**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

__________________________________________________________________________________	

 

**FORM 10-K**

 

__________________________________________________________________________________	

 

 

**Commission file number 000-33391**

 

**Terra Inventions Corp.**

(Name of Registrantas Specified in Its Charter)

 

 

**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 $0.001 per share

 

 

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [x]No

 

Indicateby checkmark if the registrant is not required to file reports to Section 13 or 15(d) of the Act. [ ] Yes [x] No 

 

Indicateby check mark whether the issuer:  (1)  filed all reports required to be filed by Section 13 or 15(d) of theExchange 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

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] 

 

Indicateby check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). [ ] Yes [x] No 

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitionsof "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 ofthe Exchange Act.

 

Largeaccelerated filer [ ]                                                                                                              Acceleratedfiler [ ]

 

Non-acceleratedfiler [ ]                                                                                                                Smallerreporting company [x]

(Do not check if a smaller reportingcompany)

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [x] No 

 

The aggregate market value of votingand non-voting common equity held by non-affiliates as of January 31, 2013, was $3,191,191 based on the average bid and asked priceson the OTC Bulletin Board on that date.

 

On November 1, 2013, there were 39,935,517shares of common stock outstanding.

 

 

**Table of Contents**

 

 

**PART I**

 

 NOTE REGARDINGFORWARD LOOKING STATEMENTS

 CAUTIONARYSTATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS

 OF THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995

 

This Annual Report contains historicalinformation as well as forward-looking statements. Statements looking forward in time are included in this Annual Reportpursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve knownand unknown risks and uncertainties that may cause our actual results in future periods to be materially different fromany future performance suggested herein. We wish to caution readers that in addition to the important factors described elsewherein this Form 10-K, the following forward looking statements, among others, sometimes have affected, and in the future couldaffect, our actual results and could cause our actual consolidated results during 2013, and beyond, to differ materiallyfrom those expressed in any forward-looking statements made by or on our behalf.

 

**Item 1. Business**

** **

***Company History***

** **

Terra Inventions Corp. (“we, “us”,or the “Company”) was incorporated under the laws of the State of Nevada in April 2000. The Company currently has noemployees, (only an accounting consultant with limited hours and the CEO), and is seeking funding to enable us to begin the developmentand marketing of electric powered vehicles and products based on the advanced lithium battery technology we developed.

** **

 

***Recent Developments***

 

Our facility in Mooresville, North Carolina,was closed in May 2012, and all employees in North Carolina were released. Currently, all ongoing work is being performed by consultants.The Company is looking to license its automotive and battery technologies to other electric vehicle manufacturers or for otherapplications.

 

We changed our name from Li-ion MotorsCorp. to Terra Inventions Corp. on November 30, 2012.

 

*DTC/DWAC Deposit Chill*

 

The Company was notified by an April16, 2013 letter from The Depository Trust Company (“DTC”) that DTC had determined to impose a restriction on physicaldeposit and on Deposit/Withdrawal At Custodian (“DWAC”) electronic deposit transactions (referred to as a “depositchill”) on our common stock. In the letter DTC stated that the deposit chill was due to the filing of an SEC enforcementaction against an attorney for securities opinions issued by that attorney. That attorney had been utilized by one of our shareholdersin connection with a transfer of stock in 2008 through our transfer agent, which transfer (although the Company was not consultedabout or involved in the transfer) appears to the Company to have been in compliance with all SEC rules. We have engaged specialcounsel in this matter. The effect of the deposit chill is that no new shares of our common stock will be accepted for depositwith DTC for electronic transfer or electronic transfer transactions, until we complete our submissions to DTC and DTC determinesto lift the deposit chill.

 

*Foreclosure Proceedings*

 

Foreclosure proceedings on the Company’sfacility in Mooresville were initiated in July 2012 by Bayview Loan Servicing, LLC (“Bayview”) and Frontline AssetManagement, Inc. (“Frontline”), with the County of Iredell, North Carolina, General Court of Justice, Superior CourtDivision. The property was sold pursuant to the Frontline notice of foreclosure and sale on August 22, 2012.  On September14, 2012, the sale of the property pursuant to the Frontline foreclosure and sale was completed, and Frontline assigned to a thirdparty its rights to its foreclosure bid, subject to the rights of Bayview, as the holder of the first mortgage on the property.

