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EX-32 - Li-ion Motors Corp.v214946_ex32.htm
EX-31 - Li-ion Motors Corp.v214946_ex31.htm
 
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 January 31, 2011
 
     
 
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
 

  
(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
 
89130
 (Address of Principal Executive Offices)
 
(Zip Code)
 
(702) 425-7376
(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 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). ¨ 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 March 15, 2011, there were 30,047,301 shares of common stock outstanding.

 
 

 

 
 
Page No.
   
PART I. FINANCIAL INFORMATION
 3
   
ITEM I – Unaudited Financial Statements
  3
   
Balance Sheets as of January 31, 2011 and July 31, 2010 (Unaudited)
4
   
Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2011 and 2010 (Unaudited)
5
   
Consolidated Statement of Comprehensive Income (Loss) for the Three and Six Months Ended January 31, 2011 and 2010 (Unaudited)
6
   
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2011 and 2010 (Unaudited)
7
   
Statement of Stockholders Deficiency (Unaudited)
8
   
Notes to Unaudited Consolidated Financial Statements
9
   
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
18
   
ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk
  22
   
ITEM 4T– Controls and Procedures.
23
   
PART II. OTHER INFORMATION
  23
   
ITEM 6 - Exhibits
  24
 
 
2

 

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, 2010. 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 operations for the three and six months ended January 31, 2011 and 2010, are not necessarily indicative of the results for the entire fiscal year or for any other period.

 
3

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Consolidated Balance Sheets
(unaudited)

   
January 31,
   
July 31,
 
   
2011
   
2010
 
Assets
           
             
Current assets:
           
             
Cash and cash equivalents
  $ 1,126     $ 2,113  
Note receivable, net of allowance for doubtful account of $836,076 and $841,207, respectively
    -       -  
Inventories
    36,103       35,000  
Employee advances
    1,344       10,000  
Other current assets
    94,189       51,000  
                 
Total current assets
    132,762       98,113  
                 
Property and equipment, net
    1,880,834       1,919,681  
                 
Deferred patent costs
    24,258       24,258  
                 
Total assets
  $ 2,037,854     $ 2,042,052  
                 
Liabilities and Stockholders' Deficiency
               
                 
Current liabilities:
               
                 
Bank overdrafts
  $ 11,770     $ 14,104  
Accounts payable and accrued expenses
    1,032,251       1,296,734  
Current portion of long-term debt
    16,480       22,444  
Customer deposits
    100,594       100,000  
Deferred revenue
    333,360       501,288  
                 
Total current liabilities
    1,494,455       1,934,570  
                 
Long-term liabilities:
               
                 
Long-term debt, less current portion
    5,886,119       5,943,056  
Long-term deferred revenue, less current portion
    -       83,333  
                 
Total liabilities
    7,380,574       7,960,959  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' deficiency
               
                 
Preferred stock, $.001 par value, 5,000,000 shares authorized, 0 issued and outstanding
    -       -  
Common stock, $.001 par value, 100,000,000 shares authorized, 30,047,301 issued and outstanding at Janaury 31, 2011 and July 31, 2010
    30,047       30,047  
                 
Additional paid-in capital
    56,758,511       56,758,511  
Accumulated deficit
    (62,122,707 )     (62,699,029 )
Accumulated other comprehensive income
    (8,571 )     (8,436 )
                 
Stockholders' deficiency
    (5,342,720 )     (5,918,907 )
                 
Total liabilities and stockholders' deficiency
  $ 2,037,854     $ 2,042,052  

See accompanying notes to unaudited consolidated financial statements

 
4

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Consolidated Statements of Operations
(unaudited)

   
For the Three Months Ended
   
For the Six Months Ended
 
   
January 31,
   
January 31,
 
   
2011
   
2010
   
2011
   
2010
 
Sales:
  $ 2,486     $ 999     $ 4,472     $ 125,909  
                                 
Costs and expenses:
                               
Cost of sales
    16,303       -       16,653       165,497  
General and administrative
    517,840       377,204       882,370       748,526  
Research and development
    547,228       224,334       1,029,205       656,955  
                                 
Total costs and expenses
    1,081,371       601,538       1,928,228       1,570,978  
                                 
Loss from operations
    (1,078,885 )     (600,539 )     (1,923,756 )     (1,445,069 )
                                 
Other (expenses) income:
                               
Interest expense
    (144,883 )     (107,208 )     (302,721 )     (169,772 )
Other income
    234,508       70,418       2,802,799       88,043  
                                 
Net income (loss) before provision for (benefit from) income taxes
    (989,260 )     (637,329 )     576,322       (1,526,798 )
                                 
Provision for (benefit from) income taxes
    -       -       -       -  
                                 
Net earnings (loss)
    (989,260 )     (637,329 )     576,322       (1,526,798 )
                                 
Less: Net earnings (loss) attributable to noncontrolling interest
    -       -       -       -  
                                 
Net earnings (loss) attributable to Li-ion Motors Corp
  $ (989,260 )   $ (637,329 )   $ 576,322     $ (1,526,798 )
                                 
Net earnings (loss) per share - basic and diluted:
                               
Net earnings (loss) per common share attributable to Li-ion Motors Corp. common shareholders
  $ (0.03 )   $ (0.03 )   $ 0.02     $ (0.07 )
                                 
Weighted average number of shares outstanding - basic and diluted
    30,047,301       21,599,808       30,047,301       21,288,096  

