,293 | $ | 1,538,060 | ||||
Accounts payable due to related parties are reimbursable general and administrative expenses paid by the Company’s President and Consultant.President.
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Note 8.9. Long-Term Debt
Long-term debt consists of:
| April 30, | July 31, | |||||||
| 2012 | 2011 | |||||||
| 5% Note payable to Bayview Loan Servicing, LLC, payable in monthly installments of $5,433 including interest, collateralized by real property due in full on or before March 2038 (1) | $ | 946,279 | $ | 951,921 | ||||
| 9.367% Note payable to Allegiance Direct Bank, payable in monthly installments of approximately $1,000, due in full on February 28, 2012 (2) | - | 6,112 | ||||||
| 12% Note payable to Frontline Asset Management, payable in monthly installments of interest only, due in full on March 30, 2013 (3) | 273,768 | 349,465 | ||||||
| 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 (4) | 6,499 | 7,394 | ||||||
| 26.85% Note payable to Treger Financial, payable in monthly installments of approximately $2,000, collateralized by real property due in full on June 1, 2012 (5) | 19,563 | 24,123 | ||||||
| 10% Note payable to Cameo Properties, LLC payable in monthly installments of interest only, due in full on December 27, 2014 (6) | 250,000 | - | ||||||
| 1,496,109 | 1,339,015 | |||||||
| Less Current Portion | (572,829 | ) | (399,407 | ) | ||||
| $ | 923,280 | $ | 939,608 | |||||
| January 31, | 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, 2013 (2) | 378,959 | 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 | ||||||
| 635,256 | 1,711,068 | |||||||
| Less Current Portion | (385,256 | ) | (1,460,189 | ) | ||||
| $ | 250,000 | $ | 250,879 | |||||
Principal maturities for long-term debt are as follows for the second quarters ended April 30:
| 2013 | $ | 572,829 | ||
| 2014 | 20,887 | |||
| 2015 | 19,793 | |||
| 2016 | 20,822 | |||
| 2017 | 21,906 | |||
| Thereafter | 839,872 | |||
| $ | 1,496,109 |
| 2013 | $ | 385,256 | ||||
| 2014 | 250,000 | |||||
| 2015 | — | |||||
| 2016 | — | |||||
| 2017 | — | |||||
| Thereafter | — | |||||
| $ | 635,256 |
(1) In November 2007, the Company refinanced athe first mortgage loan on its Mooresville, North Carolina building. The loan isbuilding (the “property”) with Bayview Loan Servicing, LLC (“Bayview”).Bayview. On March 31, 2010,July 25, 2012, Frontline, the Company entered intojunior lien holder noticed a stipulation agreement with Bayview which reduced the monthly paymentforeclosure hearing and sale to $5,349, including interest. On May 27, 2011, the Company entered into a loan adjustment agreement with Bayview which increased the unpaid liability by $9,043 to $953,316 and decreased the monthly payments to $5,433, including interest. In 2013, Bayview may step up the interest rate at that time. The loan is set to maturetake place on March 31, 2038. Effective April 1, 2012, the interest rate adjusts to Prime plus 4.875%. Interest rate changes are limited to 2% increase or decrease in any annual adjustments. During the three months ended April 30,August 22, 2012, and 2011, the Company repaid $2,893 and $7,932, respectively. Duringsale of the nine months ended April 30, 2012 and 2011,property to an assignee of Frontline, which was the Company repaid $5,642 and $12,005, respectively. On March 26, 2012, Bayview agreed to a repayment plan in which the Company is required to pay an additional $5,000 per month for the next nine months or through January 5, 2013.only bidder, was completed on September 14, 2012. The Company is in default of this note.
(2) On February 26, 2010, the Company entered into a loan agreement with Frontline Asset Management, Inc. ("Frontline").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 30, 2013, when all principal and accrued interest shall be due and payable. On April 11, 2011, Frontline assigned $850,279 of its debt to WinsorWindsor Capital, Inc. (“Winsor”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 Stock 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, 2011,2012, the Company assigned $112,500 of its note receivable with SPSCET to Frontline which reduced the balance due to Frontline by $112,500.
| 14 |
$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 three months ended April 30,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 2011, the Companyforeclosure sale to an assignee of Frontline, which was the only bidder, was completed on September 14, 2012. Frontline received advances totaling $3,093$50,000 upon the sale of the foreclosed property and $743,863, respectively; and made payments of $572 and $198,996, respectively. Duringthis amount reduced the nine months ended April 30, 2012 and 2011, the Company received advances totaling $575,555 and $1,576,618, respectively; and made payments of $22,270 and $1,081,669, respectively.