 ***Liquidity and Capital Resources***

 

As of July 31, 2013, we had cash on hand of $76 and ourliabilities totaled $2,532,392. For the year ended July 31, 2013, we incurred a net loss from continuing operations of $1,099,873.On July 31, 2013, we had a working capital deficiency of $2,532,316 and stockholders' deficiency of $2,490,836.

 

We need capital to continue development and marketing ofour electric vehicles, particularly given the number of companies competing in this sector and the fact that many of the largercar manufacturers are developing and marketing electric and hybrid vehicles.

 

We had 39,945,517 shares of common stock issued and outstandingas of November 1, 2013. Our common stock is traded on the OTCQB.

 

***General***

 

We are an early stage technology company.We plan to develop and market electric powered vehicles and products.

 

***Our Electric Battery Pack andVehicle Technology***

** **

In late 2007 and early 2008 we beganmarketing conversions of four-wheel vehicles. Then in 2009, we began to design and manufacture our own new and innovative autodesigns. Currently with only consultant work, and no work in the facility, all employee work is at a standstill.

 

We had converted and tested vehiclesbased on Chrysler PT Cruiser, Mini Cooper, Pontiac Vibe, Toyota Yaris and the Mercedes’ Smart car in the Mooresville, NorthCarolina facility. We replaced the gasoline power systems with all electric lithium battery power systems and battery managementsystems.  We developed a rapid charge system that reduces charge time by approximately 65%; it was briefly used and tested.

 

***Our Battery Technology***

 

In electric vehicles the battery packperforms the same function as the gas tank in a conventional vehicle: it stores energy needed to operate the vehicle. We used batterypacks created in-house from Kokam cells in our converted vehicles.

 

***License Agreements***

 

We entered into a License Agreement (“CleanEnviro License Agreement”) with Clean Enviro Tech Corp. (formerly Sky Power Solutions Corp., “Clean Enviro”)in April 2008, providing for our license to Clean Enviro of our patent applications and technologies for rechargeable lithium ionbatteries for electric vehicles and other applications (“Licensed Products”). With the closing of the Mooresville facilitythe space leased to Clean Enviro is no longer available and we are not certain how this will affect them and their ability to producebatteries or honor the license agreement.

 

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

 

Commercial Initiatives

 

On March 9, 2009, the State of NorthCarolina issued a manufacturing license to the Company that permitted us to manufacture our own original design vehicles with VehicleIdentification Number’s (“VIN”), and continue to convert other vehicles. The manufacturing license is currentlysuspended.

SinceFebruary 2004, the LiVTM series electric vehicleswere tested and reviewed by a number of government agencies. The testing of the LiVTM seriesvehicles by NASA, Arcadis, a contractor to the U.S. Environmental Protection Administration, NYC Taxi Commission, and US Paratransithas been completed. The LiVTM WISE is listed inthe catalogue of the Unites States General Services Administration, and these vehicles were available for purchase by multiplegovernment agencies. The target market for the LiVTM WISEwas federal government offices, utility companies, defense organizations and fleet operators. We worked with Zero Truck- USA forcommercialization of lithium ion powered heavy duty truck. The WAVE electric vehicle was targeted at the commuter environment,and the INIZIO super sport car for the high performance car market. 

 

***Competition***

 

There are a number of larger companiesselling electric vehicles including Nissan, Toyota, Tesla, General Motors and other large automobile manufacturers.

 

***Employees***

 

As of the date of this report, we haveone employee and all other work is being performed by consultants. Our President and CEO, Stacey Fling, has elected to defer hersalary. Our accounting consultant is now in a minimal capacity and Holly Roseberry serves in an advisory position in Las Vegas,Nevada. 

 

***Research and Development Expenditures***

 

We incurred research and developmentexpenditures of $1,297 in our fiscal year ended July 31, 2013, and $483,599 in our fiscal year ended July 31, 2012.

 

***Patents and Trademarks***

 

            We  filedthree utility patents, (non-provisional);  each application claims the benefit of the provisional filing date of July1, 2009.  The Patent Office has issued a Notice of Allowance for the company’s Rechargable Battery Cathode Materialpatent application.

