Item 1. Business
General
AuraSource, Inc., a Nevada corporation, (“AuraSource” or the “Company”) focuses on clean energy technology development. AuraSource developed the AuraFuelTM and AuraCoalTM processes. AuraSource formed AuraSource Qinzhou Co. Ltd. (“AuraSource Qinzhou Co. Ltd.” or “AC”), a Wholly Foreign Owned Enterprise (“WFOE”) in China to acquire these types of Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development related to HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology. The Company was incorporated on November 6, 1998 and started its current business in December 2008.
Through our WFOE, we will conduct operations in China, to perform research and development related to HCF technology, to sell services and products related to and licenses for our HCF technology, and to possibly acquire additional HCF-related technology.
Additionally, we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between AuraSource, Mongolia Energy, and Kaiyuyuan Mineral Investment Group (“KMIG”) to build an AuraFuel plant. KMIG provided the full funding for this plant. AuraSource is providing the project management expertise and the license for the AuraFuel process. The joint venture contracted China Shandong Metallurgical Engineering Corp. as EPC general contractor which will provide a turnkey solution under an initial operation service contract. The AuraFuel plant will utilize the AuraFuel process which AuraSource licensed from China Chemical Economic Cooperation Center (“CCECC”). CCECC is a Chinese governmental division which leads China’s energy and environmental research and development. AuraSource obtained the license for the Gulf of Tonkin Economic Region. The AuraFuel process utilizes a low temperature catalytic process to convert oil shale and low ranking coal into feedstock for the petrochemical industry.
Hydrocarbon Clean Fuel (HCF) Technology
We believe our HCF technology, AuraCoalTM, is a next generation of hydrocarbon clean fuel technology. It involves grinding coal into very fine particles, mixing it with water and selected chemicals to make a slurry mixture and using a proprietary biological treatment of the coal slurry mixture to reduce heavy minerals, such as sulfur. We believe such slurry mixture will have sufficient fluidity to move through pipelines, process delivery piping and burner injection nozzles. Our goal is to demonstrate to power plants and similar users that our HCF technology can convert their plants to use the technology at a lower cost than any current alternative. Given sufficient capital and development of our HCF technology, we plan to market it to plants in China and the United States with the objective of having a beta demonstration site in each country.
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Given sufficient capital, development and protection of our HCF technology, among other factors, AuraSource plans to utilize the HCF technology as follows:
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license HCF technology to international clients in applicable industries, such as coal producers and power plants;
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develop strategic partnerships to deliver consulting services with respect to design, engineering, procurement and construction for HCF applications;
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enter into joint ventures with coal producers to supply HCF treated coal to power plants;
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process coal using HCF technology and sell such coal to end users at a marked-up price;
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assist customers to convert their plants to HCF rather than oil, gas or other natural resources in order to save energy costs; and
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establish centers for processing coal with our HCF technology to supply power plants and other customers.
AuraCoaltm Clean Coal Technology
AuraCoal is patent pending technology designed to remove sulfur and ash from coal pre-combustion. This reduces energy costs and helps to eliminate harmful emissions. This proprietary clean coal technology produces a coal water mixture, which contains only trace amounts of sulfur and ash and constitutes a superb alternative to oil or natural gas. AuraCoal can be delivered via pipeline in a non-volatile state. The conversion to an AuraCoal system is designed to deliver immediate and substantive reductions in harmful particle emissions as well as savings in transportation, processing and safety costs. AuraSource plans to construct its pilot plant in mid 2010 [any update?] and distribute the coal based clean industrial fuel produced by this proprietary new generation of clean coal technology in 2011.
AuraCoal is a new generation of HCF technology. With the adoption of our proprietary AuraCoal Clean Coal technology, we believe we will be able to convert old coal systems into power generating systems that produce emissions containing only trace amounts of sulfur and ash. We believe AuraCoal technology can:
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reduce harmful emissions and energy costs;
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reduce and/or eliminate the need for scrubbers;
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reduce a power plant’s need for related precipitators and/or sulfur acceptors; and
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enable a power plant to effectively manage its carbon emissions.
AuraFueltm
AuraSource has also licensed another proprietary hydrocarbon clean fuel technology, AuraFuel, which utilizes a low temperature catalytic process to convert oil shale, asphalt shale and low-ranking coal to hydrocarbon clean fuel products in a highly efficient manner. This technology was developed by EERI, a Chinese government owned energy research institute. EERI patented the technology and the production process. AuraSource licensed this technology for Guangxi province of China and the United States. We are currently developing our own intellectual property associated with this technology. AuraSource is partnering with three Chinese companies and started construction on a pilot plant in April 2010 with production anticipating to begin in 2011. In the United States, we are currently in our planning stages and pursuing a suitable site on public or private lands to start a pilot plant in 2011.
The process is an above-ground retorting technology, which has a simple and robust design, energy self-sufficiency, minimal water usage, and high oil yields.
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The AuraFuel process consists of the following main steps:
1)
Crushing. Before retorting, raw oil shale is crushed into fine particles.
2)
Retorting. The AuraFuel process uses an annular rotary retort that heats raw oil shale. Due to the rotating feature, the retorting is a continuous process. The annular retort consists of several zones, including heating zone, reaction zone and heat recovery zone. Incoming raw shale goes into the heating zone in which the shale is heated. Then the shale enters the reaction zone in which pyrolysis of oil shale happens. Most of the pyrolysis is complete in the reaction zone. In the heat recovery zone, the spent shale is cooled and waste heat is recycled. After one cycle of motion, the retorting process is complete and spent shale is discharged.
3)
Post-processing. Produced oil vapors and gases are cleaned and delivered to a condensation system where oil condenses and non-condensable gases are fed back to the retort as energy sources. The oil goes through a distillation process to produce gasoline, diesel or residual oil.
There can be no assurance we will be able to carry out our development plans for our HCF technology, including AuraCoal and AuraFuel. Our ability to pursue this strategy is subject to the availability of additional capital and further development of our HCF technology. We will also need to finance the cost of pursuing a strategy to effectively protect our intellectual property rights in the United States and abroad where we intend to market our technology and products.
HCF Overview
We believe our HCF technology will provide an emerging type of energy saving and emission reducing fuel substitute for oil. The HCF coal product appears to exhibit fuel economy, liquidity and stability, ease of loading and unloading, storage and transportation without precipitation of the product. It seems to be conducive to pumping over long-distance pipelines, transport by railway and truck tankers and maritime shipping.
Hydrocarbon clean fuel atomization performance depends on the energy value of coal preparation and concentration, which we believe is generally the equivalent of half the energy value of heavy oil, industrial boilers, industrial kilns, power generation boiler oil and coal combustion generation.
We believe HCF has a broad range of industrial applications. Our initial objective will be to pursue applications related to power plants and industrial boilers, including steam and hot water boilers.
First Generation Coal-Water Slurry (Slurry Generation)
The first generation of HCF occurred at the U.S. Black Mesa coal slurry pipeline, which is the only operating long-distance coal-water slurry pipeline in the world. See www.informaworld.com/index/778734328.pdf. This pipeline traverses 273 miles, with an annual capacity of 4,800,000 tons. See http://www.britannica.com/EBchecked/topic/68053/Black-Mesa-pipeline. The purpose of liquefying the coal was to transport the coal economically.
The Second Generation Hydrocarbon clean fuel (Mixture Generation)
In the second generation process, the coal is a coal-water slurry physically processed with new products, consisting of approximately 65% to 70% coal and 35% to 30% water and trace chemical additives prepared in a paste, commonly known as high concentration coal-water slurry, or water coal slurry.
The Third Generation Hydrocarbon clean fuel (The Ultra-Fine Coal-Water Fuel Generation)
We believe our technology will be the third generation of hydrocarbon clean fuel technology. We believe the third generation of HCF will be a lower-cost and more efficient technology that can be used in greater depth and in a wider array of applications, and may be an alternative to oil resource applications. We expect the third generation of HCF technology will contain only trace amounts of sulfur and ash, in fine particle sizes, which allows the burning of the mixture to cause minor wear and tear on equipment. Additionally, we believe the use of ultra-fine grinding machines allows preparation of an ultra-fine paste for a new type of fuel. We believe the HCF technology may yield potential environmental advantages relative to heavy oil.
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Competition
HCF Technology
We face heavy competition from large companies like Arch Coal, Peabody Massey Energy Company, CONSOL Energy, Foster-Wheeler, GreatPoint Energy, Evergreen Energy, Inc., CoalTek, Inc., Babcock & Wilcox Company, and Yanzhou Coal Mining Company as well as numerous universities and government agencies who have greater financial, marketing, distribution and technological resources than we have, and they may have more well-known brand names in the markets. They may also seek to enter and compete with us in our market.
More indirect competition comes from alternative low-pollution energy sources, including: wind, bio-fuels and solar; all of which need additional technological advancements to be able to produce power at the scale of coal-fueled plants, which today produce 43% of world’s electricity according to U.S. Department of Energy figures published in May 2008.
