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 seven patents issued related to our 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. 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 Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended March 31, 2017, the Company has incurred operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s Plan to Continue as a Going Concern
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with other companies in the graphite industry.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
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 Cash Equivalents — We consider cash equivalent with original maturities of 90 days or less to be cash equivalents.
Property and Equipment - Property and Equipment are stated at historical cost less accumulated depreciation and amortization. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets' estimated useful lives. The useful lives of the assets are as follows: machinery and equipment 5 years, office equipment 5 to 7 years, vehicles 5 years, and leasehold improvements use the shorter of the estimated useful life or the remaining term of the agreements, generally ranging from 3 to 15 years. Additions and improvements are capitalized while routine repairs and maintenance are charged to expense as incurred. Upon sale or disposition, the historically recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to other income / expense.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of- In accordance with ASC 360, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. We currently believe there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
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 — We periodically issue stock options and shares to employees and non-employees for services. We account for stock option grants issued and vesting to employees based on Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. We account for shares issued to non-employees in accordance with ASC Topic 505, “Equity”, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.
Comprehensive Income - We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.
Foreign Currency Translation. - Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended March 31, 2017 was $24,172, compared a translation gain of $30,473 for the year ended March 31, 2016.
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, 2017 and 2016 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.
| |
The carrying value of cash, accounts receivable, accounts payables, and notes payable approximates their fair values due to their short-term maturities.
Recently Issued Accounting Pronouncements —
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements— Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Currently, there is no guidance under U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For the period ended June 30, 2016, management evaluated the Company’s ability to continue as a going concern and concluded that substantial doubt has not been alleviated about the Company’s ability to continue as a going concern. While the Company continues to explore further significant sources of financing, management’s assessment was based on the uncertainty related to the amount and nature of such financing over the next twelve months. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.
In November 2015, the FASB issued an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.
In January 2016, the FASB issued a new standard to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). The new standard will be effective for us beginning July 1, 2018. The application of the amendments will result in a cumulative-effect adjustment to our consolidated balance sheets as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new standard will be effective for us beginning July 1, 2019, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The new standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements.
Going Concern —
The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended March 31, 2017, the Company has incurred operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s Plan to Continue as a Going Concern
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with other companies in the graphite industry.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.
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.
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Income Taxes — The Company accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes.” 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 for 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 Translation. - Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended March 31, 2016 was $30,473, compared a translation loss of $0 for the year ended March 31, 2015.
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, 2017 and 2016 because their effect is anti-dilutive.
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 the 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. |
The Company evaluates embedded conversion features within convertible debt under ASC Topic 815, “Derivatives and Hedging,” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at FV with changes in FV recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC subtopic 470-20, “Debt with Conversion and Other Options,” for consideration of any beneficial conversion feature.
NOTE 6 – DUE TO RELATED PARTIES
As of March 31, 2017 and 2016, $970,642 and $2,376,137, respectively, is owed to the officers and directors and a company owned by the CEO of the Company. As of March 31, 2017, $414,729 is from the advancement of expenses and $393,990 is for past due compensation. Since 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 7 – NOTE PAYABLE – RELATED PARTY
On December 31, 2012, the Company received $500,000 from Pelican Creek, LLC (Pelican Creek”), a former related party who resigned in June 2014, and recorded the corresponding note as a current liability on the balance sheet. Our former director, Larry Kohler, manages Pelican Creek. The coupon interest on this note accrues daily on the outstanding principal amount at 8% per annum. On March 26, 2014, the Company issued 2,000,000 shares of common stock in exchange for the cancelation of a $500,000 note payable. As such, as of March 31, 2017, the Company accrued interest of $83,738 and remains in the note payable account with no conversion right. This will be settled upon the Company having a gross profit of $1 million.
On April 26, 2016, we entered into a note payable with Philip Liu, our CEO, whereby he converted amounts owed of $1,565,169. $148,439 of interest is owed as of March 31, 2017. The note has an interest rate of 10% which is compounded quarterly and is due on March 31, 2017. The note is in default.
On April 26, 2016, we entered into a note payable with Eric Stoppenhagen, our CFO, whereby he converted amounts owed of $411,214. $38,999 of interest is owed as of March 31, 2017. The note has an interest rate of 10% which is compounded quarterly and is due on March 31, 2017. The note is in default.
NOTE 5 – 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 $651,941 and $698,618 as of March 31, 2017 and 2016. 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 Company recorded $47,592 and $47,358 in amortization expense for the years ended March 31, 2017 and 2016, respectively.