Interest expense for the three months ended April 30,January 31, 2013 and 2012, was $12,135 and 2011, was $15,227 and $14,883,$15,244, respectively . Interest expense for the ninesix months ended April 30,January 31, 2013 and 2012, was $27,423 and 2011, was $48,131 and $94,746,$32,904, 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,January 31, 2013 and 2012, and 2011, the Company repaid $0 and $141,$380, respectively. During the ninesix months ended April 30,January 31, 2013 and 2012, and 2011, the Company repaid $895$0 and $141,$895, respectively. The Company is in default on this note.
Interest expense for the three months ended April 30,January 31, 2013 and 2012, was $461 and 2011, was $745 and $326,$819, respectively. Interest expense for the ninesix months ended April 30,January 31, 2013 and 2012, was $1,028 and 2011, was $2,448 and $326,$1,703, 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,January 31, 2013 and 2012, was $6,301 and 2011, was $5,624 and $0,$2,937, respectively. Interest expense for the ninesix months ended April 30,January 31, 2013 and 2012, was $12,603 and 2011, was $8,562 and $0,$2,937, respectively.
Note 9.10. Stockholders’ Equity (Deficiency)
On July 14, 2011, the Company entered into a Loan Agreement with Cameo Properties LLC.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.
| 15 |
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 increasechange 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.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 10.11. 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, 2012January 31, 2013 and 2011.2012.
| 16 |
| Three Months Ended | Nine Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Basic and Diluted Earnings (Loss) Per Share | ||||||||||||||||
| Net Earnings (Loss) Ascribed to Common Shareholders - Basic and Diluted | $ | (250,395 | ) | $ | (53,957 | ) | $ | (2,644,667 | ) | $ | 522,544 | |||||
| Weighted Average Shares Outstanding - Basic and Diluted | 26,423,470 | 6,065,817 | 26,423,470 | 6,028,250 | ||||||||||||
| Basic and Diluted Net Earnings (Loss) Per Common Share | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.10 | ) | $ | 0.09 | |||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| January 31, | January 31, | |||||||||||||||
| 2013 | 2012 | 2012 | 2011 | |||||||||||||
| Basic and Diluted Earnings (Loss) Per Share | ||||||||||||||||
| Net Earnings (Loss) Ascribed to Common Shareholders - Basic and Diluted | $ | (208,580 | ) | $ | (2,107,049 | ) | $ | (247,892 | ) | $ | (2,394,272 | ) | ||||
| Weighted Average Shares Outstanding - Basic and Diluted | 13,704,783 | 20,642,347 | 21,399,154 | 20,642,347 | ||||||||||||
| Basic and Diluted Net Earnings (Loss) Per Common Share | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.01 | ) | $ | (0.12 | ) | ||||
Net loss per common share for the ninesix months ended April 30, 2011,January 31, 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 9.
The amounts previously reported for the three months ended April 30,January 31, 2011, were as follows:
| Three Months Ended | Nine Months Ended | |||||||
| April 30. 2011 | April 30. 2011 | |||||||
| Basic and Diluted Loss Per Common Share | $ | (0.00 | ) | $ | 0.02 | |||
| Weighted Average Number of Shares | ||||||||
| Outstanding -Basic and Diluted | 30,299,586 | 30,129,548 | ||||||
| Three Months Ended | Six Months Ended | |||||||
| January 31, 2012 | January 31, 2012 | |||||||
| Basic and Diluted Loss Per Common Share | $ | (0.33 | ) | $ | (0.37 | ) | ||
| Weighted Average Number of Shares | ||||||||
| Outstanding -Basic and Diluted | 6,418,322 | 6,418,322 | ||||||
Note 11.12. Share Based Compensation
The Company records compensation expense in its consolidated statement of operations related to employee stock-based options and awards in accordance with FASB ASC 718, “Compensation”, and (“ASC 718”).
The Company recognizes the cost of all employee stock options on a straight-line attribution basis over their respective contractual terms, net of estimated forfeitures. The Company has selected the modified prospective method of transition.