See accompanying notes to unaudited consolidated financial statements

 
5

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Consolidated Statement of Comprehensive Income (Loss)
(unaudited)

   
For the Three Months Ended
   
For the Six Months Ended
 
   
January 31,
   
January 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net earnings (loss)
  $ (989,260 )   $ (637,329 )   $ 576,322     $ (1,526,798 )
                                 
Other comprehensive income
                               
Currency translation adjustment
    (535 )     -       (135 )     -  
                                 
Comprehensive income (loss)
    (989,794 )     (637,329 )     576,187       (1,526,798 )
                                 
Comprehensive income (loss) attributable to noncontrolling interest
    -       -       -       -  
                                 
Comprehensive income (loss) attributable to Li-ion Motors Corp
  $ (989,794 )   $ (637,329 )   $ 576,187     $ (1,526,798 )

See accompanying notes to unaudited consolidated financial statements

 
6

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Consolidated Statements of Cash Flows
(unaudited)

   
For the Six Months Ended
 
   
January 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings (loss)
  $ 576,322     $ (1,526,798 )
Adjustments to reconcile net earnings (loss) to net cash utilized by operating activities
               
Depreciation
    38,847       40,774  
Provision for doubtful accounts
    (5,131 )     -  
Increase (decrease) in cash flows from changes in operating assets and liabilities
               
Accounts receivable, net
    -       13,522  
Inventories
    (1,103 )     (52,915 )
Employee advances
    8,656       (3,547 )
Prepaid expenses and other current assets
    (43,189 )     13,657  
Bank overdraft
    (2,334 )     -  
Accounts payable and accrued expenses
    (264,483 )     342,264  
Customer deposits
    594       31,255  
Deferred revenue
    (251,262 )     (1,260 )
Net cash provided by (used in) operating activities
    56,917       (1,143,048 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES :
               
Additions to property and equipment
    -       (4,665 )
Net cash used in investing activities
    -       (4,665 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES :
               
Advances on promissory note
    (109,279 )     -  
Payments received on promissory note
    114,410       -  
Proceeds from issuance of debt
    832,755       108,060  
Payments on debt
    (895,655 )     (15,938 )
Advances from related parties
    -       1,401,759  
Payments to related parties
    -       (332,218 )
Net cash provided by (used in) financing activities
    (57,769 )     1,161,663  
                 
Effect of exchange rate changes on cash and cash equivalents
    (135 )     (3,099 )
      -          
CHANGE IN CASH AND CASH EQUIVALENTS
               
Net increase (decrease) in cash and cash equivalents
    (987 )     10,851  
Cash and cash equivalents at beginning of period
    2,113       5,182  
                 
Cash and cash equivalents at end of period
  $ 1,126     $ 16,033  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURES
               
Cash paid during the period for:
               
Interest
  $ 319,724     $ 52,629  
Income taxes
  $ -     $ -  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
               
Shares issued for related party advances
  $ -     $ 615,500  
Accrued expenses transferred to long-term debt
  $ -     $ 32,201  

See accompanying notes to unaudited consolidated financial statements

 
7

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Consolidated Statement of Stockholders' Deficiency
For the Periods Ended As Noted
(unaudited)

          
Common Shares
               
Accumulated Other
             
   
Number of
   
$0.01
   
Additional Paid in
   
Accumulated
   
Comprehensive
   
Comprehensive
       
   
Common Shares
   
Par Value
   
Capital
   
Deficit
   
Income (Loss)
   
Income (Loss)
   
Total
 
                                           
Balance - August 1, 2009
    20,884,101       20,884       55,731,174       (58,765,425 )     (13,413 )           (3,026,780 )
Exercise of stock options
    685,000       685       615,815       -       -             616,500  
1:2 Reverse stock split adjustment
    (10,779,696 )     (10,780 )     10,780       -       -             -  
Common stock issued as collateral on loan
    3,749,999       3,750       (3,750 )     -       -             -  
Common stock issued as collateral on loan
    10,000,000       10,000       (10,000 )     -       -             -  
Exercise of stock options
    500,000       500       349,500                             350,000  
1:5 Forward split adjustment
    5,007,897       5,008       (5,008 )     -       -             -  
Issuance of non-employee stock options
    -       -       70,000       -       -             70,000  
Foreign currency translation
    -       -       -       -       4,977     $ 4,977       4,977  
Net Loss
    -       -       -       (3,933,604 )     -       (3,933,604 )     (3,933,604 )
Comprehensive loss
                                          $ (3,928,627 )     -  
                                                         
Balance - July 31, 2010
    30,047,301     $ 30,047     $ 56,758,511     $ (62,699,029 )   $ (8,436 )           $ (5,918,907 )
                                                         
Foreign currency translation
    -       -       -       -       (135 )   $ (135 )     (135 )
Net earnings
    -       -       -       576,322       -       576,322       576,322  
Comprehensive loss
                                          $ 576,187       -  
                                                         
Balance - January 31, 2011
    30,047,301     $ 30,047     $ 56,758,511     $ (62,122,707 )   $ (8,571 )           $ (5,342,720 )

See accompanying notes to unaudited consolidated financial statements
 
 
8

 

Li-ion Motors Corp.
(Formerly EV Innovations, Inc.)
Notes to Unaudited Consolidated Financial Statements
January 31, 2011

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. The “Company’s” original business was the exploration and development of mineral interests. The Company abandoned this business in 2003.