NOTE 10 - STOCK OPTIONS
In April 2015, we granted an additional 40,000 options to purchase shares of our common stock at $0.49 per share to certain members of our BOD. In April 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In July 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In October 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In January 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In April 2016, we granted an additional 40,000 options to purchase shares of our common stock at $0.15 per share to certain members of our BOD. In April 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In July 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In October 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In January 2017, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements.
We will record stock based compensation expense over the requisite service period at grant date fair value, which in our case approximates the vesting period of the options. During the year ended March 31, 2017, the Company recorded $152,126 in compensation expense arising from the vesting of options. The Company assumed all stock options issued during the quarter will vest. Though these expenses 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 FASB ASC Topic 718, “Compensation – Stock Compensation,” 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 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 United States 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 fair value 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 FV of stock options granted:
| Dividend yield | 0.0% | |||
| Volatility | 25% to 382% | |||
| Average expected option life | 2.5 to 5 years | |||
| Risk-free interest rate | 0.68% to 2.59% | |||
The following table summarizes activity in the Company's stock option grants for the year ended March 31, 2017:
| Number of Shares |
Weighted Average Price Per Share | |||||||||
| Balance at March 31, 2015 | 4,210,000 | $ | 0.36 | |||||||
| Granted | 840,000 | $ | 0.25 | |||||||
| Balance at March 31, 2016 | 5,050,000 | $ | 0.35 | |||||||
| Granted | 840,000 | $ | 0.25 | |||||||
| Balance at March 31, 2017 | 5,890,000 | $ | 0.32 | |||||||
The following summarizes pricing and term information for options issued to employees and directors outstanding as of March 31, 2017 and 2016:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2017 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2017 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 3.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 4.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 5.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.50 | 60,000 | 7.00 | $0.50 | 60,000 | $0.50 | |||||||||||
| $0.49 | 40,000 | 8.00 | $0.49 | 40,000 | $0.49 | |||||||||||
| $0.45 | 60,000 | 7.00 | $0.45 | 60,000 | $0.45 | |||||||||||
| $0.28 | 2,850,000 | 1.38 | $0.28 | - | - | |||||||||||
| $0.27 | 60,000 | 6.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| $0.25 | 2,600,000 | 8.75 | $0.25 | 2,6000,000 | $0.25 | |||||||||||
| $0.15 | 40,000 | 9.00 | $0.15 | 40,000 | $0.15 | |||||||||||
| Balance at March 31, 2017 | 5,890,000 | 7.64 | $0.32 | 3,040,000 | $0.35 | |||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2016 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2016 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 4.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 5.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 6.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.50 | 60,000 | 8.00 | $0.50 | 60,000 | $0.50 | |||||||||||
| $0.49 | 40,000 | 9.00 | $0.49 | 40,000 | $0.49 | |||||||||||
| $0.45 | 60,000 | 8.00 | $0.45 | 60,000 | $0.45 | |||||||||||
| $0.28 | 2,850,000 | 2.38 | $0.28 | - | - | |||||||||||
| $0.27 | 60,000 | 7.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| $0.25 | 1,800,000 | 8.75 | $0.25 | 1,800,000 | $0.25 | |||||||||||
| Balance at March 31, 2016 | 5,050,000 | 4.08 | $0.36 | 2,200,000 | $0.82 | |||||||||||
| Number of Shares |
Weighted Average Price Per Share | |||||||||
| Balance at March 31, 2015 | 4,210,000 | $ | 0.36 | |||||||
| Granted | 840,000 | $ | 0.25 | |||||||
| Balance at March 31, 2016 | 5,050,000 | $ | 0.35 | |||||||
| Granted | 840,000 | $ | 0.25 | |||||||
| Balance at March 31, 2017 | 5,890,000 | $ | 0.32 | |||||||
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2017 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2017 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 3.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 4.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 5.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.50 | 60,000 | 7.00 | $0.50 | 60,000 | $0.50 | |||||||||||
| $0.49 | 40,000 | 8.00 | $0.49 | 40,000 | $0.49 | |||||||||||
| $0.45 | 60,000 | 7.00 | $0.45 | 60,000 | $0.45 | |||||||||||
| $0.28 | 2,850,000 | 1.38 | $0.28 | - | - | |||||||||||
| $0.27 | 60,000 | 6.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| $0.25 | 2,600,000 | 8.75 | $0.25 | 2,6000,000 | $0.25 | |||||||||||
| $0.15 | 40,000 | 9.00 | $0.15 | 40,000 | $0.15 | |||||||||||
| Balance at March 31, 2017 | 5,890,000 | 7.64 | $0.32 | 3,040,000 | $0.35 | |||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2016 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2016 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 4.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 5.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 6.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.50 | 60,000 | 8.00 | $0.50 | 60,000 | $0.50 | |||||||||||