Stock Option Plan
As of April 30, 2012,January 31, 2013, there are no shares of common stock remaining and available for issuance under the stock option plans.
Note 12.13. Income Taxes
The Company adopted the provisions of ASC 740, “Income Taxes” (“ASC 74”) on August 1, 2007. The implementation of ASC 740 did not impact the total amount of the Company’s liabilities for uncertain tax position.
The Company recorded no provisions for income taxes for the ninesix months ended April 30, 2012January 31, 2013 and 2011.
Note 13.14. 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 MecklenbergMeckenberg 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.
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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,IRS; however, the Company is four months in arrears in payments for a totalas of $10,000 due at April 30,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 statementfrom the IRS is $525,130.
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.
The Company’s facility in Mooresville, North Carolina iswas financed through Bayview. The CompanyBayview 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 filed Foreclosure in Superior Courtrefiled a notice of Iredell County North Carolina. The hearing was March 13,on foreclosure on its deed of trust and security agreement for a hearing on August 21, 2012, and the attorneys for the Company attended the hearing to request a forbearance period so a repayment schedule might be effected. Bayview opposed the extension; due to prior extensions granted and previous times Bayview renegotiated the interest and reduced the rate. The Clerkoutstanding amount of the Court granted 42 days,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 new hearing is set for April 24, 2012. Bayview granted a forbearance ,confession of judgment in relation to X-Prize winnings. The parties agreed to a payment schedule was provided andarrangement of $10,000 per month for a period of eight (8) months. If a default were to occur, the Company made the first payment. Since the first payment was made, there was no hearing in April. The Company is now in default.
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 NineSix months Ended April 30, 2012
Electric Vehicle Operations
Sales of our electric powered vehicles for the three months ended April 30,January 31, 2013 and 2012 of $217,000 due to a return of merchandise which took place during the Company’s second quarter with Frontline Asset Management. For the three months ended April 30, 2011, we hadwere $0 in sales of our electric powered vehicles.and $472,000, respectively. Vehicle parts sold during the three months ended April 30,January 31, 2013 and 2012 and 2011 were $0 and $2,041,$1,128, respectively.
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Sales of our electric powered vehicles for the ninesix months ended April 30,January 31, 2013 and 2012 were $0 and 2011 were $255,000 and $0,$472,000, respectively. Vehicle parts sold during the ninesix months ended April 30,January 31, 2013 and 2012 were $0 and 2011 were $4,696, and $6,513, respectively.
With the licenses of our lithium battery and electric vehicle technology described below, we are concentrating on sales of our vehicles. Several nationwide newspaper advertising campaigns generated some orders for our vehicles, and an increase in inquiries about our electric vehicle products.
Clean Enviro Tech Corp.License Agreement
We entered into a License Agreement (“Sky PowerClean Enviro Tech License Agreement”) with Clean Enviro Tech Corp. (formerly Sky Power Solutions) in April 2008, providing for our license to Sky PowerClean 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 Sky PowerCET License Agreement, we have the right to purchase our requirements of lithium ion batteries from Sky Power,CET, and our requirements of lithium ion batteries shall be supplied by Sky PowerCET in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of Sky Power.CET. Our cost for lithium ion batteries purchased from Sky PowerCET shall be Sky Power’sCET’s actual manufacturing costs for such batteries for the fiscal quarter of Sky PowerCET in which our purchase takes place. On May 25, 2010, the Sky PowerCET License Agreement was amended to reflect Sky Power’sCET’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, Sky PowerCET 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 Sky PowerCET 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
Effective May 28, 2010, the Company entered into a ten year license agreement with Lithium Electric Vehicle Corp. (“LEVC”) providing for the Company to license to LEVC certain of the Company’sCompany patent applications and technologies for electric vehicles and other applications. The purpose of the licensee is 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 consists 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 is 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 has received $732,666 from LEVC with a balance due of $267,334 as of April 30,July 31, 2012, which is now delinquent. The Company has reflected the delinquent amount due from LEVC in its accounts receivable and has established a reserve for doubtful accounts for the entire amount.
The Company is still in discussions with LEVC regarding the delinquency.
The note of $1,750,000 has been reflected on the books of the Company and due to LEVC having no assets to secure the note; the Company has recorded a reserve for doubtful accounts for the entire note amount receivedof $1,750,000.
