SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28585
AuraSource, Inc.
(Exact name of registrant as specified in its charter)
Nevada (State or Other Jurisdiction of Incorporation or Organization) |
68-0427395 (IRS Employer Identification No.) |
1490 South Price Rd. #210
Chandler, AZ 85286
(Address of principal executive offices, zip code)
Registrant's telephone number (including area code): (480) 292-7179
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [ ] NO [x]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).
YES [ ] NO [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-accelerated Filer [ ] Smaller reporting company [x]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at September 29, 2017 | |
| Common Stock, $.001 par value | 66,311,972 |
AURASOURCE, INC.
INDEX
| PART I | FINANCIAL INFORMATION | Page |
| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS: | |
| Condensed Consolidated Balance Sheets — June 30, 2016 (Unaudited) and March 31, 2016 | 3 | |
| Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) – Three months ended June 30, 2016 and 2015 | 4 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) - Three months ended June 30, 2016 and 2015 | 5 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |
| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 |
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 17 |
| ITEM 4. | CONTROLS AND PROCEDURES | 17 |
| PART II | OTHER INFORMATION | 18 |
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 18 |
| ITEM 6. | EXHIBITS | 18 |
| Signatures | 19 |
| -2- |
PART I - FINANCIAL INFORMATION
ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AuraSource, Inc.
Condensed Consolidated Balance Sheets
| June 30, 2016 | March 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 8,528 | $ | 3,550 | ||||
| Deposits and other current assets – related party | 526,963 | 526,963 | ||||||
| TOTAL CURRENT ASSETS | 535,491 | 530,513 | ||||||
| Fixed assets, net | — | 5,602 | ||||||
| Intangible assets, net | 686,720 | 698,618 | ||||||
| TOTAL ASSETS | $ | 1,222,211 | $ | 1,234,733 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 150,067 | $ | 171,016 | ||||
| Due to related parties | 601,047 | 2,376,137 | ||||||
| Note payable and accrued interest | 146,642 | 143,459 | ||||||
| Note payable and accrued interest – related party | 2,010,322 | — | ||||||
| TOTAL CURRENT LIABILITIES | 2,908,078 | 2,690,612 | ||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Preferred stock, 10,000 shares authorized, no shares issued and outstanding, no rights or privileges designated | — | — | ||||||
| Common stock, $0.001 par value, 150,000,000 shares authorized, 61,978,639 and 60,206,654 shares issued and outstanding at June 30, 2016 and March 31, 2016, respectively | 61,977 | 60,206 | ||||||
| Additional paid in capital | 12,298,229 | 12,048,024 | ||||||
| Accumulated other comprehensive income | 40,095 | 30,473 | ||||||
| Accumulated deficit | (14,086,168 | ) | (13,594,582 | ) | ||||
| Total stockholders' deficit | (1,685,867 | ) | (1,455,879 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 1,222,211 | $ | 1,234,733 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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AuraSource, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three months ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Revenue | $ | — | $ | — | ||||
| Cost of revenue | — | — | ||||||
| Gross profit (loss) | — | — | ||||||
| Operating expenses | ||||||||
| General and administrative expenses | 449,925 | 334,533 | ||||||
| Total operating expenses | 449,925 | 334,533 | ||||||
| Loss from operations | (449,925 | ) | (334,533 | ) | ||||
| Interest income (expense) and other, net | (41,661 | ) | (1,772 | ) | ||||
| Net loss | $ | (491,586 | ) | $ | (336,305 | ) | ||
| Other Comprehensive Income | ||||||||
| Foreign currency translation gain (loss) | 9,622 | — | ||||||
| Total Comprehensive Loss | $ | (481,964 | ) | $ | (336,305 | ) | ||
| NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average shares outstanding —Basic and diluted | 61,411,918 | 60,206,654 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| -4- |
AuraSource, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (491,586 | ) | $ | (336,305 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 17,500 | 50,223 | ||||||
| Options issued for services | 35,588 | 80,626 | ||||||
| Stock issued for related party finance charge | 197,638 | — | ||||||
| Stock issued for debt | 18,750 | — | ||||||
| Changes in operating assets and liabilities | ||||||||
| Interest payable | 3,183 | — | ||||||
| Accounts payable and accrued expenses | (20,949 | ) | 17,552 | |||||
| Accounts payable – related parties | 235,232 | 109,498 | ||||||
| Net cash used in operating activities | (4,644 | ) | (78,406 | ) | ||||
| Cash flows from investing activities | ||||||||
| Cash paid for acquisition of intangible | — | — | ||||||
| Net cash used in investing activities | — | — | ||||||
| Cash flows from financing activities | ||||||||
| Loans payable - related parties, net | — | 79,284 | ||||||
| Net cash provided by financing activities | — | 79,284 | ||||||
| Effect of exchange rate fluctuation on cash | 9,622 | — | ||||||
| Net change in cash | 4,978 | 878 | ||||||
| Cash - beginning balance | 3,550 | 9,784 | ||||||
| Cash - ending balance | $ | 8,528 | $ | 10,662 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for | ||||||||
| Interest | $ | — | $ | — | ||||
| Income taxes | $ | — | $ | — | ||||
NON-CASH INVESTING AND FINANCING ACTIVITY:
| Issuance of promissory note for settlement of accounts payable – related party | $ | 1,976,383 | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| -5- |
AURASOURCE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. AuraMetal, 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. (“Qinzhou”), a wholly owned subsidiary in China, 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 patent 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 accompanying unaudited 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 $14,086,168 at June 30, 2016. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company. In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty such efforts will be successful.
