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 the development and production of environmentally friendly and cost effective industrial energy and fuel used for industrial applications. AuraCoal, AuraSource’s core technology, includes ultrafine grinding and impurities removal processes. Initial industrial applications of AuraSource technology are ultra-fine coal water mixture for heavy oil substitution, and low grade iron ore fine and slimes beneficiation. 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 (“R&D”) related to the reduction of harmful emissions 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 have developed two patent pending technologies: 1) ultrafine grinding and 2) ultrafine separation.
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 (“US”) and abroad where we intend to market our technology and products.
Going Concern — The accompanying consolidated financial statements were prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations since its inception and has an accumulated deficit of $8,092,872 at March 31, 2013. 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 the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company. In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty such efforts will be successful.
Basis of Presentation and Principles of Consolidation — The accompanying consolidated financial statements have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America (“US GAAP”) and include the accounts of AuraSource, Inc. and its subsidiary, Qinzhou. All significant intercompany transactions and balances were eliminated in consolidation.
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 the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 entities whose functional currency are not 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 loss per share for the years ended March 31, 2013 and 2012 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, accounts payable and notes payable. The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities. We measure the fair value (“FV”) of financial assets and liabilities on a recurring basis. FV 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. FV measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a FV hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring FV.
The standard describes three levels of inputs that may be used to measure FV:
| 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 FV of the assets or liabilities.
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The Company had no assets or liabilities recorded at FV at March 31, 2013 or March 31, 2012.
Reclassifications — Certain reclassifications were made to the 2012 financial statements to conform to the 2013 financial presentation.
Recently Issued Accounting Pronouncements —
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs”. The amendments result in common FV measurement and disclosure requirements in US GAAP and International Financial Reporting Standards (“IFRS”), and do not require additional FV measurements and are not intended to establish valuation standards or affect valuation practices. The amendments in this update were effective during interim and annual periods beginning after December 15, 2011. Adoption of the new requirement did not have an effect on the Company’s financial position, results of operations or cash flow.
In June 2011, the FASB issued ASU 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 were effective for fiscal years, and interim periods within these years, beginning after December 15, 2011. Adoption of the new requirement did not have an effect on the Company’s 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 FV 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 FV of a reporting unit is less than its carrying amount. The amendments were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued, or for nonpublic entities, that had not been made available for issuance. Adoption of the new requirement did not have an effect on the Company’s financial position, results of operations, cash flow and the annual goodwill impairment test.
On July 27, 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment.” ASU 2012-02 provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the FV of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on our financial statements.
There were no other significant changes in the Company’s critical accounting policies and estimates during the year ended March 31, 2013.
Going Concern — The accompanying consolidated financial statements were prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations since its inception and has an accumulated deficit of $8,092,872 at March 31, 2013. 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 the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company. In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty such efforts will be successful.
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Basis of Presentation and Principles of Consolidation — The accompanying consolidated financial statements have been prepared in conformity with Accounting Principles Generally Accepted in the United States of America (“US GAAP”) and include the accounts of AuraSource, Inc. and its subsidiary, Qinzhou. All significant intercompany transactions and balances were eliminated in consolidation.
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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.
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Income Taxes — The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.
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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.
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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 entities whose functional currency are not 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 loss per share for the years ended March 31, 2013 and 2012 because their effect is anti-dilutive.
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Financial Instruments and Fair Value of Financial Instruments — Our financial instruments consist of cash, accounts payable and notes payable. The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities. We measure the fair value (“FV”) of financial assets and liabilities on a recurring basis. FV 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. FV measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a FV hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring FV.
The standard describes three levels of inputs that may be used to measure FV:
| 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 FV of the assets or liabilities.
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The Company had no assets or liabilities recorded at FV at March 31, 2013 or March 31, 2012.
NOTE 3 – DUE FROM AFFILIATE
As of March 31, 2013, an affiliated party, Timeway International Ltd, holds in trust $54,418. This money is used to pay various day to day expenses. Timeway International Ltd is controlled by our CEO.
NOTE 9 – DUE TO RELATED PARTIES
As of March 31, 2013 and 2012, $412,615 and $151,600, respectively, is owed to the officers and directors of the Company. In December 2011, the officers and directors of the Company agreed to accrue compensation for their services until such time the Company had sufficient funds to pay this liability.
