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.
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.
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.
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.
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.
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.
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
|
|
NOTE
11 – SUBSEQUENT EVENTS
During
the year ended March 31, 2017, the Company issued 4,333,333 shares of common stock for $130,000.