Basis of Presentation and Principles of Consolidation — The accompanying condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) and include the accounts of AuraSource and its subsidiary, Qinzhou. All significant intercompany transactions and balances were eliminated in consolidation.
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, 2016 included in our Annual Report on Form 10-K. The results of the three ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year ending March 31, 2017.
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.
| -6- |
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 3 years, office equipment 3 years, vehicles 5 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 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.
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 options and restricted stock awards to employees at grant date fair-value of the 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.
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 months ended June 30, 2016 and 2015 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 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.
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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.
Recent Accounting Pronouncements –
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.
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.
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 June 30, 2016). As of June 30, 2016 and March 31, 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 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.
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NOTE 3 – DEPOSITS AND OTHER CURRENT ASSETS – RELATED PARTY
Deposits and other current assets were $526,963 and $526,963 as of June 30, 2016 and March 31, 2016, respectively, and were comprised of the following:
June 30, 2016 | March 31, 2016 | |||||||
| (Unaudited) | ||||||||
| Inventory | $ | — | $ | — | ||||
| Shipping deposits | 10,918 | 10,918 | ||||||
| Mineral reserve deposits | 516,045 | 516,045 | ||||||
| Ending Balance | $ | 526,963 | $ | 526,963 | ||||
On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”), an affiliate with over 10% voting rights, to reserve export ready one million tons of 64% Fe higher content iron ore and 13 million tons of 45% grade lower content iron ore, and two million tons of manganese ore. We issued the Mineral Deposit Shares to GCH or its assigns. On February 19, 2012, GCH assigned 100% of its interest in the Mineral Reserve Agreement to Hong Kong Minerals Holdings, Ltd. The Mineral Deposit Shares shall vest and be delivered as follows: five million immediately and 11 million upon the successful completion of the first customer order of total revenue over $5 million. Success shall be defined as customer acceptance of order and final payment. To the extent a successful order does not occur, the unvested Mineral Deposit Shares shall be returned to our treasury and cancelled. To date, the Company has not achieved $5 million in revenue, as such the 11 million shares is being held by the Company. As of March 31, 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 4 – FIXED ASSETS, NET
Fixed assets, net consisted of the following:
| June 30, | March 31, | |||||||
| 2016 | 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 three months ended June 30, 2016 and 2015 was $5,602 and $38,441, respectively.
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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 AuraMetal, its HCF technology. AuraSource Qinzhou will utilize the particle grinding technology in its AuraMetal Qinzhou production line, as well as license it to others in non-related industries.
The net intangibles were $686,720 and $698,618 as of June 30, 2016 and March 31, 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 $11,898 and $11,780 in amortization expense in the three months ended June 30, 2016 and 2015, respectively.
NOTE 6 – DUE TO RELATED PARTIES
As of June 30, 2016 and March 31, 2016, $601,047 and $2,294,281, respectively, is owed to the officers and directors of the Company. As of June 30, 2016, $108,497 is from the advancement of expenses and $330,627 is for past due compensation. 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. As of June 30, 2016, $161,922 is owed to GCH.
NOTE 7 – NOTE PAYABLE
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. As an inducement to receive this loan, the Company issued 1,250,000 shares of its common stock to Pelican Creek for the year ended March 31, 2012. The FV of the shares issued was $812,500 valued at $0.65 per share, using the closing price on the effective date of the agreement. 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 June 30, 2016, the Company accrued interest of $76,632 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.