As of February 19, 2013 Terra Inventions Corp and Lithium Electric Vehicle Corp. signed an amended License Agreement. Both parties have agreed that, (1) Terra Inventions will own 49% of LEVC in exchange for the receivable as deferred revenue and has amortizedbalance of any funds due to Terra in connection with the license fee income ratably overagreement. (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 lifeUnited 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 agreement.
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Cost of Sales
Cost of sales as a percentage of net vehicle sales for the three months ended April 30, 2012January 31, 2013 was a negative 17% (due to the reversal of the second quarter sale) as0% compared to approximately 29%54% during the same period in 2011.2012. Cost of sales as a percentage of net vehicle sales for the ninesix months ended April 30, 2012January 31, 2013 was 85%0% compared to approximately 265%54% during the same period in 2011.2012. 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 $82,334$120,954 for the three months ended April 30, 2012,January 31, 2013, as compared to $420,563$2,396,441 during the same period in 2011.2012. The decrease was attributable to thea reduction of expenditures inin: (1) financing related activities of $122,529; (2) bad debt expense of $65,764;$2,191,070; (2) payroll related expenses of $64,472; and (3) advertising of $61,456; (4) professional fees of $57,746; (5) directors fees of $14,000; (6) travel of $12,528; (7) and other various expenses of $4,206.
SG&A expenses increaseddecreased to $2,702,993$169,274 for the ninesix months ended April 30, 2012,January 31, 2013, as compared to $1,302,933$2,620,659 during the same period in 2011.2012. The increasedecrease was attributable to an additional expenditure of bad debt of $2,194,898, which was offset witha reduction in: (1) advertising and marketingbad debt expense of $380,928;$2,238,173; (2) professional fees of $177,366; (3) financing related activities of $97,529; (4) travelpayroll related expenses of $66,254; (5) insurance$63,915; (3) depreciation expense of $27,504;$30,438; (4) penalties of $29,084; (5) financing related expenditure of $25,000; (6) warranty expensedirector fees of $20,139;$21,000 and (7)(6) other various expenses of $25,118.
Of all SG&A expenses the Company incurred during the first ninesix months of 2012,2013, the majority were charges that are expected to be recurring.
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,January 31, 2013 and January 31, 2012, and April 30, 2011, amounted to $71,719$0 and $227,922,$151,013, respectively. Parts and supplies expensed to R&D was $2,267$0 and $10,369$4,772 for the three months ended April 30,January 31, 2013 and 2012, and 2011, respectively. Shipping charges, battery management systems, and motor development costs were $0 and a credit of $623, for the three months ended April 30, 2012 and 2011, respectively. Costs associated with building two prototypes of our electric powered vehicles during the third quarter 2011 were reclassed to the Company’s vehicle inventory created a credit of $319,380 to R&D.
Salaries, payroll taxes, and benefits expensed to R&D for the ninesix months ended April 30,January 31, 2013 and January 31, 2012, and April 30, 2011, amounted to $475,969$0 and $870,788,$399,819, respectively. Parts and supplies expensed to R&D was $9,668$1,297 and $29,328$11,832 for the ninesix months ended April 30,January 31, 2013 and 2012, and 2011, respectively. Shipping charges, battery management systems, and motor development costs were $0and $47,377, for the nine months ended April 30, 2012 and 2011, 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 $34,220$18,897 for the three months ended April 30, 2012January 31, 2013 as compared to $105,505$32,309 for 2011,2012, and $108,062$41,108 for the ninesix months ended April 30, 2012January 31, 2013 as compared to $408,226$73,842 for 20112012 due to the reduction of the Company’s debt. Interest expense consists primarily of interest related to borrowings.
Other Income
Other income for the three months ended April 30,January 31, 2013, consisted primarily of interest income from the LEVC Note of $43,944.
Other income for the three months ended January 31, 2012 consists of (1) accounting fees and rental income from Sky Power
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CET for $16,325;$16,931; (2) rental income from Advanced Tech of $20,784;$6,928; (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 ninesix months ended April 30, 2011January 31, 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 six months ended January 31, 2012 consists of (1) accounting fees and rental income from Sky PowerCET for $54,194;$35,362; (2) rental income from Advanced Tech of $6,928; (3) interest income from the LEVC Notenote of $74,315; (3) receipt$88,219; (4) forfeiture of net proceedscustomer deposit of $2,425,272 from XPrize; (4) forgiveness$30,000; and (5) various other income of debt of $111,321; (5) recognition of fixed assets of $10,656; and (6) recycling of scrap metal for $630 .$130. Other income was reduced by $19,882$4,688 for loss from sale of assets and $220 for foreign exchange transactional expense.