Patent and Trademarks
The Company currently relies on unregistered trademarks and patents, and confidentiality of trade secrets. Our ability to compete effectively will depend on our success in protecting the HCF proprietary technology, both in the United States and abroad. There are numerous patents or patent applications relating to hydrocarbon clean fuel technology. We have not filed for patent protection or taken the steps required to obtain international patent protection.
No assurance can be given that any patents relating to the HCF technology will be issued by the United States or any foreign patent offices. Further, no assurance can be given that we will receive any patents in the future based on the continued development of the HCF technology, or that the HCF technology patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing our HCF technology. If patent protection is not available for the HCF technology, we plan to treat it as a trade secret. There can be no assurance that we will be successful in this regard.
In addition to seeking patent protection, we will rely on trade secrets, know-how and continuing technological advancement to seek to achieve and thereafter maintain a competitive advantage in the HCF market. Although we have entered into or intend to enter into confidentiality and invention agreements with our employees, consultants and advisors, no assurance can be given that such agreements will be honored or that we will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
Government Regulations
United States
We believe that existing and proposed legislation and regulations could impact fossil fuel-fired, and specifically coal-fired, power generating facilities nationally and internationally.
The following briefly describes the most significant existing national laws and regulations affecting the potential market for coal processed using our technology. State and regional policies may also impact our market.
The Clean Air Act and Acid Rain Program. The Clean Air Act of 1970, as amended, is currently the primary mechanism for regulating emissions of sulfur dioxide and nitrogen oxide from coal-fired power generating facilities. A key component of the act regulates sulfur dioxide and nitrogen oxide emissions. Specifically, title IV set a goal of reducing sulfur dioxide emissions by 10 million tons below 1980 levels and imposed a two-phased tightening of restrictions on fossil fuel-fired power plants. Phase I began in 1995 and focused primarily on coal-burning electric utility plants in the east and midwest. In 2000, Phase II began and this phase tightened the annual emissions' limits on larger higher emitting plants and set restrictions on smaller, cleaner plants fired by coal, oil, and gas. The Acid Rain Program calls for a 2 million ton reduction in nitrogen oxide emission and focuses on one set of sources that emit nitrogen oxide: coal-fired electric utility boilers. Beginning in January 2000, nitrogen oxide emissions are to be reduced 900,000 tons per year beyond the 1.2 million per year reduction set by the EPA in 1995.
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Clean Air Interstate Rule. The Clean Air Interstate Rule was finalized by the EPA in March 2005. Once fully implemented, this rule will reduce sulfur dioxide emissions in 28 states and the District of Columbia by more than 70% and nitrogen oxide emissions by more than 60% from the 2003 levels. Through the use of a cap-and-trade approach, the rule promises to achieve substantial reduction of sulfur dioxide and nitrogen oxide emissions. Reductions of nitrogen oxide emissions began in January 2009, followed by reductions of sulfur dioxide emissions in January 2010. The program will be fully implemented by January 2015.
Clean Air Mercury Rule. The U.S. Environmental Protection Agency, or EPA, finalized the Clean Air Mercury Rule, or CAMR, on March 15, 2005 to reduce mercury emissions from coal-fired power plants. Phase 1 of CAMR was set to go into effect on January 1, 2010. However, on February 8, 2008, the U.S. Circuit Court of Appeals for the District of Columbia vacated the rule, requiring EPA to draft a new regulation. As a result of this ruling, it is likely that individual coal-fired boilers and power plants will be held to stringent levels of mercury emission reductions instead of averaging mercury emissions across multiple plants and across the country.
China
The Environmental Protection Law (“EPL”) of the People’s Republic of China (“PRC”) governs us and our HCF products. The EPL, promulgated by the National People’s Congress on December 26, 1989, is the cardinal law for environmental protection in China. The law establishes the basic principle for coordinated advancement of economic growth, social progress and environmental protection, and defines the rights and duties of governments at all levels. Local environmental protection bureaus may set stricter local standards than the national standards and enterprises are required to comply with the stricter of the two sets of standards. The EPL requires any entity operating a facility that produces pollutants or other hazards to incorporate environmental protection measures into its operations and to establish an environmental protection responsibility system, which must adopt effective measures to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials.
Violators of the EPL and various environmental regulations may be subject to warnings, payment of damages and fines. Any entity undertaking construction work or manufacturing activities before the pollution and waste control and processing facilities are inspected and approved by the relevant environmental protection bureau may be ordered to suspend production or operations and may be fined. The violators of relevant environment protection laws and regulations may be exposed to criminal liability if violations result in severe loss of property, personal injuries or death.
In addition, China is a signatory to the 1992 United Nations Framework Convention on Climate Change and the 1997 Kyoto Protocol, which are intended to limit emissions of greenhouse gases. Efforts to control greenhouse gas emission in China could result in reduced use of coal if power generators switch to sources of fuel with lower carbon dioxide emissions, which in turn could reduce the revenues of our business and have a material adverse effect on our results of operations.
The Company endeavors to ensure the safe and lawful operation of its facilities in manufacturing and distribution of HCF and believes it is in compliance in all material respects with applicable PRC laws and regulations.
No enterprise may start production at its facilities until it receives approval from the Ministry of Commerce to begin operations.
Other
Any international plants will also be subject to various permitting and operational regulations specific to each country. International initiatives, such as the Kyoto Protocol, are expected to create increasing pressures on the electric power generation industry on a world-wide basis to reduce emissions of various pollutants, which management expects will create additional demand for our technology.
Employees
The Company currently has fourteen employees. The Company engages the services of independent consultants to assist it with management and business development. We plan to engage additional full-time employees as our business expands.
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Item 1A.
Item 1A. Risk Factors
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
Risks Related to the Company
We are a development stage company, have a history of operating losses and we may never achieve or maintain profitability.
We are a development stage company. Thus, we have a limited operating history upon which investors may rely to evaluate our prospects and have only a preliminary business plan upon which investors may consider to evaluate our prospects. Such prospects must be considered in light of the problems, expenses, delays and complications associated with a business that seeks to commence more significant revenue operations. We have a history of incurring losses from operations. As of March 31, 2010, we had an accumulated deficit of $2,864,811. We expect to continue to incur operating losses until such time, if ever, as we achieve sufficient levels of revenue from operations. We anticipate our existing cash and cash equivalents will not be sufficient to fund our business needs. Our ability to commence revenue operations and achieve profitability will depend on our obtaining additional capital, entering into satisfactory agreements with strategic partners, acquiring the HCF technology and finding customers for such technology. There can be no assurance that we will ever generate revenues or achieve profitability. Accordingly, we cannot predict the extent of future losses and the time required to achieve profitability, if ever.
Investors may lose all of their investment in us.
Investment in us involves a high degree of risk. Investors may never recoup all or part of or realized any return on their investment. Accordingly, investors may lose all of their investment and must be prepared to do so.
We have no revenue and cannot assure that we will have revenue or profits in the future.
We have not and currently do not generate any revenue while in our development stage. We are incurring operating losses and cannot assure investors that we will generate revenue or be profitable in the future. Continued losses could cause us to limit our operations in order to preserve working capital.
We will need additional financing.
Our cash requirements may vary materially from those now planned depending on numerous factors, including our ability to obtain the HCF technology, finding customers to use such technology and competition. We may not have sufficient funds to institute our business plan set forth in this report. We therefore would need to raise additional funds to finance our capital requirements through new financings to achieve the level of operations we anticipate. Such financings could include equity financing, which may be dilutive to stockholders, or debt financing, which would likely restrict our ability to borrow from other sources. In addition, such securities may contain rights, preferences or privileges senior to those of the rights of our current stockholders. We do not have any commitments for additional financing. There can be no assurance that additional funds will be available on terms attractive to us, or at all. If adequate funds are not available, we may be required to curtail our development of the HCF technology and/or otherwise materially curtail or reduce our operations. Alternatively, we may be forced to sell or dispose of our right or assets. Any inability to raise adequate funds on commercially viable terms could have a material adverse effect on our business, results of operation and financial condition.
Substantially all of our business activities will be overseas and we will be subject to all of the risks of international operations.
We expect that substantially all of our operations will involve performing research and development related to HCF in China and selling services and products related to and licenses for this technology to buyers in China and other international markets. Thus, substantially all of our business operations will be subject to the risks of international operations. Our business, financial condition, and results of operations could be materially adversely affected by changes or uncertainties in the political or economic climates, laws, regulations, tariffs, duties, import quotas, or other trade, intellectual property or tax policies in China and possibly other foreign countries. We will also be subject to adverse exchange rate fluctuations among Chinese currency and the U.S. dollar since we anticipate that any revenue generated as well as and costs and expenses for our operations in China will be paid in the Chinese RMB.
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We will continue to incur the expenses of complying with public company reporting requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the Exchange Act, as amended, even though compliance with such reporting requirements is economically burdensome.
We may experience difficulties in the future in complying with Section 404 of the Sarbanes-Oxley Act.