 

**1. Thermal Management System for Lithium Batteries-  Application No: 12829369**

 

It has been observed that lithium ionbatteries work efficiently and provide the highest mileage at certain predetermined temperatures.  Below optimum temperature,efficiency drops off drastically.  For example if an electric vehicle can run 100 miles at its battery’s  optimumoperational temperature, at zero or subzero temperatures the vehicle’s mileage would drop by approximately forty percent.  Toavoid this, a heating system has been introduced to keep the battery temperature at a certain point to achieve the target mileagewhile driving during the winter  seasons which reach zero or subzero temperatures. The lithium ion battery is also notallowed to charge at zero, subzero or, or below temperatures for safety issues.

 

**2. Rechargeable Battery Cathode Material - ApplicationNo. 12829355**

 

 A novel cathode material for arechargeable battery. The patent office has issued a Notice of Allowance.

 

**3. Charging Algorithm for Lithium Batteries - ApplicationNo. 12829362**

 

There are two major charging proceduresfor charging lithium polymer batteries.  One method is to charge at a constant current.  When a target voltageis reached the current is kept constant until the current which normally decreases, rises to a certain value.  Anothermethod of charging is step charging with a constant current.  In this method, the current is stopped at time intervalsuntil the target voltage is reached.  It has been observed that lithium ion batteries are very sensitive to charge rates,temperatures, thermodynamics and kinetics of all components, electrodes and battery chemistry. 

A novel method reveals a specific algorithm to efficientlycharge lithium batteries by adjusting battery voltage and current output to match the individual chemistry of lithium batteries.

 

TheCompany has also filed two provisional patents related to our battery management system and reverse battery management.

 

**Item 1A.  Risk Factors**

 

You should be particularly aware of theinherent risks associated with our business plan. These risks include but are not limited to:

 

***We have ceased electric vehicle operations in NorthCarolina and our facility there has been foreclosed upon.***

 

Our facility in Mooresville, North Carolina,was closed in May 2012, and all employees in North Carolina were released. Currently, all ongoing work is being performed by consultants.Foreclosure proceedings on the Company’s facility in Mooresville were initiated in July 2012 by the lenders secured by ourMooresville facility, and  the property was sold pursuant to a foreclosure and sale on August 22, 2012.  Thereis no assurance that we will ever be able to resume production of electric vehicles.

 

***We have incurred substantial losses and anticipateongoing losses.***

 

We do not have revenues from our jointventures or substantial sales of our products. We have not signed any definitive joint venture agreements to commercializeany of our products.  As of July 31, 2013, we had cash on hand of $76 and our liabilities totaled $2,532,392. For theyear ended July 31, 2013, we incurred a net loss from continuing operations of $1,099,873. On July 31, 2013, we had a workingcapital deficiency of $2,532,316 and stockholders' deficiency of $2,490,836.

 

We expect that we will continue to haveno or minimal earnings or incur operating losses in the future. Failure to achieve or maintain profitability may materially andadversely affect the future value of our common stock.

 

***If we do not obtain additional financing, our businesswill fail.***

 

We currently have minimal operating fundsand receive no revenues from converted vehicle sales therefore we are unable to commercialize our products. We do not currentlyhave arrangements for additional financing and we may not find such financing as required. Market factors may make the timing,amount, terms or conditions of additional financing unavailable to us.

 

  ***We are subject to allof the risks of a new business.***

 

Our business operations are relativelyrecent; therefore, we face a potentially higher risk of business failure. Our sales revenues are currently nonexistent as of thedate of this report. Potential investors should be aware of the difficulties normally encountered by newer companies and the highrate of failure of such enterprises. The likelihood of success must be considered in light of the many problems including: expenses,difficulties, complications, delays encountered in connection with the commercialization of our products, unanticipated problemsrelating to product development, arranging and negotiating with joint venture partners, additional costs and expenses that mayexceed current estimates. We have limited history upon which to base any assumption as to the likelihood that our business willprove successful, and investors should be aware that there is a substantial risk that we may not generate any significant operatingrevenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most likelyfail.

 

We expect to incur operating losses forthe foreseeable future.

 

This may adversely affect the timingof bringing products to market, as well as the profitability of such products once regulatory approvals are obtained.

**Item 1B. Unresolved Staff Comments.**

 

None.

