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”) was incorporated on March 15, 1990 and is focused on the development and production of environmentally friendly and cost effective industrial energy and feedstock used for industrial application. AuraCoal, AuraSource’s core technology, includes ultrafine grinding and impurities removal. 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 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. We have developed two patent pending technologies: 1) ultrafine grinding and 2) ultrafine separation.

On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”) to reserve export ready one million tons of 64% Fe (iron symbol) higher content iron ore and 13 million of 45% grade lower content iron ore, and two million tons of manganese ore. We agreed to issue 16 million shares of our common stock to GCH or its assigns (“Mineral Deposit Shares”). The Mineral Deposit Shares shall vest and be delivered as follows; five million immediately, 11 million upon the successful completion of the first customer order over $5 million. Success is 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. Additionally, we entered into an agreement with Gulf Coast Mining Group, LLC (“GCM”) to purchase (i) higher content iron ore, lower content iron ore and manganese ore (collectively, the "Minerals") which will be delivered loose in bulk modified Free on Board (“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.

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 $6,510,598 at December 31, 2012. 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 asset recovery is dependent upon future events, the outcome of which is unknowable. The Company intends 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, 2012 included in our Annual Report on Form 10-K. The results of the three and nine months ended December 31, 2012 are not necessarily indicative of the results to be expected for the full year ending March 31, 2013.

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 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 Transactions — The Company recognizes foreign currency gains and losses in interest income / (expense) and other, in the accompanying statements of operations. Foreign currency gains and losses arise as the Company conducts business with other entities 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 arising from stock options and warrants were excluded from the computation of basic and diluted earnings per share, for the three and nine months ended December 31, 2012 and 2011 because their effect is anti-dilutive.

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 (“FVs”) due to their short-term maturities. We measure the 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 fair value.

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 had no assets or liabilities recorded at FV on the basis above at December 31, 2012 or March 31, 2012.

Recent Accounting Pronouncements

On July 27, 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment. The ASU 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 fair value of the indefinite-lived intangible asset to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU 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 will not have a material impact on these financial statements.

There were no other significant changes in the Company’s critical accounting policies and estimates during the nine months ended December 31, 2012 compared to what was disclosed in the Company’s Form 10-K for the year ended March 31, 2012.

Cash and Equivalents — We consider investments with original maturities of 90 days or less to be cash equivalents.

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 entity’s 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.

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 had no assets or liabilities recorded at FV on the basis above at December 31, 2012 or March 31, 2012.

NOTE 2 - CONCENTRATION OF CREDIT RISK

We maintain our cash balances in US financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation (up to $250,000, per financial institution as of December 31, 2012). As of December 31, 2012 and March 31, 2012 (audited), our deposits exceeded insured amounts by $129,274 and zero, respectively. We have not experienced any losses in such accounts and we believe we are not exposed to any 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 of $116,557. In addition, we have funds being held in China by affiliates in the amount of $85,463 (Note 3).

129274

NOTE 3 – DUE FROM AFFILIATE

As of December 31, 2012 and March 31, 2012, an affiliated party, Timeway International Ltd, holds in trust $85,463 and $63,193, respectively. This money is used to pay day to day expenses on behalf of the Company. Timeway International Ltd is controlled by our CEO.

NOTE 6 – ACCOUNTS PAYABLE – RELATED PARTIES

As of December 31, 2012 and March 31, 2012 (audited), $339,543 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 9 – UNVESTED STOCK

On February 15, 2012, we entered into an agreement with GCH 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 (“HKMHL”). 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 is 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. The Company has no material prior relationship with GCH or HKMHL other than what is set forth above. We valued the shares issued at $4,480,000 based upon the price of the Company’s stock on that day.

NOTE 5 – INTANGIBLE

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 an 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. 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.

We 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 $606,000 or $1.01 per share which was the share price on August 8, 2010, the acquisition date. The Company paid $147,530 cash for the remainder of the amount due.

NOTE 10 – STOCK ISSUANCE

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 the rights to the mineral reserve deposit. The shares issued in connection with the deposit were valued at $4,480,000 (See Note 4).

During the nine months ended December 31, 2012, the Company had a private placement pursuant to which the Company sold 612,500 shares of the Company’s common stock resulting in gross proceeds of $245,000 to the Company.

195000

NOTE 11 - 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 Board of Directors (“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 expire in five years. In April 2012, we granted an additional 60,000 options to purchase shares of our common stock at $0.27 per share to certain members of our BOD. The total grant date fair value of the outstanding options was $796,873.

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 months ended December 31, 2012 and 2011, the Company recorded $3,595 and $9,018 in compensation expense arising from the vesting of options, respectively. 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 ASC Topic 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 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 FV 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 three months ending December 31, 2012:

	Number of Shares		Weighted Average Price Per Share
Balance at March 31, 2012		3,030,000	$	0.37
Granted		60,000		0.27
Balance at December 31, 2012		3,090,000		0.37

The following summarizes pricing and term information for options issued to employees and directors outstanding as of December 31, 2012:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2012		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable at December 31, 2012		Weighted Average Exercise Price

$3.50		60,000		6.25		$3.50		60,000		$3.50
$1.00		60,000		7.25		$1.00		60,000		$1.00
$0.75		60,000		8.25		$0.75		60,000		$0.75
$0.27 - 0.28		2,910,000		4.25		$0.28		15,000		$0.27
Balance at December 31, 2012		3,090,000		4.57		$0.37		180,000		$1.75

	Number of Shares		Weighted Average Price Per Share
Balance at March 31, 2012		3,030,000	$	.37
Granted		60,000		.27
Balance at September 30, 2012		3,090,000		.37

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding at June 30, 2012		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable at June 30, 2012		Weighted Average Exercise Price

$3.50		60,000		6.25		$3.50		60,000		$3.50
$1.00		60,000		7.25		$1.00		60,000		$1.00
$0.75		60,000		8.25		$0.75		60,000		$0.75
$0.27 - 0.28		2,910,000		4.25		$0.28		15,000		$0.27
Balance at September 30, 2012		3,090,000		4.57		$0.37		180,000		$1.75

NOTE 12 - LOSS PER SHARE

The 3,090,000 and 180,000 common stock equivalents (potential common stock) for the three and nine months ended December 31, 2012 and 2011, respectively, are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated.

NOTE 4 – PREPAID EXPENSES

As of December 31, 2012, we have prepaid a total of $460,000 towards the purchase of various minerals to a related party.

NOTE 7 – CUSTOMER DEPOSITS

As of December 31, 2012, we have received a total of $570,000 from customers to be applied towards the purchase of various minerals.

NOTE 8 – NOTE PAYABLE

On December 31, 2012, the Company received $500,000 from an unrelated party. The Company has not finalized the terms and conditions of this payment and has recorded it as a current liability on the balance sheet.

SEC Filings

10-K - Quarterly report [Sections 13 or 15(d)] | XBRL INSTANCE FILE