As a public company, we will be required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002. In this regard, we will be required to comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act for each fiscal year ending on or after March 31, 2011. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or stockholder litigation. Any inability to provide reliable financial reports could harm our business. Section 404 of the Sarbanes-Oxley Act also requires our independent registered public accounting firm report on management’s evaluation of our system of internal controls. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations.
If we fail to maintain proper and effective internal controls in future periods, it could adversely affect our operating results, financial condition and our ability to run our business effectively and could cause investors to lose confidence in our financial reporting.
We may be unable to continue as a going concern if we do not successfully raise additional capital or if we fail to generate sufficient revenue from operations.
Primarily as a result of our recurring losses and our lack of liquidity, in connection with our fourth quarter ended March 31, 2010 we received a report from our independent auditors that includes an explanatory paragraph describing the substantial uncertainty as to our ability to continue as a going concern.
Reliance on and experience of our officers and directors.
Our officers and directors will be responsible for the management and control of the Company. Our success will, to a large extent, depend on the quality of the management provided by the officers and directors. Although our officers and directors believe they have the ability to manage the Company, they can give no assurance that their efforts will result in success. The officers and directors have no experience in performing research and development activities in foreign countries and no experience in selling services and products related to and licenses for this technology in foreign countries. Stockholders have no right or power to take part in the management of the Company. Accordingly, no person should purchase any of the Shares offered hereby unless he is willing to entrust all aspects of the management of the Company to the officers and directors.
We may have difficulty managing growth in our business.
Assuming we are successful in commencing revenue generating activities, because of our small size and the relatively large scale of operations required for our business to yield revenue, growth in accordance with our business plan, if achieved, will place a significant strain on our financial, technical, operational and management resources. As we expand our activities, there will be additional demands on these resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including issues relating to our performance of research and development activities related to HCF and retention of experienced scientists, managers and engineers, could have a material adverse effect on our business, financial condition and results of operations and our ability to timely execute our business plan. If we are unable to implement these actions in a timely manner, our results may be adversely affected.
If we borrow money to expand our business, we will face the risks of leverage.
We anticipate that we may in the future incur debt to finance our growth. Our ability to borrow funds will depend upon a number of factors, including the condition of the financial markets. The risk of loss in such circumstances is increased because we would be obligated to meet fixed payment obligations on specified dates regardless of our revenue. If we do not meet our debt service payments when due, we may sustain the loss of our equity investment in any of our assets securing such debt upon the foreclosure on such debt by a secured lender.
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Our stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
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announcements concerning our strategy;
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litigation; and
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general market conditions.
Our common stock is considered a “penny stock,” any investment in our shares is considered to be a high-risk investment and is subject to restrictions on marketability
Our common stock is considered a “penny stock” because it is quoted and traded on the OTC Bulletin Board (“OTCBB”) and it trades for less than $5.00 per share. The OTCBB is generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to effecting a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market in the future. We can provide no assurance that our common stock will be quoted or listed on the OTC Bulletin Board, NASDAQ or any exchange, even if eligible in the future.
We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize issuance of 150,000,000 shares of common stock and 10,000 shares of preferred stock. The common stock and preferred stock can be issued by our Board of Directors (“BOD”) without stockholder approval. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common and preferred stock, in the event that buyers can be found. Any future issuances of common stock would further dilute the percentage ownership of our Company held by the public stockholders.
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Risks Related to Doing Business in China
Most, if not all, of our sales may be in China.
China is a developing country and has only a limited history of trade practices as a nation. Because we will likely direct a substantial amount of our sales efforts to customers in China, we will be subject to the laws, rules, regulations, and political authority of the government of the PRC. We may encounter material problems while doing business in China, such as in interactions with the Chinese government and the uncertainty of foreign legal precedent pertaining to our HCF business in China. Risks inherent in international operations also include the following:
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local currency instability;
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inflation;
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the risk of realizing economic currency exchange losses when transactions are completed in the Chinese RMB and other currencies;
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the ability to repatriate earnings under existing exchange control laws; and
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political unrest.
Changes in import and export laws and tariffs can also materially impact international operations. In addition, international operations involve political, as well as economic risks, including:
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nationalization;
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expropriation;
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contract renegotiations; and
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changes in laws resulting from governmental changes.
In addition, we may be subject to rules and regulations of the PRC or the jurisdiction of other governmental agencies in the PRC that may adversely affect our ability to perform under, or our rights and obligations in, our contracts with Chinese companies or government entities. In the event of a dispute, we will likely be subject to the exclusive jurisdiction of foreign courts. We may also be hindered or prevented from enforcing our rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity.
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Some or all of our sales may be made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
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the amount of government involvement;
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the level of development;
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the growth rate;
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the control of foreign exchange; and
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the allocation of resources.
While it is our understanding that the economy in China has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various economic sectors. The government of the PRC has implemented various measures to encourage or control economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
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The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the Chinese economy could result in decreased capital expenditure by power plants, which in turn could reduce demand for our products and services.
We risk the effects of general economic conditions in China.
Sales we secure in China could be adversely affected by a sustained economic recession in China. Therefore, a sustained economic recession in that country could result in lower demand or lower prices for the use of our HCF technology.
Uncertainties with respect to the Chinese legal system could have a material adverse effect on us.
We plan to conduct some of our sales and substantially all of our administrative activities in China. We will be generally subject to laws and regulations applicable to foreign investment in China. The PRC legal system is based, at least in part, on written statutes. Prior court decisions may be cited for reference but may have limited precedential value. It is our understanding that since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, the preemption of local regulations by national laws, or the overturn of local government’s decisions by the superior government. These uncertainties may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Risks Related to HCF Technology
Our business venture into the HCF business is subject to a high risk of failure.
Our business venture into the HCF technology business through our investment in AC and the HCF technology is at a very early stage and is subject to a high risk of failure. The HCF fuel technology has not been proven by us to be a commercially viable fuel alternative. In order to establish commercial viability, we will have to either undertake the construction and operation of the contemplated demonstration facility or convert an existing facility to be compatible with our HCF technology, both of which would be very costly. Even if the demonstration facility were constructed or an existing facility converted and operational, there is no assurance that the commercial viability of this HCF process would be established or that we would be able to expand the facility into a commercially viable operation or to generate revenues from this technology.
We are uncertain of our ability to protect technology through patents.
Our ability to compete effectively will depend on the success of AC in protecting its proprietary technology, both in the United States and abroad. We believe that many patents have already been issued in the area of HCF, both in the United States and abroad, although to date we have not conducted a patent search. AC directly, or through us, plans to file for patent protection in the United States and possibly outside the United States after it acquires the HCF technology. No assurances can be given that any patents will be issued to AC or to us.
No assurance can be given that any patents relating to the existing HCF technology will be issued by the United States or any foreign patent offices, that it will directly or through us receive any patents in the future based on its continued development of the HCF technology, or that our HCF patent protection within and/or outside of the United States will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing AC’s HCF technologies.
If AC directly, or through us, obtains patents, there can be no assurance that they will be enforceable to prevent others from developing and marketing competitive products or methods. If AC directly, or through us, brings an infringement action relating to any future patents, it may require the diversion of substantial funds from its or our operations and may require management to expend efforts that might otherwise be devoted to its or our operations. Furthermore, there can be no assurance that AC or us will be successful in enforcing our HCF patent rights.
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Further, if any patents issue, there can be no assurance that patent infringement claims in the United States or in other countries will not be asserted against AC or us by a competitor or others, or if asserted, that we will be successful in defending against such claims. If one of our products is adjudged to infringe patents of others with the likely consequence of a damage award, we may be enjoined from using and selling such product or be required to obtain a royalty-bearing license, if available on acceptable terms. Alternatively, in the event a license is not offered, we or AC might be required, if possible, to redesign those aspects of the product held to infringe so as to avoid infringement liability. Any redesign efforts undertaken by AC or us might be expensive, could delay the introduction or the re-introduction of our products into certain markets, or may be so significant as to be impractical.
We are uncertain of our ability to protect the HCF proprietary technology and information.
In addition to seeking patent protection, we will rely on trade secrets, know-how and continuing technological advancement to achieve and thereafter maintain a competitive advantage with respect to the HCF technology. Although we have entered into and AC intends to enter into confidentiality and invention agreements with employees, consultants, certain potential customers and advisors, no assurance can be given that such agreements will be honored or that we or AC will be able to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how.
Risk Related to the Alternative Energy Industry
A drop in the retail price of conventional energy or other alternative energy may have a negative effect on our business.
A customer's decision to purchase HCF will be primarily driven by the return on investment resulting from the energy savings from HCF. Any fluctuations in economic and market conditions that impact the viability of conventional and other alternative energy sources, such as decreases in the prices of oil and other fossil fuels could cause the demand for HCF to decline. Although we believe current levels of retail energy prices support a reasonable return on investment for HCF, there can be no assurance that future retail pricing of conventional energy and other alternative energy will remain at such levels.
Existing regulations and changes to such regulations may present technical, regulatory and economic barriers to the purchase and use of HCF, which may significantly affect the demand for our products.