 

**Item 2. Properties.**

 

Our principal executive office is locatedin Las Vegas, Nevada. Our mailing address is 4894 Lone Mountain Rd., Suite 168, Las Vegas, Nevada 89130, for which we pay$25 per month, on a month to month basis.

 

In May 2006, we purchased 40,000 squarefoot facility at 158 Rolling Hill in Mooresville, North Carolina. The Company’s facility in Mooresville, North Carolinawas financed through Bayview Loan Servicing, LLC (“Bayview”) and Frontline Asset Management, Inc. (“Frontline”),which had a second lien on the property. We became delinquent with the mortgage payments, and, following a prior foreclosure filingand new agreement as to payments under the mortgage, on July 12, 2012, Bayview refiled a notice of hearing on foreclosure on itsdeed 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 withthe same court on July 25, 2012, noticing a hearing for August 22, 2012.   On September 14, 2012, the sale of theproperty pursuant to the Frontline August 22, 2012 foreclosure and sale was completed, and Frontline assigned its rights to itsforeclosure bid to A&S Holdings Inc., a related holding company, subject to the rights of Bayview, as the holder of the firstmortgage on the property. See discussion under the caption “Legal Proceedings” below.

 

**Item 3. Legal Proceedings.**

 

Other than as described below, we arenot a party to any material legal proceedings and to our knowledge, no such proceedings are threatened or contemplated.

 

Caudle & Spears v. EV Innovations, Inc.

 

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

 

Internal Revenue Service

 

Internal Revenue Service (“IRS”)served the Company with a tax lien dated March 3, 2010 in the total amount of $251,928. Third quarter 2009 taxes are approximately$117,000, which are included in total due.  The Company has been served with an additional tax lien dated January 19,2011, in the amount of $2,925. The Company had a payment plan in place with IRS; however, the Company is arrears in payments asof July 31, 2012.  The balancedue on the most recent statement** **from the IRS is $566,071.

 

Javad Hajihadian

 

Tallman Hudders & Sorrentino hasobtained a judgment in Lehigh County, Pennsylvania, on behalf of their client Javad Hajihadian, an individual.  Mr. Hajihadianhad ordered and paid for, the first super car to be produced by the Company in November 2008. The car was in the design stage whenit was ordered.  Mr. Hajihadian’s attorney subsequently contacted  the Company to cancel his contractand 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.  Paymentswere made through November 2010, totaling $51,250, leaving a balance of five payments or $51,250 still due; which is reflectedon the Company’s balance sheet under current liabilities. The Company became delinquent and Mr. Hajihadian proceeded withlitigation and on February 4, 2011, a judgment was issued in his favor for $51,750. Management was** **deposed December2011, and produced requested documents and information.

 

 Bayview Loan Servicing, LLC

 

The Company’s facility in MooresvilleNorth Carolina was financed through Bayview Loan Servicing, LLC (“Bayview”) secured by a first lien on the Company’sproperty 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.  OnJuly 12, 2012, Bayview  refiled a notice of hearing on foreclosure on its deed of trust and security agreement for ahearing on August 21, 2012, the outstanding amount of the loan at July 31, 2012 being $946,279.   A similar noticeof foreclosure pursuant to the Frontline deed of trust was filed by the Trustee with the same court on July 25, 2012, noticinga hearing for August 22, 2012, with an amended notice of default, the amount of $508,492 being outstanding under the loan as ofJuly 31, 2012. The Trustee for Frontline also filed in Superior Court of Iredell County North Carolina on July 25, 2012, a noticeof 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 securingthe deed of trust.   On September 14, 2012, the sale of the property pursuant to the Frontline August 22, 2012foreclosure and sale was completed, and Frontline assigned its rights to its foreclosure bid to A&S Holdings Inc., subjectto the rights of Bayview, as the holder of the first mortgage on the property.

 

Under a Stipulation Agreement, datedJuly 18, 2013, Bayview agreed to suspend foreclosure proceedings and, if four monthly payments of $7,470 each were made on the30th day of the months August through November, 2013, that it would enter into a Loan Adjustment Agreement, dated asof July 18, 2013, which would extend the term of Bayview’s loan to the same date, would become effective to set the unpaidprincipal balance of the loan (including unpaid installments, late charges, fees and costs) at $1,107,515, with a monthly paymentof principal and interest of $7,470, and a maturity date of March 1, 2038. A&S Holdings has made the first three payments underthe Stipulation Agreement, the final payment being due November 30, 2013.