NOTE 6 – INTANGIBLE ASSETS, NET
We entered into an agreement with Beijing Pengchuang Technology Development Co. (“Pengchuang”), Ltd., 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 a joint development and ownership agreement, AuraSource will enrich its intellectual property portfolio, enabling the further development of AuraCoal, its HCF technology. AuraSource Qinzhou will utilize the particle grinding technology in its AuraCoal Qinzhou production line, as well as license it to others in non-related industries.
The net intangibles were $818,427 and $759,651 as of March 31, 2013 and 2012. We issued 600,000 shares of common stock for the acquisition of certain intangibles. The shares issued in connection with $753,530 of 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. The increases in intangible assets in the years ended March 31, 2013 and 2012 were $70,440 and $6,121, representing patent application fees. The Company recorded $11,664 and $0 in amortization expense in the years ended March 31, 2013 and 2012, respectively.
NOTE 11 – STOCK ISSUANCE
On May 28, 2009, we granted 1,000,000 restricted shares to Mr. Liu, our CEO, for services from July 8, 2008 to May 31, 2009. During such time, Mr. Liu received no other compensation. Additionally, Mr. Liu, Mr. Kohler, our Secretary, and Mr. Stoppenhagen, our CFO, were granted 100,000 shares of restricted stock which vests the earlier of two years or termination from the BOD. The Company recorded stock compensation arising from the grants of $13,407 and $650,000.
On October 22, 2009, the Company completed a private placement with certain institutional and accredited investors (“Investors”) pursuant to which the Company sold 5,279,693 shares of the Company’s common stock for $2,639,847. The Company intendeds to use proceeds of the offering for working capital and to develop a pilot plant in the Gulf of Tonkin Economic and Development Area which utilizes a low temperature catalytic process to reform oil shale, asphalt shale and low-ranking coal to hydrocarbon clean fuel products in a highly-efficient manner. The Company has no material relationship with any of the Investors other than in respect of the Subscription Agreements.
In connection with the closing of the private placement, the Company paid $263,985 to Source Capital Group, Inc. as agent for the private placement and issued Source Capital Group, Inc. 527,969 three year warrants.
On November 2, 2009, the BOD granted Mr. Liu, Mr. Kohler and Mr. Stoppenhagen 100,000 shares of restricted stock which vested on the board. The Company recorded compensation arising from the grants of $150,000.
On December 18, 2009, the BOD granted two consultants 800,000 shares of restricted stock. 600,000 of which vested immediately which was valued at $300,000 and 200,000 of which vests quarterly over three years which was valued at $100,000.
On March 1, 2010, the BOD granted two consultants 283,000 shares of common stock. The Company recorded compensation arising from the grants of $198,000 during the year ended March 31, 2010.
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 Company acquired intangibles of $753,530. The shares issued in connection with the acquired intangibles were valued at $1.01 per share or $606,000.
During the year ended March 31, 2012, the Company completed a private placement to certain accredited investors pursuant to which the Company sold 2,000,000 shares of the Company’s common stock resulting in gross proceeds of $1,000,000 to the Company. The Company issued 300,000 shares of the Company’s common stock to two employees. The Company recorded $195,000 in compensation expense for these shares. The Company issued 16,000,000 shares of the Company’s common stock for mineral reserve deposit. The shares issued in connection with the mineral reserve deposit were valued at $4,480,000.
During the year ended March 31, 2013, the Company issued 1,250,000 shares of common stock in connection with finance charges to enter a note payable agreement in the amount of $500,000 and 817,250 shares of common stock as interest for delaying repayment of the balances due to related parties for services rendered. The total expense for such common shares issued during the year ended March 31, 2013 was $1,261,988. The Company issued 612,500 shares for $0.40 per share. The company recorded net proceeds from the sale of these shares of $245,000. On June 11, 2012, the BOD granted 60,000 shares for services in connection with fund raising activities, all of which vested immediately and were valued at $13,200.
NOTE 12 - STOCK OPTIONS
In January 2009, we granted 60,000 options to purchase shares of our common stock at $3.50 per share to members of our BOD. In April 2010, we granted an additional 60,000 options to purchase shares of our common stock at $1.00 per share to members of our BOD. The options vest quarterly and have an expiration period of 10 years. In April 2011, we granted an additional 60,000 options to purchase shares of our common stock at $0.75 per share to certain members of our BOD. The options vest quarterly and have an expiration period of 10 years. In February 2012, we granted an additional 2,850,000 options to purchase shares of our common stock at $0.28 per share to certain members of our BOD. The options will vest upon the company earning $5 million in revenues. The options will expire in five years. The total grant date FV of the outstanding options was $782,493.