HCF is subject to oversight and regulations in accordance with national and local ordinances and regulations relating to safety, environmental protection, and related matters. We are responsible for knowing such ordinances and regulations, and must comply with these varying standards. Any new government regulations or utility policies pertaining to our product may result in significant additional expenses to us and our customers and, as a result, could cause a significant reduction in demand for our product.
The market for HCF is emerging and rapidly evolving, and its future success remains uncertain. If HCF is not suitable for widespread adoption or sufficient demand for HCF does not develop or takes longer to develop than we anticipate, we would be unable to generate revenue or to achieve or sustain profitability. In addition, demand for HCF in the markets and geographic regions where we operate may not develop or may develop more slowly than we anticipate. Many factors will influence the widespread adoption of HCF and demand for our products, including:
·
cost-effectiveness of HCF as compared with conventional and other alternative energy products and technologies;
·
performance and reliability of HCF as compared with conventional and other alternative energy products and technologies;
·
capital expenditures by customers that tend to decrease if the PRC or global economy slows down; and
·
availability of government subsidies and incentives.
Our limited marketing capability limits our ability to generate revenue.
We have limited marketing capabilities and resources to expend on marketing HCF technology. To achieve market penetration we will have to undertake significant efforts and expenditures to create awareness of, and demand for, our HCF technology and products. Our ability to penetrate the market and build our customer base will be substantially dependent on our marketing efforts, including our ability to encourage power plants to convert the plants to be compatible with our HCF technology. No assurance can be given that we will succeed. Our failure to successfully develop our marketing capabilities, both internally and through third-party joint ventures, would negatively impact our ability to generate revenue and have a material adverse effect on our business, operating results and financial condition.
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We are dependent on key personnel and the loss of the services of these personnel could harm our business.
Our success in the HCF technology business largely depends upon the efforts of our executive officers and those who are developing the HCF technology and the employees hired by AC or by us to assist such principals in developing such technology. The loss of the services of any of these individuals could have a material adverse effect on our HCF business and prospects. There can be no assurance that we will be able to retain the services of such individuals in the future. Our success will be dependent upon our ability to hire and retain qualified technical, research, management, marketing and financial personnel. We will compete with other companies with greater financial and other resources for such personnel. Although AC has not to date experienced difficulty in attracting qualified personnel, there can be no assurance that it will be able to retain the personnel it hires or acquire additional qualified personnel as and when needed.
Risks Related to an Investment in Our Securities
To date, we have not paid any cash dividends and no cash dividends are expected to be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings for our operations.
The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission (“SEC”) relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
The Company cannot predict the extent to which an active public market for its common stock will develop or be sustained. However, the Company does not rule out the possibility of applying for listing on the Nasdaq National Market or other exchanges.
Our common shares have historically been sporadically or "thinly-traded" on the OTCBB, meaning that the number of persons interested in purchasing our common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
The market price for our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” and lack of current revenues that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
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The market for our common stock is characterized by significant price volatility when compared with seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or "risky" investment due to our lack of revenues or profits to date and uncertainty of future market acceptance for our current and potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes; and additions or departures of our key personnel, as well as other items discussed under this "Risk Factors" section, as well as elsewhere in this annual report.
Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. However, we do not rule out the possibility of applying for listing on the Nasdaq National Market or other exchanges.
Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.
As of June 29, 2010, our principal stockholders and their affiliated entities own 34.06% of our outstanding common shares, representing 34.06% of our voting power. These stockholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal stockholders and their affiliated entities, elections of our BOD will generally be within the control of these stockholders and their affiliated entities. While all of our stockholders are entitled to vote on matters submitted to our stockholders for approval, the concentration of shares and voting control presently lies with these principal stockholders and their affiliated entities. As such, it would be difficult for stockholders to propose and have approved proposals not supported by management. There can be no assurance that matters voted upon by our officers and directors in their capacity as stockholders will be viewed favorably by all stockholders of the company.
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation contains a provision that eliminates the liability of our directors for monetary damages to our company and shareholders to the extent allowed under Nevada law and we are prepared to give such indemnification to our directors and officers to the extent provided by Nevada law. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
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Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other similar rule changes are likely to increase general and administrative costs and expenses. Additionally, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
The market price for our stock may be volatile which may place downward pressure on our stock price.
The market price for our stock may be volatile and subject to wide fluctuations in response to factors including the following:
·
actual or anticipated fluctuations in our quarterly operating results;
·
changes in financial estimates by securities research analysts;
·
conditions in alternative energy and coal-based product markets;
·
changes in the economic performance or market valuations of other alternative energy and coal-based products companies;
·
announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
·
addition or departure of key personnel;
·
intellectual property litigation; and
·
general economic or political conditions in China.
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.
We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell equity or debt securities or obtain a credit facility. The sale of equity securities could result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Shares eligible for future sale may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year). Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements.
We will incur increased costs as a result of being a public company.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by SEC, has required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
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Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties.
We are currently not obligated under any leases.
Item 3.
Item 3. 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 4.
Item 4. (Removed and Reserved)
.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Prices
The shares of our common stock have been listed and principally quoted on the OTC Bulletin Board under the trading symbol “ARAO.OB”.
The following table sets forth, for the fiscal quarters indicated, the high and low bid information for our common stock, as reported on the OTC Bulletin Board. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Holders
On June 28, 2010, the closing sales price of our common stock as reported on the Over-The-Counter Bulletin Board was $1.15 per share. As of June 29, 2010, there were approximately 1,087 record holders of the Company's Common Stock. Our transfer agent is Empire Stock Transfer Inc.
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Dividends
Holders of common stock are entitled to receive such dividends as the BOD may from time to time declare out of funds legally available for the payment of dividends. No dividends have been paid on our common stock, and we do not anticipate paying any dividends on our common stock in the foreseeable future.
Recent Sale of Unregistered Securities.
During the year ended March 31, 2010, we sold 5,279,693 shares of common stock for $0.50 per share.
Item 6.
Item 6. Selected Financial Data.
Not Applicable
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Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Financial Statements and notes thereto included in Item 8 of Part II of this Annual Report on Form 10-K.
Overview
AuraSource focuses on clean energy technology development. AuraSource developed the AuraFuelTM and AuraCoalTM processes. AuraSource formed AuraSource Qinzhou Co. Ltd., a WFOE in China to acquire these types of HCF technologies, performing research and development related to HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology.
Through our wholly owned subsidiary, we will conduct operations in China, to perform research and development related to HCF technology, to sell services and products related to and licenses for our HCF technology, and to possibly acquire additional HCF-related technology.
Additionally, we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between AuraSource, Mongolia Energy, and KMIG to build an AuraFuel plant. Kaiyuyuan Mineral provided the full funding for this plant. AuraSource is providing the project management expertise and the license for the AuraFuel process. The joint venture contracted China Shandong Metallurgical Engineering Corp. as EPC general contractor which will provide a turnkey solution under an initial operation service contract. The AuraFuel plant will utilize the AuraFuel process which AuraSource licensed from CCECC. CCECC is a Chinese governmental division which leads China’s energy and environmental research and development. AuraSource obtained the license for the Gulf of Tonkin Economic Region. The AuraFuel process utilizes a low temperature catalytic process to convert oil shale and low ranking coal into feedstock for the petrochemical industry.
Recently Issued Accounting Pronouncements
Refer to the notes to the consolidated financial statements 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.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("USGAAP") 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 various other assumptions that are believed 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:
We account for our business acquisitions under the purchase method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Codification 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 that are not readily apparent from other sources. There can be no assurance that actual results will not differ from these estimates.
Certain reclassifications have been made to the prior fiscal year amounts disclosed in the consolidated financial statements to conform to the presentation for the fiscal year ended March 31, 2010. These reclassifications had no effect on the reported net loss or stockholders’ equity.
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Fiscal Year 2010 Compared to Fiscal Year 2009
Results from Operations
Revenues
Revenues were zero for the years ended March 31, 2010 and 2009. Upon completion of our AuraFuel and AuraCoal plants, we expect to begin generating revenues. We expect this to occur in 2011.
Cost of Sales
Cost of sales was zero for the years ended March 31, 2010 and 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,241,383 and $197,655 for the years ended March 31, 2010 and 2009, respectively. The increase in selling, general and administrative expenses was due to commencing business operations in China and the hiring of additional employees. We expect this to increase as we expand our operations.
Interest Income and Other, Net
Interest income/(expense) and other, net was $1,098 and $(18,209) in the years ended March 31, 2010 and 2009, respectively. The decrease in expense is principally due to the reduction in the Company’s indebtedness for the year ended March 31, 2010 as further described in Note 2 to our Consolidated Financial Statements appearing elsewhere in this report.
Liquidity and Capital Resources
Net cash used in operating activities was $826,607 and $202,657 in the years ended March 31, 2010 and 2009, respectively. The increase was primarily due to the commencement of operations and stock based compensation.