| $0.49 | 40,000 | 9.00 | $0.49 | 40,000 | $0.49 | |||||||||||
| $0.45 | 60,000 | 8.00 | $0.45 | 60,000 | $0.45 | |||||||||||
| $0.28 | 2,850,000 | 2.38 | $0.28 | - | - | |||||||||||
| $0.27 | 60,000 | 7.00 | $0.27 | 60,000 | $0.28 | |||||||||||
| $0.25 | 1,800,000 | 8.75 | $0.25 | 1,800,000 | $0.25 | |||||||||||
| Balance at March 31, 2016 | 5,050,000 | 4.08 | $0.36 | 2,200,000 | $0.82 | |||||||||||
NOTE 3 – DEPOSITS AND OTHER CURRENT ASSETS – RELATED PARTY
Deposits and other current assets were $516,045 and $526,963 as of March 31, 2017 and 2016, respectively, and were comprised of the following:
| March 31, 2017 | March 31, 2016 | |||||||
| Shipping deposits | — | 10,918 | ||||||
| Mineral reserve deposits | 516,045 | 516,045 | ||||||
| Ending Balance | $ | 516,045 | $ | 526,963 | ||||
On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”), an affiliate common ownership with HKM which owns 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, 2017, the Company has obtained possession a small amount 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. GCH, GCM and HKM all have the same beneficial owner. HKM is considered an affiliate as it owns greater than 10% of our outstanding common stock.
For the year ended March 31, 2013, the Company paid $400,000 to GCM and $125,000 cash to HKM Minerals as deposit for mineral reserve.
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, 2017). As of March 31, 2017 and 2016, 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. The cash balance in China as of March 31, 2017 is $78,530.
NOTE 4 – FIXED ASSETS, NET
Fixed assets, net consisted of the following:
| March 31, | March 31, | |||||||
| 2017 | 2016 | |||||||
| Office equipment | $ | 5,013 | $ | 5,013 | ||||
| Vehicles | 147,390 | 147,390 | ||||||
| Equipment | 391,118 | 391,118 | ||||||
| Total fixed assets | 543,521 | 543,521 | ||||||
| Less accumulated depreciation | (543,521 | ) | (537,919 | ) | ||||
| Total fixed assets, net | $ | - | $ | 5,602 | ||||
The depreciation expense for the years ended March 31, 2017 and 2016 was $5,602 and $123,734, respectively.
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.
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NOTE 8 – NOTE PAYABLE
In September 30, 2014, we entered into a note payable for $63,357 which bears an interest rate of 6% per year as a settlement for previously due amounts recorded in accounts payable. The principle and interest was due on September 15, 2016 and the note is in default. As of March 31, 2017, the balance is $72,861.
| March 31, | March 31, | |||||||
| 2017 | 2016 | |||||||
| Office equipment | $ | 5,013 | $ | 5,013 | ||||
| Vehicles | 147,390 | 147,390 | ||||||
| Equipment | 391,118 | 391,118 | ||||||
| Total fixed assets | 543,521 | 543,521 | ||||||
| Less accumulated depreciation | (543,521 | ) | (537,919 | ) | ||||
| Total fixed assets, net | $ | - | $ | 5,602 | ||||
NOTE 9 – STOCK ISSUANCE
During the year ended March 31, 2017, the Company issued 1,646,985 shares of common stock as finance charge for loans to related parties. We valued these shares at fair value of $197,638 using a 10% interest rate and the share price of $.12.
During the year ended March 31, 2017, the Company issued 125,000 shares of common stock to settle a note signed in 2016 with principal amount of $15,000 plus interest, and no gain or loss resulted from the settlement.
During the year ended March 31, 2017, the Company issued 4,333,333 shares of common stock for cash of $130,000.
Accounts Receivable - The Company extends credit to its customers. Collateral is generally not required. Credit losses are provided for in the financial statements based on management’s evaluation of historical and current industry trends. Although the Company expects to fully collect amounts due, actual collections may differ from estimated amounts. The Company estimates an allowance for doubtful accounts based upon a percentage of revenue earned. When the Company expects that there is less than a 20% chance of collection, the Company writes the receivable off to its allowance for doubtful accounts. The Company does not typically accrue interest or fees on past due amounts.
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Inventory - Inventory is valued at the lower of cost or market. Cost is determined using standard costs, which approximates the first-in, first-out method.
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Property and Equipment - Property and Equipment are stated at historical cost less accumulated depreciation and amortization. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets' estimated useful lives. The useful lives of the assets are as follows: machinery and equipment 5 years, office equipment 5 to 7 years, vehicles 5 years, and leasehold improvements use the shorter of the estimated useful life or the remaining term of the agreements, generally ranging from 3 to 15 years. Additions and improvements are capitalized while routine repairs and maintenance are charged to expense as incurred. Upon sale or disposition, the historically recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to other income / expense.