 

 FINE Mobile

 

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

 

Depository Trust Company

 

The Company was notified by an April16, 2013 letter from The Depository Trust Company (“DTC”) that DTC had determined to impose a restriction on physicaldeposit and on Deposit/Withdrawal At Custodian (“DWAC”) electronic deposit transactions (referred to as a “depositchill”) on our common stock. We have engaged special counsel in this matter. The effect of the deposit chill is that no newshares of our common stock will be accepted for deposit with DTC for electronic transfer, until we complete our submissions toDTC, and DTC determines to lift the deposit chill.

 

**Item 4. Mine Safety Disclosures.**

 

None.

**PART II**

 

**Item 5. Market for Registrant's Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

Our shares of common stock tradeand have traded on the NASD OTC Bulletin Board since March 4, 2002. Our common stock also trades on the OTCQB Tierof the OTC Markets Group.  The following table sets forth for our last three fiscal years by quarter the high andlow closing prices of our common shares traded on the OTC Bulletin Board:

 

__________________________________________________________________________________	

(1)  	Aone-for-five reverse split was effective January 26, 2012, and a one-for-ten reverse split was effective December 21, 2012.

 

The above quotations are taken frominformation provided by Google and reflect inter-dealer prices, without retail mark-up, mark-down or commission and maynot represent actual transactions.

 

***Holders ofCommon Stock***

 

As of November 1, 2013, we had 179 holdersof record of our common stock.

 

***Dividends***

 

Our current policy is to retainearnings in order to finance our operations.  Our board of directors will determine future declaration and payment ofdividends, if any, in light of the then-current conditions they deem relevant and in accordance with the Nevada Revised Statutes.

 

 ***Securities Authorized forIssuance under Equity Compensation Plans***

 

All stock options under all plans havebeen granted.

 

 

***Sales of Unregistered Securities***

 

The following table sets forth the unreported sales of unregisteredsecurities for the last three years.

 

 

**Item 6. Selected Financial Data.**

** **

Not applicable.

 

 **Item 7. Management's Discussionand Analysis of Financial Condition and Results of Operations.**

 

***Forward Looking Statements***

 

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

 

***Recent Developments***

 

Our facility in Mooresville, North Carolina,was closed in May 2012, and all employees in North Carolina were released. Currently, all ongoing work is being performed by consultants.The Company is looking to establish a facility in Quebec Canada, where government incentives will help cover expenses related toresearch and development and also to license its automotive and battery technologies to other electric vehicle manufacturers.

 

Foreclosure proceedings on the Company’sfacility in Mooresville were initiated in July 2012 by Bayview Loan Servicing, LLC (“Bayview”) and Frontline AssetManagement, Inc. (“Frontline”), with the County of Iredell, North Carolina, General Court of Justice, Superior CourtDivision. The property was sold pursuant to the Frontline notice of foreclosure and sale on August 22, 2012.  On September14, 2012, the sale of the property pursuant to the Frontline August 22, 2012 foreclosure and sale was completed, and Frontlineassigned its rights to its foreclosure bid to A&S Holdings Inc., subject to the rights of Bayview, as the holder of the firstmortgage on the property.

 

Under a Stipulation Agreement, datedJuly 18, 2013, Bayview agreed to suspend foreclosure proceedings and, if four monthly payments of $7,470 each were made on the30th day of the months August through November, 2013, that it would enter into a Loan Adjustment Agreement, dated asof July 18, 2013, which would extend the term of Bayview’s loan to the same date, would become effective to set the unpaidprincipal balance of the loan (including unpaid installments, late charges, fees and costs) at $1,107,515, with a monthly paymentof principal and interest of $7,470, and a maturity date of March 1, 2038. A&S Holdings has made the first three payments underthe Stipulation Agreement, the final payment being due November 30, 2013.

 

***Results of Operations for theYear Ended July 31, 2013***

 

***Electric Vehicle Operations***

 

We sold two of our electric prototypevehicles during the fiscal year ended July 31, 2012 to Frontline Asset Management for $255,000 which was applied to our outstandingdebt with them. We have closed our facility in North Carolina and liquidated or wrote off most of our assets with some assets beingseized by the sheriff’s department in relation to a court action with FINE Mobile. Other sales during fiscal year ended July31, 2012, were for vehicle parts totaling $7,795.

