The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012 (UNAUDITED) and
March 31, 2012
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 applications. 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. Currently we developed
two patent pending technologies: 1) ultrafine grinding and 2) ultrafine separation.
In early 2010, we
formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture (“JV”) with Mongolia Energy and Kaiyuyuan Mineral
Investment Group (“KMIG”), to build an AuraFuel plant. KMIG was to provide the funding for this plant. AuraSource
was to provide project management and the license from China Chemical Economic Cooperation Center (“CCECC”). The JV
was to pay 10% of net profit as a technology license fee. In 2010, KMIG paid $3 million for the license fee deposit to CCECC and
$2 million for start-up expenditures. AuraSource invested its management resources and expenses. The JV contracted China Shandong
Metallurgical Engineering Corp. (“CSMEC”) as EPC general contractor which would provide a turnkey solution under an
operation service contract. In January 2011, since KMIG failed to fund the JV, the JV was unable to make payments on the property
and pay CSMEC. As such, the construction was put on hold. In 2011, KMIG dissolved the JV.
We are currently seeking alternative arrangements regarding this project and exploring all of our options. With limited capital
resources, we will focus on our AuraCoal technology.
On February 15,
2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”) to reserve export ready 1 million tons of
64% Fe higher content iron ore and 13 million of 45% grade lower content iron ore, and 2 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; 5 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 FOB. We entered into an agreement with GCH appointing GCH as the exclusive North American licensee for use and exploitation
of our technology as relates to applications involving precious metals 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 $6,204,829 at September 30, 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 six months ended September 30, 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 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.
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 six months ended September 30, 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 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:
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Quoted prices in active markets for identical or similar assets and liabilities.
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Level 2:
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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.
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Level 3:
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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The Company had no assets
or liabilities recorded at fair value on the basis above at September 30, 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 an option to first assess qualitative factors to determine whether events or
circumstances indicate it is more likely than not that the indefinite-lived intangible asset is impaired. If an
entity concludes 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 six months ended September
30, 2012 compared to what was disclosed in the Company’s Form 10-K for the year ended March 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 September 30, 2012). As of September 30, 2012 and March 31, 2012, our deposits
did not exceed insured amounts. We have not experienced any losses in such accounts and we believe we are not exposed to any 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 $78,467.
NOTE 3 – DUE FROM AFFILIATE
As of September 30, 2012 and March
31, 2012, an affiliated party, Timeway International Ltd, holds in trust $82,287 and $63,193, respectively. This money is used
to pay various day to day expenses. Timeway International Ltd is controlled by our CEO.
NOTE 4 – ACCOUNTS PAYABLE RELATED
PARTIES
As of September
30, 2012 and March 31, 2012, $313,645 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 5 – UNVESTED STOCK
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 Hong Kong Minerals Holdings
Ltd (“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 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.
NOTE 6 – INTANGIBLE
We entered into
an agreement with Beijing Pengchuang Technology Development Co. (“Pengchuang”), Ltd., an independent Chinese company,
to purchase 50% of its 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 7 – STOCK ISSUANCE
During the year
ended March 31, 2012, the Company completed a private placement to 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. 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 the deposit were valued at $4,480,000 (See Note 4).
During the six months
ended September 30, 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.
NOTE 8 - 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 expire in 5 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 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 September 30, 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 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 BSOPM, is recognized as compensation expense on a straight-line basis over the vesting period of each
stock option award.
These assumptions
were used to determine the fair value of stock options granted using the BSOPM:
These
assumptions were used to determine the fair value of stock options granted: dividend yield 0.0%, volatility 25% to 155%,
average expected option life 10 years, risk free interest rate 1.76% to 2.59%.
The following table
summarizes activity in the Company's stock option grants for the six months ending September 30, 2012:
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Number of
Shares
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Weighted Average Price Per Share
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Balance at March 31, 2012
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3,030,000
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$
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.37
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Granted
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60,000
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.27
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Balance at September 30, 2012
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3,090,000
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$
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.37
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The following summarizes
pricing and term information for options issued to employees and directors outstanding as of September 30, 2012:
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Options Outstanding
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Options Exercisable
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Range of Exercise Prices
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Number Outstanding at September 30, 2012
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Weighted Average Remaining
Contractual
Life
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Weighted Average Exercise Price
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Number Exercisable at September 30, 2012
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Weighted Average Exercise Price
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$3.50
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60,000
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6.50
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$3.50
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60,000
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$3.50
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$1.00
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60,000
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7.50
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$1.00
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60,000
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$1.00
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$0.75
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60,000
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8.50
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$0.75
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60,000
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$0.75
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$0.27 - 0.28
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2,910,000
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4.50
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$0.28
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15,000
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$0.27
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Balance at September 30, 2012
|
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3,090,000
|
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4.82
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$0.37
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180,000
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$1.75
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NOTE 9 - LOSS PER SHARE
The following table
sets forth common stock equivalents (potential common stock) for the three and six months ended September 30, 2012 and 2011 that
are not included in the loss per share calculation above because their effect would be anti-dilutive for the period indicated:
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2012
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2011
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Weighted average common stock equivalents:
|
|
|
|
|
|
|
|
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Non-Plan Stock Options
|
|
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3,090,000
|
|
|
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180,000
|
|
|
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