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. As of July 31, 2009, the Company no longer considered itself a development stage company as planned principal operations have begun in its primary line of business.

On April 16, 2008, the Company sold their controlling interest of approximately 69% of the outstanding common stock in Zingo, Inc. (presently Superlattice Power, Inc., “SPI”). Prior to April 16, 2008, SPI was a related party that provided telecommunication services to business and residential customers utilizing VOIP technology and currently is researching and developing rechargeable lithium ion batteries.

Effective April 15, 2008, the Company entered into a License Agreement (“License Agreement”) with SPI providing for their license to SPI 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 SPI, and their requirements of lithium ion batteries shall be supplied by SPI in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of SPI. The Company’s cost for lithium ion batteries purchased from SPI shall be SPI’s actual manufacturing costs for such batteries for the fiscal quarter of SPI in which the Company’s purchase takes place. On May 25, 2010, the license agreement was amended to reflect Superlattice’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, SPI has agreed to invest a minimum of $1,500,000 in each of the next two years in development of the technology for the Licensed Products. To date, SPI 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 SPI 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.

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.

Under the license agreement, LEVC has agreed to pay the Company $1,000,000 in the form of cash, of which we have received $666,666 and the remaining balance of $333,334 is now delinquent; and $1,750,000 in the form of a convertible debenture which has not been issued and is also delinquent.

 
9

 

Basis of Presentation

The Company’s business is subject to most of the risks inherent in the establishment of a new business enterprise. The likelihood of success of the Company must be considered in light of the expenses, difficulties, delays and unanticipated challenges encountered in connection with the formation of a new business, raising operating and development capital, and the marketing of a new product. There is no assurance the Company will ultimately achieve a profitable level of operations.

On October 27, 2010, the Company received $2.5 million as an award from Automotive X-Prize (see Note 14) and during the previous fiscal year, entered into a ten year license agreement with LEVC expanding the Company's products and technology in Canada. The Company expects the funds received from Automotive X-Prize, LEVC, additional advances received from Frontline Asset Management, Inc. (“Frontline) and Winsor Capital, Inc. (“Winsor”) and the expected revenue from operations to be sufficient to cover operations over the next twelve months.

In January 2009, the Company’s shareholders approved a one-for-three reverse stock split of its outstanding common shares which became effective on February 19, 2009. Also on February 19, 2009, the authorized shares of the Company were increased from 35,714,285 to 50,000,000 shares.

In January 2010, the Board of Directors approved a merger with a 100% subsidiary resulting in the change of the Company’s name to Li-ion Motors, Corp. The Board of Directors also approved a two-for-one reverse split that was effective February 1, 2010, and the authorized shares were decreased in the same ratio to 25,000,000 shares. Pursuant to majority stockholder consent, the authorized was increased from 25,000,000 shares to 100,000,000 shares.

Except for the presentation of common shares authorized and issued on the consolidated balance sheet and shares presented in the consolidated statement of stockholders' deficiency, all shares and per share information has been revised to give retroactive effect to the reverse stock splits.

On April 20, 2010, the Company approved a 20% restricted stock dividend for the holders of its common stock, consisting of one share of common stock for each five shares held of record on the May 28, 2010 record date.

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) as the primary source of authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Although the establishment of the ASC did not change current GAAP, it did change the way we refer to GAAP throughout this document to reflect the updated referencing convention.

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, 2010. There were no significant changes to these accounting policies during the six months ended January 31, 2011, and the Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform with current period presentations.

Note 3. Note Receivable

During the six months ended January 31, 2011, the Company advanced Superlattice Power, Inc. (“SPI”) $109,279 of which $114,410 was repaid ($74,000 in the form of cash and $40,410 in reimbursement for a leased employee). A credit of $5,131 to bad debt expense is included in general and administrative expenses for the six months ended January 31, 2011.

 
10

 

During the year ended July 31, 2010 the Company advanced SPI $1,282,988, of which $441,781 was repaid and the net amount was reserved as an allowance for doubtful accounts .

As of January 31, 2011 and July 31, 2010, an allowance for doubtful accounts in the amount of $836,076 and $841,207, respectively, was recorded against the note receivable, reducing the amount to $0.

Note 4. Inventories

Inventories consist of the following:

   
January 31,
   
July 31,
 
   
2011
   
2010
 
Raw Materials
  $ 1,103     $ -  
Finished Goods
    35,000       35,000  
    $ 36,103     $ 35,000  

Finished goods as of January 31, 2011 and July 31, 2010, are related to the Company’s planned sales of electric powered vehicles.

 Note 5. Property and Equipment

Property and equipment consist of:

   
January 31,
   
July 31,
 
   
2011
   
2010
 
Building and Improvements
  $ 1,287,001     $ 1,287,001  
Furniture and Fixtures
    15,794       15,794  
Office Equipment
    146,016       146,016  
Machinery and Equipment
    36,971       36,971  
Vehicles
    66,429       66,429  
Software Costs
    28,913       28,913  
Land
    700,000       700,000  
      2,281,124       2,281,124  
                 
Less Accumulated Depreciation
    (400,290 )     (361,443 )
Net Property and Equipment
  $ 1,880,834     $ 1,919,681  

Depreciation expense for the three months ended January 31, 2011 and 2010, was $19,372 and $19,491, respectively. Depreciation expense for the six months ended January 31, 2011 and 2010, was $38,847 and $40,774, respectively, and  is included in general and administrative expenses on the Company’s consolidated statement of operations.
 