 

We had converted and manufactured vehiclesin Mooresville, North Carolina. We had teams of highly qualified engineers overseeing electrical and mechanical staff, all engineersand staff were released from contracts when the building was closed just prior to foreclosure proceedings. When we had licensedour lithium battery and electric vehicle technology described below, we hoped to concentrate on sales of our vehicles.

 

***Clean Enviro License Agreement***

 

We entered into a License Agreement (“CleanEnviro License Agreement”) with Clean Enviro Tech Corp. in April 2008, providing for our license to Clean Enviro of our patentapplications and technologies for rechargeable lithium ion batteries for hybrid vehicles and other applications (“LicensedProducts”).  Under the Clean Enviro License Agreement, we have the right to purchase our requirements of lithiumion batteries from Clean Enviro, and our requirements of lithium ion batteries shall be supplied by Clean Enviro in preferenceto, and on a priority basis as compared with, supply and delivery arrangements in effect for other customers of Clean Enviro. Ourcost for lithium ion batteries purchased from Clean Enviro shall be Clean Enviro’s actual manufacturing costs for such batteriesfor the fiscal quarter of Clean Enviro in which our purchase takes place. On May 25, 2010, the Clean Enviro License Agreement wasamended to reflect Clean Enviro’s territory would be the United States, U.S. possessions and territories only, and the Companycan license other companies in other parts of the world.

 

Clean Enviro agreed to invest a minimumof $1,500,000 in 2008 and 2009 in development of the technology for the Licensed Products. To date, Clean Enviro has not met theminimum requirements in the development of technology, and therefore, is not in compliance with its obligations under this covenantof the license agreement.  The Company has advised Clean Enviro that it will not give notice of default against them for theirfailure to comply with this covenant over the term of the License Agreement. With the closure of the Mooresville facility and theloss of the leased space to Clean Enviro, they may be unable to fulfill this agreement.

***Lithium Electric Vehicle Corp.  LicenseAgreement***

 

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

 

The license agreement consists of anannual fee of $500,000 for ten years and an additional $1,750,000 based on a valuation report prepared by an independent thirdparty.  LEVC is required to pay $1 million of the license fee during year one for the initial two years and $500,000each additional year.  The Company has received $732,666 from LEVC with a balance due of $267,334 as of July 31, 2012,which is now delinquent.  The Company wrote off the balance due from LEVC during the year ended July 31, 2012.

 

***Cost of Sales***

 

Cost of sales as a percentage of net vehicle sales for thefiscal year ended July 31, 2013 was 0% as compared to 177% for the same period in 2012. Cost of sales at July 31, 2012, included$209,947 in inventory write offs due to the facility being closed.  Excluding this write off, our cost of sales wouldhave been 97% of our sales.  

 

***General and Administrative Expenses***

 

General and administrative (“SG&A”) expensesdecreased to $534,726 for the fiscal year ended July 31, 2013, as compared to $1,054,901 during the same period in 2012. The decreasewas attributable to lender default fees of $200,000.  This was offset by a reduction in: (1) bad debt expense of $506,206;(2) penalties and late fees of $89,088; (3) salaries and related payroll expenses of $61,242; (4) depreciation expense of $48,485;(5) finder’s fees related to debt financing of $25,000; (6) office rental related expenses of $22,889; (7) directors feesof $21,000; and (8) other various expenses of $42,179.  Of all SG&A expenses the Company incurred during fiscal 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, andbenefits expensed to R&D for the fiscal year ended July 31, 2013 and July 31, 2012, amounted to $0 and $471,300, respectively.Parts and supplies expensed to R&D was $1,297 and $12,299 for the fiscal year ended July, 2013 and 2012, respectively.

 

***Interest Expense***

 

Interest expense decreased to $84,438 for the fiscal yearended July 31, 2013 as compared to $145,088 for 2012.  The decrease was due to the conversion of debt to the Company’scommon stock. Interest expense consists primarily of interest related to borrowings.

 

***Other Income***

 

Other income for the year ended July 31, 2013, consistedprimarily of accounting fees from CET.