Net cash used in investing activities was $125,467 and $2,058 in the years ended March 31, 2010 and 2009, respectively. The increase was due to the transferring of all rights and ownership interests in assets relating to the exploration and development of mineral resources to Mongsource and the purchase of capital equipment in China.
Net cash provided by in financing activities was $2,448,644 and $341,465 in 2010 and 2009, respectively. The increase in cash provided by financing activities was primarily due to approximately $2,600,000 received for the issuance of common stock and $205,725 received for the issuance of debt. This was offset by offering costs of approximately $358,000.
On July 11, 2008, we entered into a Revolving Promissory Note (the “Note”) with Mongsource USA, LLC, the majority stockholder of the Company. Through June 11, 2009, Mongsource USA, LLC had advanced us approximately $475,000. Additionally, on September 6, 2008, we entered into an Exploration Licenses Transfer Agreement, with Mongsource USA, LLC, under which Mongsource USA agreed to transfer to the Company three mineral exploration licenses in Mongolia.
On June 11, 2009, we entered into an agreement with MongSource USA, LLC whereby we transferred all rights and ownership interests in our assets relating to the exploration and development of mineral resources which includes all assets of AuraSourse LLC, a Mongolian subsidiary, in exchange for the forgiveness of the Note and all amounts due under the Note. We recorded a capital contribution of $386,578 to additional paid in capital to account for this agreement.
The Company suffered recurring losses from operations and has an accumulated deficit of $2,864,811 at March 31, 2010. Currently, we have not generated any revenues and as of March 31, 2010, had a cash balance of approximately $1.6 million. The Company is seeking various forms of financing. While we believe we have sufficient cash resources for the next twelve months, in order to meet our business goals we will need to seek additional funding or enter into strategic partnerships.
Going Concern Uncertainties
As of the date of this annual report, there is doubt regarding our ability to continue as a going concern as we have not generated sufficient cash flow to fund our business operations and loan commitments. Our future success and viability, therefore, are dependent upon our ability to generate capital financing. The failure to generate sufficient revenues or raise additional capital may have a material and adverse effect upon the Company and our shareholders.
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Capital Expenditures
We have not incurred any material capital expenditures for the year ended March 31, 2010 and 2009.
Commitments and Contractual Obligations
Effective August 1, 2009, we entered into an Employment Agreement (the “Employment Agreement”) with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month.
We currently do not have any other material commitments and contractual obligations.
Off-Balance Sheet Arrangements
As of March 31, 2010, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
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Item 8.
Item 8. Financial Statements and Supplementary Data
AURASOURCE, INC.
(a development stage company)
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AuraSource, Inc and Subsidiary
Chandler, Arizona
We have audited the consolidated balance sheets of AuraSource, Inc. and Subsidiary, a development stage company, (the “Company”), as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended. The statements of operations, stockholders’ equity (deficit) and cash flows included in the cumulative information from inception (March 15, 1990) to March 31, 2008 have been audited by other auditors whose report is presented separately in the Company’s 10-K filing. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended. Further, in our opinion, based on our audits and the report of other auditors’ as referred to above, the financial statements fairly present in all material respects, the results of the Company’s operations and cash flows for the period from inception (March 15, 1990) to March 31, 2010 in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses from operations and has an accumulated deficit of $2,864,811 as of March 31, 2010. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from such uncertainty.
/s/ Goldman Kurland and Mohidin, LLP
Encino, California
June 29,
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AURASOURCE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements
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AURASOURCE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2010 AND 2009
AND FOR THE PERIOD MARCH 15, 1990 (INCEPTION)
THROUGH MARCH 31, 2010
The accompanying notes are an integral part of these consolidated financial statements
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AURASOURCE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD MARCH 15, 1990 (INCEPTION)
THROUGH MARCH 31, 2010
The accompanying notes are an integral part of these consolidated financial statements
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AURASOURCE, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009
AND FOR THE PERIOD MARCH 15, 1990 (INCEPTION)
THROUGH MARCH 31, 2010 AND 2009
NON-CASH FINANCING ACTIVITY:
The accompanying notes are an integral part of these consolidated financial statements
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AURASOURCE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2010 and 2009
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Current Operations and Background - AuraSource focuses on clean energy technology development. AuraSource developed the AuraFuelTM and AuraCoalTM processes. AuraSource formed AuraSource Qinzhou Co. Ltd., a WFOE in China to acquire these types of HCF technologies, performing research and development related to HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology.
Through our wholly owned subsidiary, we will conduct operations in China, to perform research and development related to HCF technology, to sell services and products related to and licenses for our HCF technology, and to possibly acquire additional HCF-related technology.
Additionally, we formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between AuraSource, Mongolia Energy, and KMIG to build an AuraFuel plant. KMIG provided the full funding for this plant. AuraSource is providing the project management expertise and the license for the AuraFuel process. The joint venture contracted China Shandong Metallurgical Engineering Corp. as EPC general contractor which will provide a turnkey solution under an initial operation service contract. The AuraFuel plant will utilize the AuraFuel process which AuraSource licensed from CCECC. CCECC is a Chinese governmental division which leads China’s energy and environmental research and development. AuraSource obtained the license for the Gulf of Tonkin Economic Region. The AuraFuel process utilizes a low temperature catalytic process to convert oil shale and low ranking coal into feedstock for the petrochemical industry.
There can be no assurance we will be able to carry out our development plans for our HCF technology, including AuraCoal and AuraFuel. Our ability to pursue this strategy is subject to the availability of additional capital and further development of our HCF technology. We will also need to finance the cost of pursuing a strategy to effectively protect our intellectual property rights in the United States and abroad where we intend to market our technology and products.
Going Concern - The accompanying consolidated financial statements were prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations since its inception and has an accumulated deficit of $2,864,811 at March 31, 2010. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue its existence. The recovery of the Company’s assets is dependent upon continued operations of the Company.
In addition, the Company's recovery is dependent upon future events, the outcome of which is undetermined. The Company intends to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.
Basis of Presentation and Principles of Consolidation - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates -The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers investments with original maturities of 90 days or less to be cash equivalents.
Income Taxes - The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.
Stock-Based Compensation - The Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services in exchange for the award.
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Net Income (Loss) Per Share - The Company computes basic and diluted net loss per share by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. Common equivalent shares related to stock options and warrants were excluded from the computation of basic and diluted earnings per share for the years ended March 31, 2010 and 2009 because their effect is anti-dilutive.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed FDIC insured limits.
Financial Instruments and Fair Value of Financial Instruments - Our financial instruments consist of cash and accounts payable. The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities. We measure the fair value of financial assets and liabilities on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1:
Quoted prices in active markets for identical or similar assets and liabilities.
Level 2:
Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amount of the Company’s financial assets and liabilities, including cash and accrued expenses, approximate fair value without being discounted, due to the short-term maturities during which these amounts are outstanding.
Reclassifications - Certain reclassifications were made to the 2009 financial statements to conform to the 2010 financial presentation
Recently Issued Accounting Pronouncements -
In February 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, "Subsequent Events (Topic 855)-Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09"). ASU 2010-09 was issued to change certain guidance in the original codification and to clarify other portions. All of the amendments in ASU 2010-09 are effective upon issuance of the final ASU 2010-09, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.
In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 provides amended disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2010-06 with no impact on disclosures.
In September 2009, the FASB issued updated guidance of Accounting Standards Codification ("ASC") 605, "Revenue Recognition," for establishing the criteria for separating consideration in multiple-element arrangements. The updated guidance is effective for fiscal years beginning on or after June 15, 2010 and requires companies allocating the overall consideration to each deliverable to use an estimated selling price of individual deliverables in the arrangement in the absence of vendor-specific evidence or other third-party evidence of the selling price for the deliverables. The updated guidance also provides additional factors that should be considered when determining whether software in a tangible product is essential to its functionality. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.
In August 2009, the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures (Topic 820)-Measuring Liabilities at Fair Value an Update 2009-05" ("ASU 2009-05"). ASU 2009-05 amends subtopic 820-10, "Fair Value Measurements and Disclosures-Overall" and provides clarification for the fair value measurement of liabilities in circumstances where quoted prices for an identical liability in an active market are not available. ASU 2009-05 is effective for the first reporting period beginning after issuance. The Company adopted ASU 2009-05 with no impact on its consolidated financial position or results of operations.
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Effective July 1, 2009, the Company adopted the FASB ASC 105, "Generally Accepted Accounting Principles-Overall" ("ASC 105"). ASC 105 establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue any new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs. The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
In May 2009, the FASB issued ASC 855, "Subsequent Events" ("ASC 855"). This should not result in significant changes in the subsequent events that an entity reports. Rather, ASC 855 introduces the concept of financial statements being available to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained. The Company adopted ASC 855 with no impact on its consolidated financial position or results of operations.
In April 2009, the FASB issued updated guidance of ASC 820, "Fair Value Measurements." The updated guidance is effective for interim and annual periods ending after June 15, 2009 and provides guidance on how to determine the fair value of assets and liabilities in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. The updated guidance modifies the requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. The updated guidance also enhances the disclosure of instruments for both interim and annual periods. The Company adopted this updated guidance with no impact on its consolidated financial position or results of operations.