 
11

 
 
Note 6. Other Current Assets

   
January 31,
   
July 31,
 
   
2011
   
2010
 
             
Retainers
  $ 749     $ 7,500  
Deferred Warranty Asset
    13,668       25,594  
Prepaid Expenses
    79,772       17,906  
Total
  $ 94,189     $ 51,000  
 
Note 7. Accounts Payable and Accrued Expenses

Accounts payable, accrued expenses and other current liabilities at January 31, 2011 and July 31, 2010 consisted of:

   
January 31,
   
July 31,
 
   
2011
   
2010
 
             
Accounts Payable
  $ 585,407     $ 599,518  
Accounts Payable - Related Parties
    81,673       63,325  
Wages, Paid Leave and Payroll Related Taxes
    206,119       407,884  
Accrued Interest
    84,229       114,619  
Other
    74,823       111,388  
Total
  $ 1,032,251     $ 1,296,734  
 
 
12

 
 
Note 8. Long-Term Debt

Long-term debt consists of:

   
Years Ended
 
    
July 31,
 
    
January 31,
   
July 31,
 
   
2011
   
2010
 
5% Note payable to Bayview Loan Servicing, LLC, payable in monthly installments of $5,349 including interest, collateralized by real property due in full on or before March 2038 (1)
  $ 945,505     $ 953,437  
                 
10% Note payable to Crystal Capital Ventures, payable in May 2012 collateralized by 9,000,000 shares of the Company's common stock (2)
    3,000,000       3,000,000  
                 
11.24% Note payable to Allegiance Direct Bank, payable in monthly installments of approximately $1000 and has been paid in full (3)
    -       5,000  
                 
12% Note payable to Frontline Asset Management, payable in monthly installments of interest only, due in full on March 1, 2012 (4)
    1,185,435       1,235,404  
                 
10% Note payable to Winsor Capital Inc. due in full on April 15, 2013 collaterized by 12,000,000 shares of the Company's common stock (5)
    771,659       771,659  
      5,902,599       5,965,500  
Less Current Portion
    (16,480 )     (22,444 )
    $ 5,886,119     $ 5,943,056  
 
Principal maturities for long-term debt are as follows for the second quarters ended January 31:

2011
  $ 16,480  
2012
    4,202,773  
2013
    789,900  
2014
    19,191  
2015
    20,190  
Thereafter
    854,065  
    $ 5,902,599  
  
 
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(1) In November 2007, the Company refinanced a loan on its North Carolina building. The loan is with Bayview Loan Servicing, LLC. Effective March 31, 2010, the Company entered into a stipulation agreement with Bayview Loan Servicing, LLC that reduced the current monthly payment to $5,349, including interest, property taxes, and insurance. In 2013, Bayview Loan Servicing LLC may step up the interest rate at that time. The loan is set to mature 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 January 31, 2011 and 2010, the Company repaid $2,666 and $8,237, respectively. During the six months ended January 31, 2011 and 2010, the Company repaid $7,982 and $15,938, respectively. Interest expense for the three months ended January 31, 2010 and 2010, for Bayview Loan Servicing, LLC was $12,056 and $25,927, respectively. Interest expense for the six months ended January 31, 2010 and 2010, for Bayview Loan Servicing, LLC was $20,122 and $52,390, respectively.

 (2) On May 5, 2008, the Company entered into a loan agreement with Crystal Capital Ventures Inc. (“Crystal Capital”). The loan agreement provides for loans to the Company of up to $3,000,000, with a minimum initial loan of $500,000 taking place on May 19, 2008. The loans bear interest payable monthly in arrears at the rate of 10% per annum, and mature and are payable on May 4, 2012. The loan under the loan agreement is secured by shares of the Company’s common stock held by Crystal Capital. The Company is required to issue shares as collateral at the rate of two and one half shares of the Company’s common stock for each dollar principal amount of the loan advanced to the Company.  Following disbursement of the first $1,000,000 of funds pursuant to the loan agreement, on May 27, 2008, the Company issued 2,500,000 shares of common stock as collateral to Crystal Capital. After the 1:3 reverse stock split in February 2009 the Company issued Crystal an additional 5,000,000 shares to make their shares held as collateral total 7,500,000. Pursuant to the anti-dilution provisions in the Crystal Capital Ventures loan agreement with the 1:2 reverse stock split of February 1, 2010, the Company issued 3,749,999 shares to Crystal Capital Ventures so they again hold 7,500,000 post reverse stock split shares.  In connection with the Company's 20% stock dividend, the Company issued an additional 1,500,000 common shares to be held as collateral.

As of January 31, 2011, the Company has borrowed the full $3,000,000 under the loan agreement from Crystal Capital. Interest expense to Crystal Capital for the three months ended January 31, 2011 and 2010, was $75,616 and $79,467, respectively. Interest expense to Crystal Capital for the six months ended January 31, 2011 and 2010, was $151,233 and $156,085, respectively.