We record stock based compensation expense over the requisite service period, which in our case approximates the vesting period of the options. During the years ended March 31, 2013 and 2012, the Company recorded $14,380 and $36,070 in compensation expense related to 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 FV of each stock option granted is estimated on the grant date using the Black-Scholes option pricing model (“BSOPM”). The BSOPM 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 US Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Company’s 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 management’s estimate. The FV of each option grant, as calculated by the BSOPM 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 using the BSOPM:
| Dividend yield | 0.0% | |||
| 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 years ended March 31, 2013 and 2012:
| Number of Shares |
Weighted Average Price Per Share | |||||||||
| Balance at March 31, 2012 | 3,030,000 | $ | 0.37 | |||||||
| Granted | 60,000 | — | ||||||||
| Balance at March 31, 2013 | 3,090,000 | $ | 0.37 | |||||||
The following summarizes pricing and term information for options issued to employees and directors outstanding as of March 31, 2013:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2013 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2013 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 6.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 7.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 8.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.28 | 2,850,000 | 3.88 | $0.28 | — | — | |||||||||||
| $0.27 | 60,000 | 9.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| Balance at March 31, 2013 | 3,090,000 | 4.16 | $0.37 | 240,000 | $1.38 | |||||||||||
| Number of Shares |
Weighted Average Price Per Share | |||||||||
| Balance at March 31, 2012 | 3,030,000 | $ | 0.37 | |||||||
| Granted | 60,000 | — | ||||||||
| Balance at March 31, 2013 | 3,090,000 | $ | 0.37 | |||||||
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2013 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2013 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 6.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 7.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 8.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.28 | 2,850,000 | 3.88 | $0.28 | — | — | |||||||||||
| $0.27 | 60,000 | 9.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| Balance at March 31, 2013 | 3,090,000 | 4.16 | $0.37 | 240,000 | $1.38 | |||||||||||
NOTE 13 - LOSS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2013 and 2012 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
| 2013 | 2012 | |||||||
| Weighted average common stock equivalents: | ||||||||
| Non-plan stock options | 3,090,000 | 3,030,000 | ||||||
NOTE 4 – DEPOSITS AND OTHER CURRENT ASSETS
Deposits and other current assets were $631,254 and $3,075 as of March 31, 2013 and 2012, respectively, and were comprised of the following:
| March 31, 2013 | March 31, 2012 | |||||||
| Inventory deposit | $ | 10,000 | $ | — | ||||
| Shipping deposits | 96,254 | — | ||||||
| Mineral reserve deposits | 525,000 | — | ||||||
| Prepaid expenses | — | 3,075 | ||||||
| Balance at March 31, 2013 | 631,254 | $ | 3,075 | |||||
On May 10, 2012, the Company agreed to purchase certain minerals from HKM Minerals for $50,000. The $10,000 represents a deposit towards that purchase. As of March 31, 2013, AuraSource is to pull iridium out of the mineral, prior to selling.
On January 25, 2013, the Company entered into a broker transportation agreement with M&L Logistics, Inc. to arrange transportation of minerals for various carriers, consignors or consignees for one year. This agreement can be terminated at anytime upon notice by either party. As of March 31, 2013, these deposits were recorded as shipping deposits.
On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”), an affiliate with over 10% voting rights, to reserve export ready one million tons of 64% Fe higher content iron ore and 13 million tons of 45% grade lower content iron ore, and two million tons of manganese ore. We issued the Mineral Deposit Shares to GCH or its assigns. On February 19, 2012, GCH assigned 100% of its interest in the Mineral Reserve Agreement to Hong Kong Minerals Holdings, Ltd. The Mineral Deposit Shares shall vest and be delivered as follows: five million immediately and 11 million upon the successful completion of the first customer order of total revenue over $5 million. Success shall be defined as customer acceptance of order and final payment. To the extent a successful order does not occur, the unvested Mineral Deposit Shares shall be returned to our treasury and cancelled. To date, the Company has not achieved $5 million in revenue, as such the 11 million shares is being held by the Company. As of March 31, 2013, the Company has not obtained possession of the above noted minerals. As such, the issuance of the shares have been recorded as a charge to additional paid in capital and a credit to common stock at par value of $0.001 per share for a total of $16,000. GCH has the right to designate two members on the Board of Directors (“BOD”), one of whom is to be mutually agreed. To date GCH has not designated any board members. Additionally, we entered into an agreement with Gulf Coast Mining Group, LLC (“GCM”) to purchase Minerals which will be delivered loose in bulk modified FOB. We entered into an agreement with GCH appointing GCH as the exclusive North American licensee for use and exploitation of our technology as it relates to applications involving precious metals in exchange for royalty payments of 5% of gross revenues.
