10-K - Quarterly report [Sections 13 or 15(d)] | XBRL INSTANCE FILE
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current Operations and Background AuraSource, Inc. (AuraSource or Company) focuses on clean energy technology development. AuraSource developed the AuraCoalTM AuraFuelTM and processes. AuraSource formed AuraSource Qinzhou Co. Ltd., a wholly owned subsidiary in China (Qinzhou) to acquire these types of Hydrocarbon Clean Fuel (HCF) technologies, performing research and development related to the reduction of harmful emission and energy costs for HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology. Currently we developed two patent pending technologies: 1) ultrafine grinding and 2) ultrafine separation.
In early 2010, we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture along with Mongolia Energy and Kaiyuyuan Mineral Investment Group (KMIG) to build an AuraFuel plant. KMIG was to provide the full funding for this plant. AuraSource was to provide the project management expertise and the license from China Chemical Economic Cooperation Center (CCECC). The joint venture was to pay 10% of net profit as a technology license fee. In 2010, KMIG paid $3 million for the license fee deposit to CCECC and $2 million for start-up expenditures. AuraSource invested its management resources and expenses. The joint venture contracted China Shandong Metallurgical Engineering Corp. (CSMEC) as the general contractor which would provide a turnkey solution under an operation service contract. In January 2011, since KMIG failed to fund the joint venture, the joint venture was unable to make payments on the property and pay CSMEC. As such, the construction was put on hold. On June 29, 2011, KMIG informed AuraSource it was dissolving the joint venture. We are currently seeking alternative arrangements regarding this project and exploring all of our options. With limited capital resources, we will focus on our AuraCoal technology.
There can be no assurance we will be able to carry out our development plans for our HCF technology, including AuraCoal and AuraFuel. Our ability to pursue this strategy is subject to the availability of additional capital and further development of our HCF technology. We also need to finance the cost of effectively protecting our intellectual property rights in the United States and abroad where we intend to market our technology and products.
Going Concern The accompanying consolidated financial statements were prepared assuming we will continue as a going concern. We have suffered recurring losses from operations since inception and have an accumulated deficit of $4,946,576 at September 30, 2011. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should we be unable to continue our existence. The recovery of our assets is dependent upon our continued operations.
In addition, our recovery is dependent upon future events, the outcome of which is undetermined. We intend to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.
Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP).
The unaudited consolidated financial statements were prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with US GAAP was omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes for the year ended March 31, 2011 included in our Annual Report on Form 10-K. The results of the three and six months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending March 31, 2012.
Use of Estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Equivalents We consider investments with original maturities of 90 days or less to be cash equivalents.
Income Taxes The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Stock-Based Compensation The Company recognizes the cost of employee services received for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services.
Foreign Currency Transactions The Company recognizes foreign currency gains and losses in other income (expense) on the accompanying statement of operations. Foreign currency gains and losses arise as the Company conducts business with other entitys whose functional currency is not in US dollars. Generally, these gains and losses are recorded at an exchange rate difference between the foreign currency and the functional currency that arises between the transaction date and the payment date.
Net Loss Per Share The Company computes basic and diluted net loss per share by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Common equivalent shares related to stock options and warrants were excluded from the computation of basic and diluted earnings per share, for the three and six months ended September 30, 2011 and 2010 because their effect is anti-dilutive.
Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation (FDIC) insured limits.
Financial Instruments and Fair Value of Financial Instruments Our financial instruments consist of cash and accounts payable. The carrying values of cash and accounts payable are representative of their fair values due to their short-term maturities. We measure the fair value of financial assets and liabilities on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
|Level 1:||Quoted prices in active markets for identical or similar assets and liabilities.|
|Level 2:||Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.|
|Level 3:||Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.|
The Company had no assets or liabilities recorded to be valued on the basis above at September 30, 2011 or March 31, 2011.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805): Disclosures of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29), which specifies that pro forma disclosures for business combinations are to be reported as if the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The pro forma disclosures must also include a description of material, nonrecurring pro forma adjustments. ASU 2010-29 is effective for business combinations with an acquisition date of January 1, 2011 or later. Adoption of the new requirement did not have an effect on the Companys financial position, results of operations or cash flows.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments result in common fair value measurement and disclosure requirements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs), and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments in this update are effective during interim and annual periods beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the Companys financial position, results of operations or cash flow.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. In this update, FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders equity. The amendments require that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective for fiscal years, and interim periods within these years, beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the Companys financial position, results of operations or cash flow.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles Goodwill and Other (Topic 350). ASU No. 2011-08 redefines the approach to goodwill impairment testing by providing companies with the option to qualitatively evaluate the likelihood of impairment before proceeding to Step 1 of the impairment test (i.e. comparison of the fair value of a reporting unit to its carrying value). The amendment also provides more guidance on the types of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entitys financial statements for the most recent annual or interim period have not yet been issued, or for nonpublic entities, that have not been made available for issuance. Adoption of the new requirement is not expected to have an effect on the Companys financial position, results of operations, cash flow and the annual goodwill impairment test.