(3) On February 28, 2010 the Company financed a liability policy (workman’s compensation) with Allegiance Direct Bank for the period February 28, 2010 to February 28, 2011 for $13,351. The Company was required to make a down payment of $3,351 in February 2010 and monthly payments including interest of 9.4%. During the three months ended January 31, 2011 and 2010, the Company repaid $2,075 and $2,940, respectively. During the six months ended January 31, 2011 and 2010, the Company repaid $5,000 and $5,880, respectively. Interest expense for the three months ended January 31, 2011 and 2010, paid to Allegiance Direct Bank is $29 and $152, respectively. Interest expense for the six months ended January 31, 2011 and 2010, paid to Allegiance Direct Bank is $261 and $303, respectively.

(4) 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 May 1, 2010, 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, 2011 when all principal and accrued interest shall be due and payable.  During the three months ended January 31, 2011 and 2010, the Company received advances totaling $271,920 and $0, respectively; and made payments of $416,242 and $0, respectively.  During the six months ended January 31, 2011 and 2010, the Company received advances totaling $832,755 and $0, respectively; and made payments of $882,673 and $0, respectively.  Interest expense for the three months ended January 31, 2011 and 2010, was $32,905 and $0, respectively . Interest expense for the six months ended January 31, 2011 and 2010, was $79,864 and $0, respectively.

(5) On April 15, 2010 the Company entered into a loan agreement for $2,000,000 with Winsor Capital Inc. The loan provides for payments of up to $2,000,000 to the Company with an initial installment of $250,000 and additional installments of up to $1,750,000 with a 10% interest rate. The entire loan amount is secured by 12,000,000 shares of the Company common stock. Each loan installment matures three years from issuance of the installment. The loan has an anti-dilution clause for the stock issued as collateral. Stock is issued and delivered proportionately to the delivery of funds.  Interest expense for the three months ended January 31, 2011 was $19,450.  Interest expense for the six months ended January 31, 2011 was $38,900.
 
 
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Note 9. Stockholders’ Equity

On January 15, 2009, the Company’s shareholders approved a 1:3 reverse stock split for the outstanding shares but it did not take effect until February 19, 2009. Common stock, authorized shares was 35,714,285 and was increased to 50,000,000 on February 19, 2009. On February 20, 2009, the Company issued Wyndom Capital Investments, Inc. an additional 6,666,665 shares as collateral for a loan that in June 2009 went into default and the share collateral for which was taken by the lender. Crystal Capital Ventures Inc. was issued 4,999,999 shares so they again held 7,500,000 post reverse stock split shares as of February 20, 2009, as collateral for a loan of up to $3,000,000 as discussed in Note 8.

On February 1, 2010, the Company effected a 1:2 reverse stock split. Pursuant to the anti-dilution provisions in the Crystal Capital Ventures loan agreement the Company issued 3,749,999 shares to Crystal Capital Ventures, so they again held 7,500,000 post reverse stock split shares. Concurrent with the 1:2 reverse stock split the authorized shares were also reduced from 50,000,000 to 25,000,000 shares. By shareholder approval on May 17, 2010 the authorized shares of common stock were increased from 25,000,000 to 100,000,000.

Except for the presentation of common shares authorized and issued on the consolidated balance sheet and shares presented in the consolidated statement of stockholders’ deficiency, all shares and per share information has been revised to give retroactive effect to the reverse stock splits.

Note 10. Net Income (Loss) Per Common Share

Income (Loss) per share is computed based on the weighted average number of shares outstanding during the year. Diluted gain (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares during the specified periods.

The following table sets forth the reconciliation of the basic and diluted net gain (loss) per common share computations for the six months ended January 31, 2011 and 2010.

   
Three Months Ended
   
Six Months Ended
 
    
January 31,
   
January 31,
 
   
2011
   
2010
   
2011
   
2010
 
Basic and Diluted EPS:
                       
Net Income/(Loss) Ascribed to Common Shareholders - Basic and Diluted
  $ (989,260 )   $ (637,329 )   $ 576,322     $ (1,526,798 )
Weighted Average Shares Outstanding - Basic and Diluted
    30,047,301       21,599,808       30,047,301       21,288,096  
Basic and Diluted Net Gain (Loss) Per Common Share
  $ (0.03 )   $ (0.03 )   $ 0.02     $ (0.07 )

Note 11. 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” (“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 Dividend

On April 20, 2010, the Board of Directors approved a 20% restricted stock dividend for the holders of our common stock, consisting of one share of common stock for each five shares held of record on the May 28, 2010 record date.
 
 
15

 
 
Increase in Authorized Common Stock

 On April 7, 2010, the Company’s board of directors approved an amendment to our Articles of Incorporation to increase the authorized number of shares of common stock from 25,000,000 shares, par value $.001 per share, to 100,000,000 shares, par value $.001 per share. The Company thereafter received the written consent from a shareholder of our company holding a majority (51.58%) of the outstanding shares of our common stock on April 8, 2010. The Company filed the amendment with the Secretary of State on Nevada on May 4, 2010, after mailing a Definitive Information Statement to our stockholders and the amendment was effective May 17, 2010.

Stock Option Plan

As of January 31, 2011, there are no shares of common stock remaining and available for issuance under the stock option plans.

Note 12. 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 six months ended January 31, 2011 and 2010.
 
Note 13. Commitments and Contingencies

Lease Agreement

Our principal executive office is located in Las Vegas, Nevada. We lease approximately 1,900 square feet under a lease agreement that commenced in March 2008 and renews on an annual basis. The lease provides for an aggregate annual payment of $18,000. We believe our current facilities will generally be adequate for our needs for the foreseeable future.