In June 2008, the FASB issued updated guidance of ASC 815, "Derivatives and Hedging" ("ASC 815"), that is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The updated guidance specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company's own stock and (b) classified in stockholders' equity in the statement of financial position would not be considered a derivative financial instrument. The updated guidance provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer's own stock and is able to qualify for the scope exception. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.
In April 2008, the FASB issued updated guidance of ASC 350, "Intangibles-Goodwill and Other," removing the requirement for an entity to consider, when determining the useful life of an acquired intangible asset, whether the intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions associated with the intangible asset. The intent of the updated guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under ASC 805, "Business Combinations," and other U.S. generally accepted accounting principles. The updated guidance replaces the previous useful-life assessment criteria with a requirement that an entity considers its own experience in renewing similar arrangements. This updated guidance applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.
In December 2007, the FASB issued updated guidance of ASC 810, "Consolidation." This updated guidance establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The updated guidance also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This updated guidance was effective for fiscal years beginning after December 15, 2008. The Company determined that this updated guidance has no impact on its consolidated financial position or results of operations.
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NOTE 2 - NOTE PAYABLE.
On July 8, 2008, all debts and accrued interest were satisfied with C.W. Gilluly and Affinity Financial Group, Inc. (“AFG”).
On July 11, 2008, we entered into a Revolving Promissory Note (the “Note”) with Mongsource USA, LLC, the majority stockholder of the Company. Through June 11, 2009, Mongsource USA, LLC had advanced us approximately $475,000. Additionally, on September 6, 2008, we entered into an Exploration Licenses Transfer Agreement, with Mongsource USA, LLC. , under which Mongsource USA agreed to transfer to the Company three mineral exploration licenses in Mongolia.
On June 11, 2009, we entered into an agreement with MongSource USA, LLC whereby we transferred all rights and ownership interests in our assets relating to the exploration and development of mineral resources which includes all assets of AuraSourse LLC, a Mongolian subsidiary, in exchange for the forgiveness of the Note and all amounts due under the Note. We recorded a capital contribution of $386,578 to account for this agreement.
NOTE 3 - DISCONTINUED OPERATIONS
As explained in Note 2, on June 11, 2009, we entered into an agreement with MongSource USA, LLC whereby we transferred all rights and ownership interests in our assets relating to the exploration and development of mineral resources which includes all assets of AuraSourse LLC, a Mongolian subsidiary, in exchange for the forgiveness of the Note and all amounts due under the Note.
NOTE 4 - STOCK ISSUANCE
On May 28, 2009, the BOD granted Mr. Liu 1,000,000 restricted shares for his services as CEO and President from July 8, 2008 until May 31, 2009. During such time, Mr. Liu received no other compensation. Additionally, the BOD granted Mr. Liu, Mr. Kohler and Mr. Stoppenhagen, each a director of the Company, 100,000 shares of restricted stock on May 28, 2009 for their board services which vests the earlier of two years from date of grant or termination from the board. The Company recorded stock compensation arising from the grants of $650,000 during the year ended March 31, 2010.
On October 22, 2009, the Company completed a private placement to certain institutional and accredited investors (“Investors”) pursuant to which the Company sold 5,279,693 shares of the Company’s common stock resulting in gross proceeds of $2,639,847. The Company intends to use proceeds of the offering for working capital and to develop a pilot plant in the Gulf of Tonkin Economic and Development Area which utilizes a low temperature catalytic process to reform oil shale, asphalt shale and low-ranking coal to hydrocarbon clean fuel products in a highly-efficient manner. The Company has no material relationship with any of the institutional and accredited investors participating in the private placement offering other than in respect of the Subscription Agreements.
In connection with the closing of the private placement offering, the Company paid a commission of $316,781 to Source Capital Group, Inc. as exclusive agents for the private placement offering and issued to Source Capital Group, Inc. a three year warrant to purchase 527,969 shares of the Company’s common stock at an exercise price of $0.55.
On November 2, 2009, the BOD granted Mr. Liu, Mr. Kohler and Mr. Stoppenhagen 100,000 shares of restricted stock which vests the earlier of two years or termination from the board. The Company recorded stock compensation arising from the grants of $150,000 during the year ended March 31, 2010.
On December 18, 2009, the BOD granted two consultants 800,000 shares of restricted stock, 600,000 of which vested immediately and 200,000 of which vest quarterly over three years. The Company recorded stock compensation arising from the grants of $300,000 during the year ended March 31, 2010.
On March 1, 2010, the BOD granted two consultants 283,000 shares of common stock. The Company recorded stock compensation arising from the grants of approximately $198,000 during the year ended March 31, 2010.
NOTE 5 - STOCK OPTIONS
In January 2009, we granted 60,000 options to purchase shares of our common stock at an exercise price of $3.50 to members of our BOD. The options vest quarterly starting January 1, 2009 and expire ten years after the date of grant. We will record compensation expense of $53,628 in the quarters in which the options vest. The Company has assumed all stock options issued during the quarter will vest. Though these expenses will result in a deferred tax benefit, we have a full valuation allowance against the deferred tax benefit.
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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 date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. The expected life of an option grant is based on management’s estimate. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
The following assumptions were used to determine the fair value of stock options granted using the Black-Scholes option-pricing model:
The following table summarizes activity in the Company's stock option grants during 2010:
The following summarizes pricing and term information for options issued to employees and directors which are outstanding as of March 31, 2010:
NOTE 6 - EARNINGS PER SHARE
The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2010 and 2009 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:
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NOTE 7 - INCOME TAX
The deferred tax asset for the years ended March 31, 2010 and 2009 consisted of the following:
Management provided a deferred tax asset valuation allowance equal to the potential benefit due to the Company’s loss. When the Company demonstrates the ability to generate taxable income, management will re-evaluate the allowance.
As of March 31, 2010, the Company has a federal and state net operating loss carry-forward of approximately $2,456,000 which is available to offset future taxable income that expires as follows:
Reconciliation between the provision for income taxes and the expected tax benefit using the federal statutory rate of 34% for 2010 and 2009 is as follows:
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Leases -The Company currently is not party to any leases and rent expense for the years ended March 31, 2010 and 2009 was zero.
Litigation - The Company is currently not a party to any legal proceedings.
Employment Agreement - Effective August 1, 2009, we entered into an Employment Agreement (the “Employment Agreement”) with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month. The term of the contract is from August 1, 2009 to March 31, 2014.
NOTE 9 - CONCENTRATION OF CREDIT RISK
We maintain our cash balances in various financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation (up to $250,000, per financial institution as of March 31, 2010). As of March 31, 2010, our deposits exceeded insured amounts by $751,110. We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash.
Currently, we maintain a bank account in China. As of March 31, 2010, we had a balance of $619,282 in this account. This account is not insured and we believe is exposed to significant credit risk on cash.
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NOTE 10 - RELATED PARTY TRANSACTIONS
On July 11, 2008, we entered into a Revolving Promissory Note with Mongsource, our majority stockholder. Under the terms of the Note, Mongsource agreed to advance to the Company, from time to time and upon request of the Company, amounts up to $500,000 during the commitment period, commencing July 11, 2008 and expiring December 31, 2009 (the “Expiration Date”). The Note accrues interest at 10%. All advances made under the Note and all accrued and unpaid interest thereon due and payable on the Expiration Date. The Note included customary default provisions and provides that all obligations under the Note will accelerate and become immediately due and payable upon the occurrence of an event of default, including default in payment, breach by the Company of any material provisions of the Note, or the commencement and continuation of a bankruptcy proceeding. The Note provided that upon the occurrence of an event of default, Mongsource will hold a first credit position on the entire amount owed on the Note, including the all unpaid principal and interest and interest will continue to accrue after the event of default at 10% or the legal rate of interest, whichever is lower.
We paid Source Capital Group, Inc., a firm affiliated with Mr. John P. Boesel, III, who is a Senior Vice President and Branch Manager of Source Capital Group, a commission of $263,985 to Source Capital Group, Inc., $52,797 for unaccountable expenses and was issued 527,969 three year warrants to purchase 527,969 shares of the Company’s common stock at an exercise price of $0.55. Mr. Boesel is also a founding investor and director of Mongsource BVI and a member, manager and founding investor of Mongsource.
On June 11, 2009, we entered into an agreement with MongSource USA, LLC whereby we transferred all rights and ownership interests in our assets relating to the exploration and development of mineral resources which includes all assets of AuraSourse LLC, a Mongolian subsidiary, in exchange for the forgiveness of the Note and all amounts due under the Note. We recorded a capital contribution of $386,578 to additional paid in capital as of the result of this agreement.
Effective August 1, 2009, we entered into an Employment Agreement (the “Employment Agreement”) with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month. The term of the contract is from August 1, 2009 to March 31, 2014. For the year ended March 31, 2010, Mr. Liu received $194,667 as total compensation pursuant to this Employment Agreement.