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Revenue Recognition - The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. When we are paid in advance for products or services we classify these amounts as deferred revenue. Upon the receipt of these products at the destination port, we recognize revenue. For services, we amortized the price over the term of the agreement.
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Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of- In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. We currently believe there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
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| March 31, 2017 | March 31, 2016 | |||||||
| Shipping deposits | — | 10,918 | ||||||
| Mineral reserve deposits | 516,045 | 516,045 | ||||||
| Ending Balance | $ | 516,045 | $ | 526,963 | ||||
| 2017 | 2016 | |||||||
| Weighted average common stock equivalents: | ||||||||
| Non-plan stock options | 5,890,000 | 5,050,000 | ||||||
NOTE 11 - LOSS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2017 and 2016 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2017 and 2016 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
| 2017 | 2016 | |||||||
| Weighted average common stock equivalents: | ||||||||
| Non-plan stock options | 5,890,000 | 5,050,000 | ||||||
NOTE 12 - INCOME TAX
The deferred tax asset as of March 31, 2017 and 2016 consisted of the following:
| 2017 | 2016 | |||||||
| Net operating loss carryforwards | $ | 5,364,553 | $ | 4,936,193 | ||||
| Less valuation allowance | (5,364,553 | ) | (4,936,193 | ) | ||||
| $ | — | $ | — | |||||
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. The Company has not filed its tax returns for the years ending March 31, 2014, 2015, 2016 and 2017.
As of March 31, 2017, the Company has net operating loss carryforward of $14,774,312 which is available to offset future taxable income that expires by year 2034.
Reconciliation between the provision for income taxes and the expected tax benefit using the federal statutory rate of 34% for 2016 and 2015 is as follows:
| 2017 | 2016 | |||||||
| Income tax benefit at federal statutory rate | (34.00 | )% | (34.00 | )% | ||||
| Foreign tax rate difference | 1.49 | % | 1.49 | % | ||||
| State income tax benefit, net of effect on federal taxes | (3.80 | )% | (3.80 | )% | ||||
| Increase in valuation allowance | 36.31 | % | 36.31 | % | ||||
| Income tax expense | — | — | ||||||
| 2017 | 2016 | |||||||
| Net operating loss carryforwards | $ | 5,364,553 | $ | 4,936,193 | ||||
| Less valuation allowance | (5,364,553 | ) | (4,936,193 | ) | ||||
| $ | — | $ | — | |||||
| 2017 | 2016 | |||||||
| Income tax benefit at federal statutory rate | (34.00 | )% | (34.00 | )% | ||||
| Foreign tax rate difference | 1.49 | % | 1.49 | % | ||||
| State income tax benefit, net of effect on federal taxes | (3.80 | )% | (3.80 | )% | ||||
| Increase in valuation allowance | 36.31 | % | 36.31 | % | ||||
| Income tax expense | — | — | ||||||
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases — We currently lease 260 square feet of office space at 1490 South Price Road, Suite 210C, Chandler, Arizona for $700 per month. The lease expires June 30, 2018 and $7,000 is due through the remainder of the lease. We leased 116 square meters of space in 129 Datian Street, Jiafa Building A33C, Jingan District, Shanghai, China for $1,068 per month expired in March 2018. We leased office space in Yong Fu West, Guangxi Province, Qinzhou, China for $266 per month which expires in March 2018. We believe that our facilities are adequate to meet our current and near-term needs.
Litigation — The Company is currently not a party to any material legal proceedings.
Employment Agreement — Effective January 1, 2014, 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. Each quarter Mr. Liu shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. 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 January 1, 2014 to December 31, 2019. Mr. Liu is currently deferring his compensation until such time as the Company can afford payment.
Effective January 1, 2014, the Company entered into an employment agreement with Eric Stoppenhagen, the Company’s CFO. Under the employment agreement, Mr. Stoppenhagen will receive a base salary of $120,000 per year and a guaranteed bonus of $20,000 per year. Each quarter Mr. Stoppenhagen shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. Mr. Stoppenhagen will be eligible for an incentive bonus based on his performance. Additionally, Mr. Stoppenhagen will receive a car allowance of $250 per month and an office allowance of $250 per month. The term of the contract is from January 1, 2014 to December 31, 2019. Mr. Stoppenhagen is currently deferring his compensation until such time as the Company can afford payment.
Foreign Currency Translation. - Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended March 31, 2017 was $24,172, compared a translation gain of $30,473 for the year ended March 31, 2016.