Effective April 16, 2008, SPI agreed to lease approximately 5,000 square feet of space in the Company’s North Carolina facility at a rental rate of $2,500 per month and the monthly rental to be escalated five (5%) percent annually beginning April 16, 2009.  The leased space is suitable for, and utilized by SPI for, SPI’s developmental and manufacturing operations for licensed products pursuant to the License Agreement. The leased space is leased on a month-to-month basis at a current monthly rental of $2,756. Although the lease was signed, the space is only 80% completed as of January 31, 2011. The Company also entered into a month to month lease agreement for $750 with SPI for renting offices in the Company’s Las Vegas corporate office.

Total rental income for the three months ended January 31, 2011 and 2010 was $10,519 and $10,125, respectively. Total rental income for the six months ended January 31, 2011 and 2010 was $21,038 and $20,250,  respectively.

License Agreement

Effective May 28, 2010 the Company entered into a 10 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. LEVC agreed to pay the Company $2 million dollars over the initial two year term with the option to extend the agreement on an annual basis for an additional $500,000 per year.  The revenue earned from the license agreement is amortized over the two year period, and for the three months ended January 31, 2010 the Company recognized income of $125,000 and for the six months ended January 31, 2011, recognized income of $250,000  with $333,334 being deferred.

 
 
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In connection with the license agreement, LEVC agreed to pay the Company a royalty on each and every licensed product sold or distributed by LEVC.  The royalty is due within ten days of each calendar quarter. In addition, LEVC agreed to pay the Company $1,000,000 in the form of cash, of which we have received $666,666 and the remaining balance of $333,334 is now delinquent; and $1,750,000 in the form of a convertible debenture which has not been issued and is also delinquent.

 Surety Bond

The Company applied to North Carolina Department of Motor Vehicles for a manufacturing license. This application required a surety bond of $50,000 for three years which the Company acquired from Kaercher Campbell & Associates. The Company is licensed as a motor vehicle dealer to engage in the business of selling motor vehicles by the State of North Carolina DMV.  The Company's license is effective through March 31, 2011.

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 Meckenberg 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 the its payment arrangements and has a balance of $4,263 still due.

Internal Revenue Service 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 has a payment plan in place with the Internal Revenue Service (“IRS”).

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 $56,375.

Note 14. Automotive X Prize

The Progressive Insurance Automotive X-Prize, (“PIAXP”), competition was announced in April 2008 as a way to spur the development of clean, high-mileage vehicles, and is funded for a total of $10 million, which will be divided among three separate categories. The X-Prize challenge drew an unexpectedly strong response; 115 teams entered 136 separate vehicles, winners were announced in Washington D.C. on September 15, 2010 and the Company was the winner in its entry class. On October 27, 2010, the Company received $2.5 million from XPrize and was recorded as other income in the Company’s consolidated statement of operations.

 
 
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Note 15. Forgiveness of Debt

During the six months ended January 31, 2011, management of the Company reviewed the outstanding accounts payable and determined that the liability was overstated due to the payables no longer existing from prior years.  A credit of $111,321 has been reflected on the Company’s Consolidated Statement of Operations under other income.

 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 Six months Ended January 31, 2011

Electric Vehicle Operations

Sales of our electric powered vehicles for the three months ended January 31, 2011 and 2010 were $0 and $0, respectively. Sales of our electric powered vehicles for the six months ended January 31, 2011 and 2010 were $0 and $124,280, respectively.

We convert and manufacture vehicles in our developmental facility in Mooresville, North Carolina. Our teams of highly qualified engineers oversee electrical and mechanical staff.  This 40,000 square foot facility has office space,  room for manufacturing, conversions, storage and a battery lab that is leased to Superlattice Power, Inc., with the potential for future growth, enabling us to work on many projects and vehicles concurrently.

With the licenses of our lithium battery and electric vehicle technology described below, we are concentrating on sales of our vehicles.  We initiated several nationwide newspaper advertising campaigns which  generated some orders for our vehicles, and we are also seeing as a result a significant increase in inquiries about our electric vehicle products.

We entered into a License Agreement (“Superlattice License Agreement”) with Superlattice in April 2008, providing for our license to Superlattice of our patent applications and technologies for rechargeable lithium ion batteries for hybrid vehicles and other applications (“Licensed Products”).  Under the Superlattice License Agreement, we have the right to purchase our requirements of lithium ion batteries from Superlattice, and our requirements of lithium ion batteries shall be supplied by Superlattice in preference to, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of Superlattice. Our cost for lithium ion batteries purchased from Superlattice shall be Superlattice’s actual manufacturing costs for such batteries for the fiscal quarter of Superlattice in which our purchase takes place. On May 25, 2010, the Superlattice License Agreement was amended to reflect Superlattice’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.
 
Superlattice agreed to invest a minimum of $1,500,000 in 2008 and 2009 in development of the technology for the Licensed Products. In the initial year under the License Agreement, Superlattice invested $264,043 in the development of technology, and therefore is not in compliance with its obligations under this covenant of the Superlattice License Agreement. We have advised Superlattice, that we will not give notice of default against Superlattice for its failure to comply with this covenant for the term of the License Agreement.
 
On May 25, 2010, the Superlattice License Agreement was amended to limiting the license granted to Superlattice to only the United States, permitting Li-ion to grant other licenses to companies in other parts of the world.
 