 

Effective April 16, 2008, Sky Power agreed to lease approximately5,000 square feet of space (“Leased Space”) in our North Carolina facility, such Leased Space to be suitable for, andutilized by Sky Power for, Sky Power’s developmental and manufacturing operations for Licensed Products pursuant to the LicenseAgreement.  The Leased Space is leased on a month-to-month basis at a monthly rental of $3,038 the monthly rental tobe escalated five (5%) percent annually.  With the closing of the facility in May 2012, and pending foreclosure thislease is null and void.

Other income for the year ended July 31, 2012, consistedprimarily of (1) interest income from the LEVC Note of $175,479; (2) accounting fees and rental income from Sky Power for $62,083;(3) nonrefundable deposit of $30,000; and (4) forgiveness of debt of $17,435.  This income was offset by: (1) writedown of lost deposit of $50,000; and (2) other expense of $143.

 

***Net Loss***

 

Net loss attributable to common stockholders for the fiscalyear ended July 31, 2013, decreased to $1,099,873 from $2,312,015 for the previous fiscal year. Basic and diluted loss attributableto common stockholders per share of common stock for the fiscal year ended July 31, 2013 was $0.02 as compared to $0.11 for thefiscal year ended July 31, 2012.

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***Liquidity and Capital Resources***

 

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

 

At July 31, 2013, we had liabilities of $2,532,392, as comparedwith $3,351,316 at July 31, 2012; and a working capital deficiency of $2,532,316 and stockholders' deficiency of $2,490,836.

 

Our property, plant and equipment decreased to $3,267 atJuly 31, 2013, as compared with $1,054,931 at July 31, 2012.  

 

We used net cash in operating activities of $158,326 in theyear ended July 31, 2013, as compared with $742,456in 2012, and cash used in investing activities was $0 in 2013, as compared withcash received of $35,285 in 2012.

 

During the year ended July 31, 2013, from the issuance ofa promissory note for a receivable, we advanced $0 to CET and were repaid $0. During the year ended July 31, 2013, we receivednet proceeds of $168,228 from the issuance of promissory notes for debt, and made repayments of $9,005. Total cash provided byfinancing activities in the year ended July 31, 2013 was $159,223 as compared to $700,342 in 2012.

  

On February 26, 2010, the Company enteredinto a loan agreement with Frontline. The loan provides for payments to the Company of $2,000,000 with interest at a fixed annualrate of 12%.  On March 1, 2012, an Addendum to the original Promissory Note, dated February 26, 2010, was entered intowhich amended the term of the note to  provide for interest only payments, due on the last day of every month until maturitydate March 30, 2013, when all principal and accrued interest shall be due and payable.  On April 11, 2011, Frontlineassigned $850,279 of its debt to Windsor Capital, Inc. (“Windsor”). On April 19, 2011, Frontline partially assigned$437,309 to Kisumu S.A. (“Kisumu”) and Kisumu immediately converted the assigned note for 1,041,212 shares of CommonStock 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 valueprice of $0.42 per share.  On December 27, 2011, Frontline purchased two electric vehicles for $255,000.  Onthe same day Frontline assigned $250,000 to Cameo Properties, LLC.  On April 26, 2012, the Company assigned $112,500of its note receivable with Clean Enviro to Frontline which reduced the balance due to Frontline by $112,500.

 

On April 15, 2010, the Company enteredinto a loan agreement for $2,000,000 with Windsor. The loan provided for payments of up to $2,000,000 to the Company with an initialinstallment of $250,000 and additional installments of up to $1,750,000 with a 10% interest rate. The entire loan amount was securedby 12,000,000 shares of the Company common stock. Each loan installment matured in three years from issuance of the installment.The loan had an anti-dilution clause for the stock issued as collateral. Stock is issued and delivered proportionately to the deliveryof funds.  The loan was fully funded during the third quarter ending April 30, 2011 with (1) cash advances of $250,000;(2) debt assignment from Frontline of $850,279; (3) accrued interest of $33,534; and (4) $97,528 in cash advance fees.