Net Earnings (Loss)
Net loss attributable to common stockholders for the three months ended April 30, 2012January 31, 2013 was $241,019$208,580 compared to $53,957$2,107,049 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, 2012January 31, 2013 was $0.01$.02 as compared to $0.01$0.10 for the previous fiscal quarter.
Net earnings attributable to common stockholders for the ninesix months ended April 30, 2012January 31, 2013 was $2,644,667$247,892 compared to a net earningsloss of $522,544$2,394,272 for the previous fiscal quarter. Basic and diluted loss attributable to common stockholders per share of common stock for the ninesix months ended April 30, 2012January 31, 2013 was $0.10$.01 as compared to a gain of $0.09$0.12 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, 2012,January 31, 2013, we had liabilities of $4,727,825,$2,246,737, as compared with $4,292,604$3,351,316 at July 31, 2011;2012; and working capital deficiency of $2,266,225$1,995,223 and stockholders' equity deficiency of $2,587,712.
Our property plant and equipment decreased to $1,804,119$4,508 at April 30, 2012,January 31, 2013, as compared with $1,983,739$5,785 at July 31, 2011.
Net cash used in operating activities was $492,588$76,892 during the ninethree months ended April 30,October 31, 2012, as compared with $752,956net cash provided by of $353,997 in 2011, and cash used in2012. We did not have any investing activities during the ninesix months ended April 30, 2012, was $0, as compared to $140,704 during the same period in 2011.
During the ninesix months ended April 30, 2012,January 31, 2013, from the issuance of a promissory note for a receivable, we advanced $71,364$0 to Sky PowerCET and were repaid $22,991.$0. During the ninesix months ended April 30, 2012,January 31, 2013, we received net proceeds of $575,555$77,185 from the issuance of promissory notes for debt, and made repayments of $39,978 .$0. Total cash provided by financing activities forin the ninesix months ended April 30, 2012January 31, 2011 was $487,204$77,185 as compared with $892,015cash used of $359,195 in 2011.
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 havehas 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.
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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, 2011.2012. There were no significant changes to these accounting policies during the ninesix months ended April 30, 2012,January 31, 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 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 ITEM 4 (T). 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 arewere 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 in other factors which could significantlyare reasonably likely to materially affect, the Company’s internal controls subsequent to the date the Company carried out its evaluation.
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.
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Caudle & Spears v. EV Innovations, Inc.
Caudle & Spears has obtained a default judgment against the Company in MecklenbergMecklenburg 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,IRS; however, the Company is four months in arrears in payments for a totalas of $10,000 due at April 30,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 statementfrom the IRS is $525,130.
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,.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 wasdeposed December 2011, and produced requested documents and information.
Bayview Loan Servicing, LLC
The Company’s facility in Mooresville North Carolina iswas financed through Bayview. The Company became delinquentBayview 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 mortgage payments and Bayviewsame 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 Foreclosure in Superior Court of Iredell County North Carolina.Carolina on July 25, 2012, a notice of foreclosure and sale to take place on August 22, 2012. The hearing was March 13,Trustee under the Bayview deed of trust on August 21, 2012, filed its notice of foreclosure and the attorneys for the Company attended the hearingsale to request a forbearance period so a repayment schedule might be effected. Bayview opposed the extension; due to prior extensions granted and previous times Bayview renegotiated the interest and reduced the rate. The Clerktake place on September 18, 2012, of the Court granted 42 days,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 new hearing is set for April 24, 2012. Bayview granted a forbearance ,confession of judgment in relation to the X-Prize winnings. The parties agreed to a payment schedule was provided andarrangement of $10,000 per month for a period of eight (8) months. If a default were to occur, the Company made the first payment. Since the first payment was made, there was no hearing in April. The Company is now in default.
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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.
| Date: | By: | /s/ Stacey Fling | |
| Stacey Fling | |||
| Chief Executive Officer and Principal Financial Officer | |||
| By: | /s/ Stacey Fling | ||||
| Stacey Fling | |||||
| President | |||||
| (President, Chief Executive Officer | |||||
| Principal Financial Officer and Director) | |||||
| Date: | |||||
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