.
NOTE 11 - SUBSEQUENT EVENT
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through June 29, 2010, the date the financial statements were issued.
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Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable
Item 9A(T).
Item 9A(T). Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our President, who serves as our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined by Rule 240.13a-15(e) or 15d-15(e)) of the Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon this evaluation, our interim President concluded that, as of the end of such period, our disclosure controls and procedures are effective as of the end of the fiscal year covered by this Form 10-K.
(b) Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and for assessing the effectiveness of internal control over financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of internal control over financial reporting 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 has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2010. In making its assessment of internal control over financial reporting, management used the criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on the results of this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of March 31, 2010.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. 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 on Form 10-K.
(c) Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of the year ended March 31, 2010 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None
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PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company as of March 31, 2010, and their positions with the Company, are as follows:
Directors are elected for a period of one year and until their successors are duly elected. Executive officers are elected by the Board of Directors. There are no family relationships between our executive officers and directors.
Philip Liu was appointed Chief Executive Officer, President and Chairman of the Board in July 2008. Mr. Liu has served as a director of the Company since July 2008. Mr. Liu has 24 years of experience in international trade, business development, investment banking and financial services, as well as entrepreneurial ventures. He has worked both in China and in the United States and has led a number of entrepreneurial ventures, including two medical device distribution ventures, in China. Since founding the company in 2005, Mr. Liu has served as the managing director of Timeway International Ltd, a Hong Kong company. Through Mr. Liu, Timeway International Ltd. has provided investment banking advisory services to clients such as BOT Capital, Okay Airways, Rothschild China, Sunray Group, iKang Group and Arrail Dental. Mr. Liu is also a director of MyOEM Inc., a private corporation which he co-founded in 2000. From 1994 to 2001, Mr. Liu was the Asia Business Venture Partner of the Phoenix, Arizona based investment-banking firm, Yee, Desmond, Schroeder & Allan Inc. From 1988 to 1989, Mr. Liu worked as a project manager with China Kanghua Development Corp., one of the Chinese State Council direct controlled investment firms located in Beijing, China.. While at China Kanghua Development Corp., Mr. Liu served on the negotiation team with multinational investment banking firms in a major industrial joint venture project. From 1987 to 1988, Mr. Liu worked as a project manager in China Ningbo Import & Export Corp. From 1984 to 1986, Mr. Liu worked as a research fellow at the Economic Research Institute of Wuhan Iron & Steel Group under the Ministry of Metallurgical Industry of China. Mr. Liu was born and raised in China. He graduated from Hubei Business School in 1984, after he visited the United States as an exchange student. Mr. Liu attended North Carolina State University and Campbell University (North Carolina) between 1990 and 1993. Mr. Liu obtained a MBA in corporate finance from Campbell University. Mr. Lui is a resident of Phoenix, Arizona and is a U.S. Citizen.
Lawrence Kohler was appointed Secretary in July 2008. He has served as a director of the Company since July 2008. Mr. Kohler has served as the managing director of Global Capital Management, LLC, which provides investment planning, since 1998. Mr. Kohler held vice president positions with E.F. Hutton, Kidder Peabody and Smith Barney. Mr. Kohler founded Capital West Investment Group, a NASD member broker dealer. Mr. Kohler received a business degree from Mercyhurst College in 1979. In 2000, Mr. Kohler declared personal bankruptcy, but we do not believe this impacts Mr. Kohler’s service to the Company.
Eric Stoppenhagen was appointed Chief Financial Officer and Treasurer in July 2008. He has served as a director of the Company since July 2008. Mr. Stoppenhagen through his consulting company, Venor, Inc., provides financial and management services to small to medium-sized companies that either are public or desire to become public. He provides CFO services to these companies, which includes as transaction advice, preparation of security filings and advice regarding compliance with corporate governance requirements. Mr. Stoppenhagen has more than ten years of financial experience having served in an executive capacity for several public and private companies, including as Vice President of Finance and subsequently Interim President of Trestle Holdings, Inc. from 2003 to 2009; Interim President of WoozyFly Inc. from 2009 to 2010; Interim President of Trist Holdings, Inc. from 2007 to 2010; CFO and Director of AuraSource, Inc. from 2008 to 2010; President of Catalyst Lighting Group, Inc. in 2010; and, CFO of Jardinier Corp. from 2007 to 2008. Mr. Stoppenhagen is a Certified Public Accountant and holds a Juris Doctorate and Masters of Business Administration both from George Washington University. Additionally, he holds a Bachelor of Science in Finance and a Bachelor of Science in Accounting both from Indiana University.
All directors hold office until the next annual meeting of the stockholders of the Company and until their successors have been duly elected and qualified. The Company’s Bylaws provide that the Board of Directors will consist of no less than three members. Officers are elected by and serve at the discretion of the Board of Directors.
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Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent of a registered class of our equity securities, file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-ten percent stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file. During the year ended March 31, 2010, none of our executive officers, directors and greater-than-ten percent stockholders have complied with all Section 16(a) filing requirements and such individuals intend to file these reports.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal executive officers, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Company’s Code of Ethics may be obtained free of charge by contacting the Company at the address or telephone number listed on the cover page hereof.
Audit Committee
Although we are not a “listed company” under SEC rules and are therefore not required to have an audit committee comprised of independent directors, we have formed an Audit Committee that is currently comprised of two members: Lawrence Kohler and Philip Liu, with Mr. Kohler serving as Chairman of the committee.
The Audit Committee pre-approves the performance of audit and non-audit services by the Company’s accountants and reviews the Company’s internal control systems, financial reporting procedures, the general scope of the Company’s annual audit, the fees charged by the independent accountants, and the fairness of any proposed transaction between any officer, director or other affiliate of the Company and the Company. With respect to the foregoing, the Audit Committee makes recommendations to the full Board and performs such further functions as may be required or delegated to the Committee by the BOD. The BOD has adopted a written charter for the Audit Committee. A copy of the Company’s Audit Committee Charter may be obtained free of charge by contacting the Company at the address or telephone number listed on the cover page hereof.
Director Independence
Our BOD currently consists of three members: Philip Liu, Eric Stoppenhagen, and Lawrence Kohler.
We do not have a separately designated compensation or nominating committee of our BOD and the functions customarily delegated to these committees are performed by our full BOD. We are not a “listed company” under SEC rules and are therefore not required to have separate committees comprised of independent directors. We have, however, determined that Mr. Kohler is “independent” as that term is defined in Section 5605 of the NASDAQ Listing Rules as required by the NASDAQ Stock Market.
Item 11.
Item 11. Executive Compensation
The following table and related footnotes show the compensation paid during the fiscal years ended March 31, 2010 and 2009 and to the Company's executive officers.
SUMMARY COMPENSATION TABLE
__________________________
(1)
Mr. Liu received $1,250 in 2009 and $2,750 in 2010 as a director for attending board meetings and $8,000 for car and office allowances.
(2)
In September 2008, Mr. Liu and Mr. Stoppenhagen were issued 100,000 shares for joining the BOD.
(3)
On May 28, 2009, the BOD granted Mr. Liu 1,000,000 restricted shares for his services as an officer of the Company from July 8, 2008 until May 31, 2009. Additionally, on May 28, 2009 the BOD granted Mr. Liu and Mr. Stoppenhagen 100,000 shares of restricted stock which vests the earlier of two years from the date of grant or termination from the board for their service as board members. On November 2, 2009, the BOD granted Mr. Liu and Mr. Stoppenhagen an additional 100,000 shares of restricted stock which vests the earlier of two years from the date of grant or termination from the board for their service as board members.
(4)
This represents amounts paid to Venor, Inc. for Eric Stoppenhagen to provide financial consulting services at a rate of $175 per hour. Additionally, Mr. Stoppenhagen received $3,000 for attending board meetings.
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Narrative Disclosure to Summary Compensation Table
Effective August 1, 2009, we entered into an Employment Agreement (the “Employment Agreement”) with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month. The term of the contract is from August 1, 2009 to March 31, 2014. If the contract is terminated without cause, Mr. Liu shall be paid through March 31, 2014. For the years ended March 31, 2010 and 2009, Mr. Liu received $194,667 and zero, respectively. The $194,667 consisted of $160,000 for salary, $26,666 for bonuses, $8,000 for car and office allowances. Mr. Liu received $1,250 in 2009 and $2,750 in 2010 as a director for attending board meetings. We recorded a stock compensation expense of $1,030 in 2009 for 100,000 shares received for joining the BOD and $600,000 in 2010 for 1,000,000 shares issued for Mr. Liu’s executive services from July 8, 2008 until May 31, 2009 and 200,000 shares for servicing on the BOD.
We pay Mr. Stoppenhagen $175 per hour to provide financial consulting services. For the years ended March 31, 2010 and 2009, Mr. Stoppenhagen received $110,345 and $43,000, respectively. Additionally, we recorded a compensation expense of $1,030 in 2009 for 100,000 shares received for joining the BOD and $100,000 in 2010 for 200,000 shares for servicing on the BOD.