 
18

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

Under the LEVC License Agreement, LEVC has agreed, in consideration of the grant of the license, to pay us $1,000,000, of which $666,666 has been paid, with the remaining $333,334 now delinquent, plus an amount equal to the independent valuation of the license under the LEVC License Agreement, less the $1,000,000 payment.  The payment of the excess of the valuation amount over the $1,000,000 payment would be made by way of a convertible debenture or other securities which have not been made and are now delinquent. Additionally, LEVC, as licensee, would pay an annual fee of $500,000, commencing on the second anniversary of the date of the LEVC License Agreement, and a royalty as determined in the independent valuation report. The initial term of the license is ten years.

Cost of Sales

Cost of sales as a percentage of net sales for the three months ended January 31, 2011 was 656% compared to approximately 0% during the same period in 2010.   The cost of sales for the second quarter represents the cost of sales on parts as there were no vehicle sales during the three months ended January 31, 2011.

Cost of sales as a percentage of net sales for the six months ended January 31, 2011 was 372% compared to approximately 131% during the same period in 2010.   The cost of sales for 2011 represents the cost of sales on parts as there were no vehicle sales during the six months ended January 31, 2011.

General and Administrative Expenses

General and administrative (“SG&A”) expenses increased to $517,840 for the three months ended January 31, 2011, as compared to $377,204 during the same period in 2010. The increase was attributable to additional expenditures in advertising and promotional expenses of $287,277, which was offset by a reduction in: (1) payroll related expenses of $48,905; (2) professional fees of $29,368; (3) penalties of $23,324; (4) insurance expense of $10,702;  and (3) other various expenses of $34,342.

SG&A expenses increased to $882,370 for the six months ended January 31, 2011, as compared to $748,526 during the same period in 2010. The increase was attributable to:  (1) advertising and promotional expenses of $289,486; and (2) travel  of $29,084.  The increase in expenditures was offset with reduction in (a) payroll related expenses of $97,238; (b)  professional fees of $63,308; and (c) insurance expense of $21,560.

Of all SG&A expenses the Company incurred during the first-half of 2011, 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 January 31, 2011 and January 31, 2010, amounted to $388,426 and $371,095, respectively. Parts and supplies expensed to R&D was $13,381 and a credit of $153,569 for the three months ended January 31, 2011 and 2010, respectively. Shipping charges, battery management systems, and motor development costs were $37,948 and $6,808, for the three months ended January 31, 2011 and 2010, respectively. Costs associated with building two prototypes of our electric powered vehicles during the second quarter 2011 and 2010, increased R&D by $107,473 and $0, respectively.

 
 
19

 
 
Salaries, payroll taxes, and benefits expensed to R&D for the six months ended January 31, 2011 and January 31, 2010, amounted to $642,865 and $777,050, respectively. Parts and supplies expensed to R&D was $18,959 and a credit of $131,515 for the six months ended January 31, 2011 and 2010, respectively. Shipping charges, battery management systems, and motor development costs were $48,000 and $11,420, for the six months ended January 31, 2011 and 2010, respectively. Costs associated with building two prototypes of our electric powered vehicles during the first-half of 2011 and 2010, increased R&D by $319,381 and $0, 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 increased to $144,883 for the three months ended January 31, 2011 as compared to $107,208 for 2010, and $302,721 for the six months ended January 31, 2011 as compared to $169,772 for 2010 due to additional issuance of debt. Interest expense consists primarily of interest related to borrowings.

Other Income

Effective April 16, 2008, Superlattice agreed to lease approximately 5,000 square feet of space (“Leased Space”) in our North Carolina facility, such Leased Space to be suitable for, and utilized by Superlattice for, Superlattice’s developmental and manufacturing operations for Licensed Products pursuant to the License Agreement.  The Leased Space is leased on a month-to-month basis at a monthly rental of $2,756 the monthly rental to be escalated five (5%) percent annually.

Other income for the three months ended January 31, 2011 consists of (1) accounting fees and rental income from Superlattice for $18,019; (2) revenue earned from the license agreement with LEVC of $125,000; and (3) forgiveness of debt of $111,321. Other income was reduced by $19,832 for foreign exchange transactional expense.  Other income for the three moths end January 31, 2010 consisted of accounting fees and rental income from Superlattice for $17,625 and forgiveness of debt of $52,793 .

Other income for the six months ended January 31, 2011 consists of (1) accounting fees and rental income from Superlattice for $36,038; (2) revenue earned from the license agreement with LEVC of $250,000; (3) receipt of net proceeds of  $2,425,272 from XPrize; and (4) forgiveness of debt of $111,321.  Other income was reduced by $19,832 for foreign exchange transactional expense. Other income for the six-moths end January 31, 2010 consisted of accounting fees and rental income from Superlattice for $35,250 and forgiveness of debt of $52,793.

Net Earnings (Loss)

Net loss attributable to common stockholders for the three months ended January 31, 2011 was $989,260 compared to $637,329 for the previous fiscal quarter. Basic and diluted loss attributable to common stockholders per share of common stock for the three months ended January 31, 2011 was $0.03 as compared to $0.03 for the previous fiscal quarter.

Net earnings attributable to common stockholders for the six months ended January 31, 2011 was $576,322 compared to a net loss of $1,526,798  for the previous fiscal quarter. Basic and diluted gain attributable to common stockholders per share of common stock for the six months ended January 31, 2011 was $0.02 as compared to a loss of $0.07 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.

