10-K - Quarterly report [Sections 13 or 15(d)] | XBRL INSTANCE FILE
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current Operations and Background — AuraSource focuses on the development and production of environmentally friendly and cost effective industrial energy and feedstock 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 HCF technologies, performing research and development related to the reduction of harmful emission and energy costs for HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology. Currently we developed two patent pending technologies: 1) ultrafine grinding and 2) ultrafine separation.
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 (“U.S.”) 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 $5,533,641 at March 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 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 that such efforts will be successful.
Basis of Presentation and Principles of Consolidation — The accompanying consolidated financial statements have been prepared in conformity with US GAAP.
Use of Estimates — The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Equivalents — We consider investments with original maturities of 90 days or less to be cash equivalents.
Income Taxes — The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Stock-Based Compensation — The Company recognizes the cost of employee services received for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services.
Foreign Currency Transactions — The Company recognizes foreign currency gains and losses in other income (expense) on the accompanying statement of operations. Foreign currency gains and losses arise as the Company conducts business with other entity’s whose functional currency is not in U.S. 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 Income (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, 2012 and 2011 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 FDIC insured limits.
Financial Instruments and Fair Value of Financial Instruments — Our financial instruments consist of cash and accounts payable. The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities. We measure the fair value of financial assets and liabilities on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
| Level 1: | Quoted prices in active markets for identical or similar assets and liabilities. | |
| Level 2: | Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities. | |
| Level 3: |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
| |
The Company had no assets or liabilities recorded at fair value at March 31, 2012 or March 31, 2011.
Reclassifications — Certain reclassifications were made to the 2011 financial statements to conform to the 2012 financial presentation.
Recently Issued Accounting Pronouncements —
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2010-29, “Business Combinations (Topic 805): Disclosures of Supplementary Pro Forma Information for Business Combinations” (ASU 2010-29), which specifies that pro forma disclosures for business combinations are to be reported as if the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The pro forma disclosures must also include a description of material, nonrecurring pro forma adjustments. ASU 2010-29 is effective for business combinations with an acquisition date of January 1, 2011 or later. Adoption of the new requirement did not have an effect on the Company’s financial position, results of operations or cash flows.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRSs), and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The amendments in this update are effective during interim and annual periods beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the Company’s financial position, results of operations or cash flow.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this update, FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update are effective for fiscal years, and interim periods within these years, beginning after December 15, 2011. Adoption of the new requirement is not expected to have an effect on the 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 fair value of a reporting unit to its carrying value). The amendment also provides more guidance on the types of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued, or for nonpublic entities, that have not been made available for issuance. Adoption of the new requirement is not expected to have an effect on the Company’s financial position, results of operations, cash flow and the annual goodwill impairment test.
There were no other significant changes in the Company’s critical accounting policies and estimates during the year ended December 31, 2012.
NOTE 2 - CONCENTRATION OF CREDIT RISK
We maintain our cash balances in 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 March 31, 2012). As of March 31, 2012 and 2011, 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 significant credit risk on cash of $302,405.
NOTE 3 – DUE FROM AFFILIATE
As of March 31, 2012, an affiliated party, Timeway International Ltd, holds in trust $63,193. This money is used to pay various day to day expenses. Timeway International Ltd is controlled by our CEO.
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 a highly efficient and low energy consumption grinding technology, which utilizes fluid shock waves to make ultrafine particles. This technology can be applied to the coal water slurry, solid lubricant and other material grinding processes. Through the joint development and ownership agreement, AuraSource will enrich its intellectual property portfolio, enabling the further development of AuraCoal, its Hydrocarbon Clean Fuel technology. 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. We acquired intangibles of $753,530. The shares issued in connection with the acquired intangibles were valued at $606,000 or $1.01 per share which was the share price on August 8, 2010, the acquisition date. The Company paid cash for the remainder of the amount due.
NOTE 6 – 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 a deposit. The shares issued in connection with this deposit were valued at $4,480,000.
NOTE 7 - 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 5 years. The total grant date fair value of the outstanding options was $782,493.
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 years ended March 31, 2012 and 2011, the Company recorded $36,070 and $88,538 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 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 Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
These assumptions were used to determine the fair value of stock options granted 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 year ending March 31, 2012:
| Number of Shares | Weighted Average Price Per Share | |||||||||
| Balance at March 31, 2011 | 120,000 | $ | 2.25 | |||||||
| Granted | 2,910,000 | 0.29 | ||||||||
| Balance at March 31, 2012 | 3,030,000 | $ | 0.37 | |||||||
The following summarizes pricing and term information for options issued to employees and directors outstanding as of March 31, 2012:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2012 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at March 31, 2012 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 7.00 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 8.00 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 9.00 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.28 | 2,850,000 | 4.88 | $0.28 | - | - | |||||||||||
| Balance at March 31, 2012 | 3,030,000 | 5.07 | $0.37 | 180,000 | $1.75 | |||||||||||
NOTE 8 - EARNINGS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2012 and 2011 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
| 2012 | 2011 | |||||||
| Weighted average common stock equivalents: | ||||||||
| Non-Plan Stock Options | 3,030,000 | 120,000 | ||||||
NOTE 4 – DEPOSIT
On February 15, 2012, we entered into an agreement with GCH to reserve export ready 1 million tons of 64% Fe higher content iron ore and 13 million tons of 45% grade lower content iron ore, and 2 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 HKMHL. The Mineral Deposit Shares shall vest and be delivered as follows: 5 million immediately, 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. GCH has the right to designate two members on the BOD, one of whom is to be mutually agreed. 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.
NOTE 9 - INCOME TAX
The deferred tax asset as of March 31, 2012 and 2011 consisted of the following:
| 2012 | 2011 | |||||||
| Net operating loss carryforwards | $ | 1,482,694 | $ | 1,009,241 | ||||
| Less valuation allowance | (1,482,694 | ) | (1,009,241 | ) | ||||
| $ | — | $ | — | |||||
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, 2012, the Company has net operating loss carryforward of approximately $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% and state statutory rate of 6.9% for 2012 and 2011 is as follows:
| 2011 | 2010 | |||||||
| Income tax benefit at federal statutory rate | -34.00 | % | -34.00 | % | ||||
| State income tax benefit, net of effect on federal taxes | -6.90 | % | -6.90 | % | ||||
| Increase in valuation allowance | 40.90 | % | 40.90 | % | ||||
| Income tax expenses | — | — | ||||||
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases — We currently lease approximately 1,260 square feet of office space at 1490 South Price Road, Suite 210, Chandler, Arizona for $2,295 per month. The lease expires January 31, 2013. As of March 31, 2012, $22,950 is due under this lease for the year ended March 31, 2013.
.
Litigation — The Company is currently not a party to any legal proceedings.
Employment Agreement - Effective August 1, 2009, we entered into the 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 11 – SUBSEQUENT EVENT
On May 31, 2012, the Company completed a private placement offering to certain accredited investors pursuant to which the Company sold 500,000 shares of the Company’s common stock resulting in gross proceeds of $200,000 to the Company.