On April 19, 2011, Windsor convertedthe entire $2,000,000 outstanding loan amount for the 10,000,000 collateralized shares and the Company issued a Stock PurchaseWarrant (“Windsor Warrant”) which entitles Windsor, for a three-year period, to purchase at a purchase price of $.001per share, on a one time basis and only following the effectiveness of the first reverse split of the Company’s common stockfollowing the issuance of the Windsor Warrant , such number of shares of common stock as is equal to the difference between 10,000,000and the number of shares into which such 10,000,000 shares were changed in such first reverse split, the effect being to protectWindsor from any dilution to its 10,000,000 share holding resulting from such first reverse split.

 

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 “AmendedLoan Agreement”). Each Note issued under the Amended Loan Agreement is due three years from the date of its issuance. TheAmended Loan Agreement provides for loans to the Company of up to $750,000 (the “Loan”), with a minimum initial loanof $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 halffrom execution of the Amended Loan Agreement. This is not a revolving facility, and any principal repaid by the Company will notbe available for additional advances to the Company under the Amended Loan Agreement. The Company cannot, without the Lender’sconsent, prepay all or part of the Loan. The notes evidencing the installments of the loans bear interest payable monthly in arrearsat the rate of 10% per annum, and mature and are due and payable three years from the date of issuance. On December 27, 2011, Frontlineassigned $250,000 of its receivable to Cameo.

 

***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. Those fundshave all been used and we need capital to recommence development and marketing of our electric vehicles. Given the number of companiescompeting in this sector and the fact that many of the larger car manufacturers are developing and marketing electric and hybridvehicles there is no guarantee we will achieve or maintain a place in this market.

 

The Company hassubstantial obligations to the Internal Revenue Service and other creditors. The Company is trying to make payments to the InternalRevenue Service (IRS) for delinquent payroll taxes, and had a plan in place with one of two judgment creditors, upon which we havedefaulted.  There is no assurance that we will be able raise additional required capital to meet obligations arisingfrom the settlements of these obligations and litigation matters, as well as the settlement payments with the IRS, and continueoperations.

 

Our current operating funds will notallow any commercialization of our planned products, and therefore we need to obtain additional financing in order to completeour business plan.  In addition, our facility in Mooresville, North Carolina, was closed in May 2012, and all employeesin North Carolina were released. Currently, all ongoing work is being performed by consultants. Foreclosure proceedings on theCompany’s facility in Mooresville were initiated in July 2012 by the lenders secured by our Mooresville facility, and  theproperty was sold pursuant to a foreclosure and sale on August 22, 2012.  There is no assurance that we will ever beable to resume production of electric vehicles.

 

We anticipate approximately$2,000,000 of additional working capital will be  required  over the next 12  months for certificationand market introduction  of these products through joint venture partners or otherwise.  We do not have sufficientcash on hand to meet these anticipated obligations, which are in addition to payments we will owe to judgment creditors and theIRS.

 

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

 ***CriticalAccounting Issues***

 

The Company's discussion and analysisof its financial condition and results of  operations are based upon the Company's financial statements, which have been  preparedin accordance with accounting principles generally accepted in the  United States of America. The preparation of thefinancial statements requires  the Company to make estimates and judgments that affect the reported amount of  assets,liabilities, and expenses, and related disclosures of contingent assets  and liabilities. On an on-going basis, the Companyevaluates its estimates,  including those related to intangible assets, income taxes and contingencies and  litigation.The Company bases its estimates on historical experience and on  various assumptions that are believed to be reasonableunder the circumstances,  the results of which form the basis for making judgments about carrying values  ofassets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimatesunder different assumptions or conditions.

 

***Other Matters***

None. 

 

***New Financial Accounting Standards***

 

The Financial Accounting Standards Board (“FASB”)has codified a single source of U.S. Generally Accepted Accounting Principles (“GAAP”), the Accounting Standards CodificationTM.Unless needed to clarify a point to readers, we will refrain from citing specific section references when discussing applicationof accounting principles or addressing new or pending accounting rule changes. There are no recently issued accounting standardsthat are expected to have a material effect on our financial condition, results of operations or cash flows.

 

 **Item 7A. Quantitative and QualitativeDisclosures About Market Risk.**

 

            InterestRate Risk - Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level ofinterest 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 significantshort-term investments, and due to the short-term nature of our investments, we believe that there is not a material risk exposure.  Ourdebt is at fixed interest rates.

 

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

**Item 8. Financial Statements and Supplementary Data.**

 

**TERRA INVENTIONS CORP.**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

**July 31, 2013 and 2012**

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