 
 
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At January 31, 2011, we had liabilities of $7,380,574, as compared with $7,960,959 at July 31, 2010; and a working capital deficiency of $1,361,693 and a stockholders’ deficiency of $5,342,720.

Our property, plant and equipment decreased to $1,880,834 at January 31, 2011, as compared with $1,919,681 at July 31, 2010.
 
Net cash provided by operating activities was $56,918 during the six months ended January 31, 2011, as compared with $1,143,048 used  in 2010, and cash used in investing activities during the six months ended January 31, 2011, was $0 , as compared to $4,665 during the same period in 2010.

During the six months ended January 31, 2011, from the issuance of a promissory note for a receivable, we advanced $109,279 to Superlattice Power, Inc. and was repaid $114,410. During the six months ended January 31, 2011, we received net proceeds of $832,755 from the issuance of promissory notes for debt, and made repayments of  $895,655.  Net cash provided by financing activities for the six months ended January 31, 2011 was $57,769, as compared with cash used of $1,161,663 for the comparable period in 2010.

On May 5, 2008, the Company entered into a loan agreement with Crystal Capital Ventures Inc. (Crystal”). The loan agreement provides for loans to the Company of up to $3,000,000, with a minimum initial loan of $500,000 on May 19, 2008. The notes bear interest payable monthly in arrears at the rate of 10% per annum and mature and are due and payable May 4, 2011. The loans under the loan agreement are secured by shares of the Company’s common stock held by Crystal. The Company is required to issue shares as collateral at the rate of two and one half shares of the Company’s common stock for each dollar principal amount of the loan advanced to the Company.  Following disbursement of the first $1,000,000 of funds pursuant to the loan agreement, on May 27, 2008, the Company issued 2,500,000 shares of common stock as collateral to Crystal. After the 1:3 reverse stock split in February 2009 the Company issued Crystal an additional 5,000,000 shares to make their shares held as collateral total 7,500,000. After the 1:2 reverse stock split in February 2010 the Company issued Crystal an additional 3,749,999 shares to make their shares held as collateral total 7,500,000.

As of January 31, 2011, the Company has borrowed the full $3,000,000 under the loan agreement from Crystal Capital. Interest expense to Crystal Capital for the three months ended January 31, 2011 and 2010, was $75,616 and $79,467, respectively. Interest expense to Crystal Capital for the six months ended January 31, 2011 and 2010, was $151,233 and $156,085, respectively.  The current balance as of October 31, 2010 due to Crystal Capital is $3,000,000.

On October 12, 2010, the Company entered into a amendment to the Crystal loan agreement, under which the lender agreed to extend the due date of the loan to May, 2012.

On February 26, 2010, the Company entered into a loan agreement with Frontline Asset Management Inc. (“Frontline”). The loan provides for advances to the Company of $2,000,000 with interest at a fixed annual rate of 12%. On May 1, 2010, an Addendum to the original Promissory Note, dated February 26, 2010, 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, 2011, when all principal and accrued interest are due and payable.  During the three months ended January 31, 2011 and 2010, the Company received advances totaling $271,920 and $0, respectively, and made payments of $416,242 and $0, respectively.  During the six months ended January 31, 2011 and 2010, the Company received advances totaling $832,755 and $0, respectively; and made payments of $882,673 and $0, respectively.  Interest expense for the three months ended January 31, 2011 and 2010, was $32,905 and $0, respectively . Interest expense for the six months ended January 31, 2011 and 2010, was $79,864 and $0, respectively.

On October 11, 2010, the Company entered into a amendment to the Frontline loan agreement, under which the lender agreed to extend the due date of the loan to March 1, 2012.

On April 15, 2010 the Company entered into a loan agreement for $2,000,000 with Winsor Capital Inc. The loan provides for loans of up to $2,000,000 to the Company with an initial installment of $250,000 and additional installments of up to $1,750,000 with a 10% interest rate. The entire loan amount is secured by 10,000,000 shares of the Company common stock. Each loan installment matures three years from issuance of the installment. The loan has an anti-dilution clause for the stock issued as collateral. Stock is issued and delivered proportionately to the delivery of funds. Interest expense for the three months ended January 31, 2011 was $19,450.  Interest expense for the six months ended January 31, 2011 was $38,900.
 
 
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Liquidity Issues

On October 27, 2010, we received the $2,500,000 in funds for the X Prize award, from the competition sponsored by Progressive Insurance Casualty Company.  We will need additional capital to continue development and marketing of our electric vehicles, particularly given the number of companies competing in this sector and the fact that many of the larger car manufacturers are developing and marketing electric and hybrid vehicles.

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 have 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 other 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, 2010.  There were no significant changes to these accounting policies during the six months ended January 31, 2011 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.
 
 
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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 are 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 or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

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
Caudle & Spears has obtained a default judgment against the Company in Meckenberg 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 the its payment arrangements and has a balance of $4,263 still due.

Internal Revenue Service
Internal Revenue Service 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. We are working toward a payment arrangement with the IRS.

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 $56,375.
 
 
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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.
 
 
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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: March 17, 2011
By:
/s/ Stacey Fling
 
   
Stacey Fling
 
   
Chief Executive Officer and Principal
Financial Officer
 
 
 
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