In our fiscal year ending March 31, 2010, the company did not retain outside consultants to provide advice in relation to executive compensation.
Outstanding Equity Awards at Fiscal Year-End March 31, 2010
The following table provides information with respect to stock option and restricted stock awards held by each of our executive officers as of March 31, 2010.
(1) These stock option awards vest the earlier of two years from grant date or termination from the Company.
(2) The market value of the restricted stock awards is based on the closing market price of our common stock as of June 28, 2010, which was $1.25 per share.
Options Exercised and Year-End Option Values
The following table sets forth certain information regarding the value of unexercised options held by the named executive officer and directors as of March 31, 2010.
Aggregated Option and Warrant Exercises in the Last Fiscal Year and Fiscal Year-End Option and Warrant Values
The following table and related footnotes set forth option exercises in 2010 and year-end option values for the Company's Executive Officers.
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Compensation of Directors
The following table details the total compensation earned by the company’s non-employee directors in our fiscal year ending March 31, 2010:
Our BOD approved a compensation plan for the BOD. Under such plan, current members of the Company’s BOD including our employee directors) earn $500 for every meeting attended in person and $250 for every meeting attended telephonically. Additionally, the Company will grant each director 20,000 stock options on the first business day of each calendar year, at the closing market price on the day of grant. At the end of each fiscal quarter, 5,000 of the 20,000 stock options granted will vest. The Company will issue new members of the BOD 100,000 shares of the Company’s common stock on the date of appointment.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding beneficial ownership of our common stock as of June 29, 2010 by (i) each person who " beneficially " owns more than 5% of all outstanding shares of our common stock, (ii) each director and the executive officer identified above, and (iii) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Shares of our common stock subject to options and warrants from the Company that are currently exercisable or exercisable within 60 days of June 29, 2010 are deemed to be outstanding and to be beneficially owned by the person holding the options or warrants for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The information presented in this table is based on 28,262,190 shares of our common stock outstanding on June 29, 2010. Unless otherwise indicated, the address of each of the executive officers and directors and 5% or more shareholders named below is c/o 1490 South Price Road, Suite 219, Chandler, AZ 85286.
(2)
Officer and director of the Company.
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Equity Compensation Plan Information
The following table sets forth certain information regarding the Company’s equity compensation plans as of March 31, 2010.
These optioned were issued under the board compensation plan. Under the plan each board member receives 20,000 stock options per year which vest 25% at the end of each fiscal quarter.
Changes in Control Arrangements
There existed no change in control arrangements at March 31, 2010.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Other than the employment arrangements described above in “Executive Compensation” and the transactions described below, since April 1, 2008, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party:
·
in which the amount involved exceeds $120,000; and
·
in which any director, executive officer, shareholder who beneficially owns 5% or more of our common stock or any member of their immediate family had or will have a direct or indirect material interest.
On July 11, 2008, we entered into a Revolving Promissory Note with Mongsource, our majority stockholder. Under the terms of the Note, Mongsource agreed to advance to the Company, from time to time and upon request of the Company, amounts up to an aggregate of $500,000 during the commitment period, commencing on July 11, 2008 and expiring on June 30, 2009 (the “Expiration Date”). The Note accrues interest at a rate of ten percent (10%) per annum, compounded annually. All advances made under the Note and all accrued and unpaid interest thereon will become due and payable on the Expiration Date. The Note includes customary default provisions and provides that all obligations under the Note will accelerate and become immediately due and payable upon the occurrence of an event of default, including default in payment, breach by the Company of any material provisions of the Note, or the commencement and continuation of a bankruptcy proceeding. The Note provides that upon the occurrence of an event of default, Mongsource will hold a first credit position on the entire amount owed on the Note, including the all unpaid principal and interest and interest will continue to accrue after the event of default at an interest rate of ten percent (10%) per annum or the legal rate of interest, whichever is lower.
On September 6, 2008, we entered into an Exploration Licenses Transfer Agreement (“Mongolia Licenses Transfer Agreement”), with Mongsource USA, our controlling stockholder, under which Mongsource USA agreed to transfer to the Company three mineral exploration licenses in Mongolia (“Mongolia Exploration Licenses”) in exchange for 30,000,000 shares of the Company’s common stock (“Mongsource License Shares”). Under the terms of the Mongolia Licenses Transfer Agreement, if certain conditions are satisfied and we issue the Mongsource License Shares to Mongsource USA, then such shares will be held in escrow by the Company until additional conditions are satisfied, including the issuance of direct exploration licenses to the Company by the Mongolian governmental authorities, the satisfactory completion of the Company’s due diligence investigation, receipt of certain instruments and certificates from governmental authorities evidencing the Company’s ownership of licenses and exploration rights and the Company’s receipt of a legal opinion in respect of certain matters. If any of these and other conditions specified in the Mongolia License Transfer Agreement is neither satisfied nor waived by the Company, the License Transfer Agreement will be terminated and the Mongsource License Shares will be released from escrow and returned to the Company. The agreement also provides for termination of the Mongolia Licenses Transfer Agreement by either party due to a breach of the agreement or if the conditions specified therein have not been either satisfied or waived by the parties by December 31, 2008. As of the date of this filing, the conditions necessary to transfer the Mongsource License Shares have not been satisfied.
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On June 11, 2009, we entered into an agreement with MongSource USA, LLC whereby we would transfer all rights and ownership interests in our assets relating to the exploration and development of mineral resources which includes all assets of AuraSourse LLC, a Mongolian subsidiary, in exchange for the forgiveness of the Note and all amounts due under the Note.
We paid Source Capital Group, Inc., a firm affiliated with Mr. John P. Boesel, III, who is a Senior Vice President and Branch Manager of Source Capital Group, a commission of $263,985 to Source Capital Group, Inc., $52,797 for unaccountable expenses and was issued 527,969 three year warrants to purchase 527,969 shares of the Company’s common stock at an exercise price of $0.55. Mr. Boesel is also a founding investor and director of Mongsource BVI and a member, manager and founding investor of Mongsource.
Effective August 1, 2009, we entered into an Employment Agreement with Philip Liu, the Company’s CEO. Under the Employment Agreement, Mr. Liu will receive a base salary of $240,000 per year and a guaranteed bonus of $40,000 per year. Mr. Liu will be eligible for an incentive bonus based on his performance. Additionally, Mr. Liu will receive a car allowance of $500 per month and an office allowance of $500 per month. The term of the contract is from August 1, 2009 to March 31, 2014. For the year ended March 31, 2010, Mr. Liu received $194,667 under the Employment Agreement.
Item 14.
Item 14. Principal Accountant Fees and Services
Independent Public Accountants
The Company engaged GPKM as its new independent registered public accounting firm as of July 14, 2008. During The Company’s two most recent fiscal years and the subsequent interim period through June 17, 2010, neither the Company nor anyone on its behalf has consulted with GPKM regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the Company nor oral advice was provided by GPKM that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement, as that term is defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304 (a)(1)(v) of Regulation S-K.
Audit Fees
The aggregate fees billed by GPKM for the audit of the Company’s consolidated financial statements in the years ended March 31, 2010 and 2009, the reviews of the quarterly reports on Form 10-Q for the same fiscal years and statutory and regulatory filings were $26,500 for 2010 and $16,500 for 2009.
Audit-Related Fees
There were no fees billed by GPKM for audit-related services for the years ended March 31, 2010 and 2009.
Tax Fees
The aggregate fees billed by GPKM for tax-related services for the years ended March 31, 2010 and 2009 were $900 and zero, respectively.
All Other Fees
There were no fees billed by GPKM for other services not described above for the years ended March 31, 2010 and 2009.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors
The Board’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Board regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Board may also pre-approve particular services on a case-by-case basis. No services were approved by the Board of Directors in accordance with Item 2 - 01(c)(7)(i)(C) of Regulation S-X.
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The Board has determined that the rendering of the services other than audit services by GPKM is compatible with maintaining the principal accountant’s independence.
1. Audit services include audit work performed in the preparation of consolidated financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.
2. Audit-Related services are for assurance and related services that are reasonably related to the audit or review of our consolidated financial statements.
3. Tax services include all services performed by the independent auditor’s tax personnel except those services specifically related to the audit of the consolidated financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
4. Other Fees are those associated with products or services not captured in the other categories.
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PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report
1. Financial Statements.
See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
2. Financial Statement Schedules.
All financial statement schedules are omitted because the information is inapplicable or presented in the Notes to Financial Statements.
3. Exhibits. See Item 15(b) below.
(b) Exhibits. We have filed, or incorporated into this Form 10-K by reference, the exhibits listed on the accompanying Index to Exhibits immediately following the signature page of this Form 10-K.
(c) Financial Statement Schedule. See Item 15(a) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
The undersigned directors and officers of AuraSource, Inc. do hereby constitute and appoint Eric Stoppenhagen with full power of substitution and resubstitution, as their true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officer and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto, and we do hereby ratify and confirm all that said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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Index to Exhibits:
* Previously filed.
** Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K.