In December 31, 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 amount of principle and interest as of June 30, 2016 is $70,010. The principle and interest are due on September 15, 2016. The note payable is currently in default.
NOTE 8 – NOTE PAYABLE – RELATED PARTY
On April 26, 2016, we entered into a note payable with Philip Liu, our CEO, whereby he converted amounts owed of $1,565,169. $1,592,255 of principle and interest is owed as of June 30, 2016. The note has an interest rate of 10% and is due on March 31, 2017. The note is in default as of the date of this filing.
On April 26, 2016, we entered into a note payable with Eric Stoppenhagen, our CFO, whereby he converted amounts owed of $411,214. $418,068 of principle and interest is owed as of June 30, 2016. The note has an interest rate of 10% and is due on March 31, 2017. .. The note is in default as of the date of this filing.
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NOTE 9 – STOCK ISSUANCE
During the quarter ended June 30, 2016, the Company issued 1,646,985 shares of common stock as finance charge for loans to related parties. The fair value of these shares at the date of issuance was $197,638.
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.
NOTE 10 - 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. In April 2013, we granted an additional 60,000 options to purchase shares of our common stock at $0.45 per share to certain members of our BOD. In January 2014, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO. In April 2014, we granted an additional 60,000 options to purchase shares of our common stock at $0.50 per share to certain members of our BOD. In April 2014, 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 2014, 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 2014, 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 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 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.
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 June 30, 2016, the Company recorded $35,588 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 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.
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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 three months ended June 30, 2016:
| 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 | 240,000 | 0.25 | ||||||||
| Balance at June 30, 2016 | 5,290,000 | $ | 0.32 | |||||||
The following summarizes pricing and term information for options issued to employees and directors outstanding as of June 30, 2016:
| Options Outstanding | Options Exercisable | |||||||||||||||
| Range of Exercise Prices | Number Outstanding at June 30, 2016 | Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price | Number Exercisable at June 30, 2016 | Weighted Average Exercise Price | |||||||||||
| $3.50 | 60,000 | 2.75 | $3.50 | 60,000 | $3.50 | |||||||||||
| $1.00 | 60,000 | 3.75 | $1.00 | 60,000 | $1.00 | |||||||||||
| $0.75 | 60,000 | 4.75 | $0.75 | 60,000 | $0.75 | |||||||||||
| $0.50 | 60,000 | 7.75 | $0.50 | 60,000 | $0.50 | |||||||||||
| $0.49 | 40,000 | 8.75 | $0.49 | 10,000 | $0.49 | |||||||||||
| $0.45 | 60,000 | 6.75 | $0.45 | 60,000 | $0.45 | |||||||||||
| $0.28 | 2,850,000 | 1.38 | $0.28 | - | - | |||||||||||
| $0.27 | 60,000 | 5.75 | $0.27 | 60,000 | $0.28 | |||||||||||
| $0.25 | 1,600,000 | 8.25 | $0.25 | 1,600,000 | $0.25 | |||||||||||
| $0.15 | 40,000 | 9.75 | $0.15 | 40,000 | $0.15 | |||||||||||
| Balance at June 30, 2016 | 5,290,000 | 7.52 | $0.32 | 2,440,000 | $0.37 | |||||||||||
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NOTE 11 – SUBSEQUENT EVENTS
During the year ended March 31, 2017, the Company issued 4,333,333 shares of common stock for $130,000.
| -13- |
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended March 31, 2016 and presume readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-Q.
The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended March 31, 2016 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited consolidated financial statements and notes thereto that appear elsewhere in this report.
Overview
We focus on the development and production of environmentally friendly and cost effective industrial energy and feedstock used for industrial applications. AuraMetal, 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 Qinzhou to acquire these types of HCF technologies; to perform research and development related to the reduction of harmful emission and energy costs; to license HCF technology to third parties; and to sell services and products derived from these technologies. Currently, we have seven patents patent issued related to our technologies: 1) ultrafine grinding and 2) ultrafine separation.
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 agreed to issue the Mineral Deposit Shares to GCH or its assigns. 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 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 relates to applications involving precious metals in exchange for royalty payments of five percent of gross revenues.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates which are based on historical experience and on other assumptions that we believe to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies require significant management judgments and estimates:
| -14- |
We account for our business acquisitions under the purchase method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, "Business Combinations." The total cost of acquisitions is allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair value of the tangible net assets acquired is recorded as intangibles. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items.