NOTE 8 – CUSTOMER ADVANCES
As of March 31, 2013, we have received $570,000 from customers to be applied towards the purchase of various minerals by those customers.
NOTE 10 – NOTE PAYABLE
On December 31, 2012, the Company received $500,000 from Pelican Creek, LLC (Pelican Creek”), an unrelated party, and recorded the corresponding note as a current liability on the balance sheet. As an inducement to receive this loan, the Company issued 1,250,000 shares of its common stock to Pelican Creek. The FV of the shares issued was $812,500 valued at $0.65 per share, using the closing price on the effective date of the agreement. See Note 11, Stock Issuance, for further details. The coupon interest on this note accrues daily on the outstanding principal amount at 8% per annum. As such, as of March 31, 2013, the Company accrued interest of $10,000 and recorded it as part of the accounts payable and accrued expenses account. The Company finalized the terms and conditions of this payment on June 7, 2013.
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 March 31, 2013). As of March 31, 2013 and 2012, our deposits did not exceed insured amounts. 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 credit risk on cash.
NOTE 5 – FIXED ASSETS, NET
Fixed assets, net consisted of the following:
| March 31, | March 31, | |||||||
| 2013 | 2012 | |||||||
| Office equipment | $ | 2,954 | $ | — | ||||
| Vehicles | 147,390 | 147,390 | ||||||
| Equipment | 391,118 | 304,212 | ||||||
| Total fixed assets | 541,462 | 451,602 | ||||||
| Less accumulated depreciation | (95,758 | ) | (36,247 | ) | ||||
| Total fixed assets, net | $ | 445,704 | $ | 415,355 | ||||
The depreciation expense for the years ended March 31, 2013 and 2012 was $59,511 and $24,219, respectively. The Company attributed $29,294 and $0 of depreciation expense in 2013 and 2012, respectively, to R&D expense.
NOTE 7 – DEFERRED REVENUE
As of March 31, 2013 and 2012, the deferred revenue was $63,754 and $0, respectively, representing amount received from a customer for equipment to be shipped in the future.
NOTE 14 - INCOME TAX
The deferred tax asset as of March 31, 2013 and 2012 consisted of the following:
| 2013 | 2012 | |||||||
| Net operating loss carryforwards | $ | 2,469,278 | $ | 1,482,694 | ||||
| Less valuation allowance | (2,469,278 | ) | (1,482,694 | ) | ||||
| $ | — | $ | — | |||||
Management provided a deferred tax asset valuation allowance equal to the potential benefit due to the Company’s loss. When the Company demonstrates the ability to generate taxable income, management will re-evaluate the allowance.
As of March 31, 2013, the Company has net operating loss carryforward of $4,360,000 which is available to offset future taxable income that expires by year 2031.
Reconciliation between the provision for income taxes and the expected tax benefit using the federal statutory rate of 34% for 2013 and 2012 is as follows:
| 2013 | 2012 | ||||||
| Income tax benefit at federal statutory rate | (34.00)% | (34.00)% | |||||
| Foreign tax rate difference | 1.49% | 2.68% | |||||
| State income tax benefit, net of effect on federal taxes | (3.80)% | (3.20)% | |||||
| Increase in valuation allowance | 36.31% | 34.52% | |||||
| Income tax expense | — | — | |||||
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Leases — We currently lease 1,260 square feet of office space at 1490 South Price Road, Suite 210, Chandler, Arizona for $2,470 per month. The lease expires January 31, 2014. As of March 31, 2013, $0 is due under this lease.
Litigation — The Company is currently not a party to any legal proceedings.
Employment Agreement — Effective August 1, 2009, we entered into an Employment Agreement with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month. The term of the contract is from August 1, 2009 to March 31, 2014.
NOTE 16 – SUBSEQUENT EVENT
In August 2012, we agreed to sell iron ore to a customer for a total of $2,000,000. The customer deposited $500,000. The customer was unable to provide the remainder of the deposit. On April 12, 2013, we agreed to convert the $500,000 deposit into 1,250,000 shares of our common stock.
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.