There were no other significant changes in the Companys critical accounting policies and estimates during the three and six months ended September 30, 2011 compared to what was previously disclosed in the Companys Form 10-K for the year ended March 31, 2011.
NOTE 2 - CONCENTRATION OF CREDIT RISK
We maintain our cash balances in financial institutions that from time to time exceed amounts insured by the FDIC (up to $250,000, per financial institution as of September 30, 2011). As of September 30, 2011 and March 31, 2011, our deposits exceeded insured amounts by $787,125 and $459,890, respectively. We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash.
Currently, we maintain a bank account in China. This account is not insured and we believe is exposed to significant credit risk on cash of $787,125.
NOTE 3 DUE FROM AFFILIATE
As of September 30, 2011 and March 31, 2011, an affiliated party, Timeway International Ltd, holds in trust $111,122 and $67,643, respectively. This money is used to pay various day to day expenses. Timeway International Ltd is controlled by our CEO.
NOTE 4 INTANGIBLE
We entered into an agreement with Beijing Pengchuang Technology Development Co. Ltd. (Pengchuang)., an independent Chinese company, to purchase 50% of the intellectual property related to ultrafine particle processing. Pengchuang developed a highly efficient and low energy consumption grinding technology, which utilizes fluid shock waves to make ultrafine particles. This technology can be applied to the coal water slurry, solid lubricant and other material grinding processes. Through the joint development and ownership agreement, AuraSource will enrich its intellectual property portfolio, enabling the further development of AuraCoal, its Hydrocarbon Clean Fuel technology. Qinzhou will utilize the particle grinding technology in its AuraCoal Qinzhou production line, as well as license it to others in non-related industries.
We issued 600,000 shares of common stock for the acquisition of certain intangibles. We acquired intangibles of $753,530. The shares issued in connection with the acquired intangibles were valued at $606,000 or $1.01 per share which was the share price on August 8, 2010, the acquisition date. The Company paid cash for the remainder of the amount due.
NOTE 5 STOCK ISSUANCE
During the year ended March 31, 2011, the Company issued 1,000,000 shares of common stock. The Company issued 400,000 shares for $1.25 per share. The Company recorded net proceeds from the sale of these shares of $500,000. The Company issued 600,000 shares of common stock for the acquisition of certain intangibles. The shares issued in connection with the acquired intangibles were valued at $1.01 per share or $606,000.
On June 17, 2011, the Company completed a private placement to certain accredited investors pursuant to which the Company sold 2,000,000 shares of the Companys common stock resulting in gross proceeds of $1,000,000 to the Company.
On August 28, 2011, the Company issued 300,000 shares of the Companys common stock to two employees. The Company recorded $195,000 in compensation expense for these shares.
NOTE 6 - STOCK OPTIONS
On April 1, 2011, we granted 60,000 options to purchase shares of our common stock at $0.75 per share to members of our BOD. In April 2010, we granted 60,000 options to purchase shares of our common stock at $1.00 per share to certain executives of the Company. The options vest quarterly and have an expiration period of 10 years. The total grant date fair value of the outstanding options was $91,456. We will record stock based compensation expense over the requisite service period, which in our case approximates the vesting period of the options. During the three and six months ended September 30, 2011, the Company recorded $17,350 and $25,683 in compensation expense for the vesting of options, respectively. During the three and six months ended September 30, 2010, the Company recorded $36,026 and $44,359 in compensation expense for the vesting of options, respectively. The Company assumed all stock options issued during the quarter will vest. Though these expenses will result in a deferred tax benefit, we have a full valuation allowance against the deferred tax benefit.
The Company adopted the detailed method provided in ASC 718 for calculating the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the income tax effects of employee stock-based compensation awards that are outstanding.
The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option pricing model (BSOPM). The BSOM has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Companys dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. The expected life of an option grant is based on managements estimate. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
These assumptions were used to determine the fair value of stock options granted:
|Volatility||25% to 155%|
|Average expected option life||10.00 years|
|Risk-free interest rate||1.76% to 2.59%|
The following table summarizes activity in the Company's stock option grants for the six months ending September 30, 2011:
|Weighted Average Price Per Share|
|Balance at March 31, 2011||120,000||$||2.25|
|Balance at September 30, 2011||180,000||$||1.75|
The following summarizes pricing and term information for options issued to employees and directors outstanding as of September 30, 2011:
|Options Outstanding||Options Exercisable|
|Range of Exercise Prices||Number Outstanding at September 30, 2011||Weighted Average Remaining Contractual Life||Weighted Average Exercise Price||Number Exercisable at September 30, 2011||Weighted Average Exercise Price|
|Balance at September 30, 2011||180,000||8.50||$||1.75||135,000||$||2.08|
NOTE 8 - LOSS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the six months ended September 30, 2011 and 2010 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the period indicated:
|Weighted average common stock equivalents:|
|Non-Plan Stock Options||180,000||120,000|