We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates.
Results of Operations
For the Three Months Ended June 30, 2016 and 2015
Revenues
Revenues were $0 and $0 for the three months ended June 30, 2016 and 2015, respectively.
Gross Profit
Gross profit was $0 and $0 for the three months ended June 30, 2016 and 2015, respectively.
General and Administrative Expenses
General and administrative expenses were $449,925 and $361,533 for the three months ended June 30, 2016 and 2015, respectively. The increase of $88,392 was due primarily to stock compensation expense.
Interest Income (Expense) and Other
Interest income (expense) and other was ($41,661) and $(1,772) for the three months ended June 30, 2016 and 2015, respectively. The interest expense for the three months ended June 30, 2016 and 2015 was primarily due to the outstanding note payables.
Liquidity and Capital Resources
Net cash used in operating activities was $(4,644) and $(78,406) in the three months ended June 30, 2016 and 2015, respectively. The decrease in cash used for operations was mainly due accruing of expenses for services and accounts payable to related parties in 2016 versus 2015.
Net cash used in investing activities was $0 and $0 in the three months ended June 30, 2016 and 2015, respectively.
Net cash provided by financing activities was $0 and $79,284 in the three months ended June 30, 2016 and 2015, respectively.
| -15- |
The Company suffered recurring losses from operations and has an accumulated deficit of $14,086,168 at June 30, 2016. The Company has incurred losses of $491,586 and $363,305 for the three months ended June 30, 2016 and 2015, respectively. The Company has not continually generated significant revenues. Unless our operations continue to generate significant revenues and cash flows from operating activities, our continued operations will depend on whether we are able to raise additional funds through various sources, such as equity and debt financing, other collaborative agreements and strategic alliances. Our management is actively engaged in seeking additional capital to fund our operations in the short to medium term. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term.
Inflation and Seasonality
Inflation has not been material to us during the past five years. Seasonality has not been material to us.
Recent Accounting Pronouncements
Refer to the notes to the consolidated financial statements in our March 31, 2016 Annual Report on Form 10-K for a complete description of recent accounting standards which we have not yet been required to implement and may be applicable to our operation, as well as those significant accounting standards that have been adopted during the current year.
Off-Balance Sheet Arrangements
As of June 30, 2016, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
| -16- |
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of June 30, 2016, that our disclosure controls and procedures are not effective to a reasonable assurance level of achieving such objectives. However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Management's Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. The internal controls for the Company are provided by executive management's review and approval of all transactions. Our ICFR also includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's ICFR as of June 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our ICFR and testing of the operational effectiveness of these controls.
Based on this assessment, management has concluded that as of June 30, 2016, our ICFR was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.
This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding ICFR. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting: There were no changes in our ICFR during the quarter ending June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our ICFR.
| -17- |
PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
We are not a party to any current or pending legal proceedings that, if decided adversely to us, would have a material adverse effect upon our business, results of operations, or financial condition, and we are not aware of any threatened or contemplated proceeding by any governmental authority against us. To our knowledge, we are not a party to any threatened civil or criminal action or investigation.
ITEM 1A – RISK FACTORS
In addition to the other risk factors and information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K is not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, operating results and/or cash flows.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 – EXHIBITS
| Exhibit | Description | ||||
| 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32 | Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| 101.INS | XBRL Instance | ||||
| 101.SCH | XBRL Taxonomy Extension Schema | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation | ||||
| 101.DEF | XBRL Taxonomy Extension Definition | ||||
| 101.LAB | XBRL Taxonomy Extension Labels | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation | ||||
| -18- |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| AURASOURCE, INC. | ||
| Date: September 29, 2017 | /s/ PHILIP LIU | |
| Name: Hongliang Philip Liu | ||
| Title: Chief Executive Officer | ||
| Date: September 29, 2017 | /s/ ERIC STOPPENHAGEN | |
| Name: Eric Stoppenhagen | ||
| Title: Chief Financial Officer |
| -19- |
EXHIBIT INDEX
| Exhibit | Description | ||||
| 31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 32 | Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| 101.INS | XBRL Instance | ||||
| 101.SCH | XBRL Taxonomy Extension Schema | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation | ||||
| 101.DEF | XBRL Taxonomy Extension Definition | ||||
| 101.LAB | XBRL Taxonomy Extension Labels | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation | ||||
| -20- |