AuraSource, Inc. - FORM 10-Q - February 2, 2011

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EX-32 - EXHIBIT 32 - AuraSource, Inc.ex32.htm
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended December 31, 2010

or

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to         

Commission File Number 0-28585


AuraSource, Inc.
(Exact name of registrant as specified in its charter)

Nevada
(State or Other Jurisdiction of Incorporation or Organization)
68-0427395
(IRS Employer Identification No.)

1490 South Price Rd. #219
Chandler, AZ 85286
 (Address of principal executive offices, zip code)

Registrant's telephone number (including area code): (480) 292-7179

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x     NO 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding twelve months (or shorter period that the registrant was required to submit and post such files).
YES o     NO x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
  
Outstanding at February 2, 2011
Common Stock, $.001 par value
  
29,262,190
   

 
 
 

AURASOURCE, INC.


INDEX

 PART I
FINANCIAL INFORMATION
  
 ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS:
  
 
Consolidated Balance Sheets — December 31, 2010 (Unaudited) and March 31, 2010
 3
 
Consolidated Statements of  Operations (Unaudited) — Three and Nine months ended December 31, 2010 and 2009
 4
 
Consolidated Statements of Stockholders’ Equity (Deficit) — Nine months ended December 31, 2010
 5
 
Consolidated Statements of Cash Flows (Unaudited) —Nine months ended December 31, 2010 and 2009
 6
 
Notes to Consolidated Financial Statements
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 12
 ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 16
 ITEM 4.
CONTROLS AND PROCEDURES
 16
     
 PART II
OTHER INFORMATION
 16
ITEM 1.
LEGAL PROCEEDINGS
16
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
16
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
16
 ITEM 4.
(REMOVED AND RESERVED)
 16
ITEM 5.
OTHER INFORMATION
16
 ITEM 6.
EXHIBITS
 17


 


  



 
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PART I - FINANCIAL INFORMATION

  ITEM I — CONSOLIDATED FINANCIAL STATEMENTS

AuraSource, Inc.
(A Development Stage Enterprise)
Consolidated Balance Sheets


 
December 31,
    
March 31,
  
 
2010
    
2010
  
ASSETS
(Unaudited)
        
Current assets
          
   Cash and equivalents
   $ 982,251     $ 1,642,006  
   Due from affiliate
     25,437       -  
   Prepaid expenses
     22,506       4,294  
Total current assets
     1,030,194       1,646,300  
                 
   Fixed assets, net of accumulated depreciation
     36,838       31,074  
                 
   Intangible assets, net
     753,530       -  
                 
Total assets
   $ 1,820,562     $ 1,677,374  
                 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
          
Current liabilities
                
    Accounts payable
   $ 21,657     $ 32,008  
    Accrued expenses
     -       30,000  
   
                
                 
Total current liabilities
     21,657       62,008  
                 
Commitments and contingencies
                
                 
Shareholders' equity
                
    Preferred stock, 10,000 shares authorized, no shares issued and
                
       outstanding, no rights or privileges designated
     -       -  
    Common stock, $.001 par value, 150,000,000 shares authorized 29,262,190 and 28,262,190
        shares issued and outstanding at December 31, 2010 and March 31, 2010, respectively.
     29,262       28,262  
   Additional paid in capital
     5,608,454       4,451,915  
   Accumulated deficit
     (3,838,811 )     (2,864,811 )
Total shareholders' equity
     1,798,905       1,615,366  
                 
Total liabilities and shareholders' equity
   $ 1,820,562     $ 1,677,374  
                 
                 
The accompanying notes are an integral part of these consolidated financial statements.
  
 
  

 
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AuraSource, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Operations
Three and Nine months Ended December 31, 2010 and 2009 and Period March 15, 1990 (Inception) through December 31, 2010
(Unaudited)

   
Three months ended December 31,
    
 Nine months ended December 31,
    
March 15, 1990 (Inception) to December 31,
  
   
2010
    
2009
    
2010
    
2009
    
2010
  
                               
Revenue, net
   $ -     $ -     $ -     $ -     $ -  
                                         
Cost of revenue
     -       -       -       -       -  
                                         
Gross profit
     -       -       -       -       -  
                                         
Operating expenses:
                                        
   General & administrative expenses
     283,271       785,284       987,065       1,722,347       3,855,128  
       Total operating expenses
     283,271       785,284       987,065       1,722,347       3,855,128  
                                         
Loss from operations
     (283,271 )     ( 785,284 )     (987,065 )     (1,722,347 )     (3,855,128 )
                                         
Merger fee, net
     -       -       -       -       80,000  
Interest income / (expense) and other, net
     5,291       3,852       13,065       (939 )     (63,683 )
                                         
Net loss applicable to common stockholders
   $ (277,980 )   $ (781,432 )   $ (974,000 )   $ (1,723,286 )   $ (3,838,811 )
                                         
Basic & Diluted Loss per share
   $ (0.01 )   $ (0.03 )   $ (0.03 )   $ (0.08 )        
                                         
Weighted average shares outstanding
     29,262,190       26,449,328       28,844,735       22,999,670          
                                         




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)
MARCH 15, 1990 (INCEPTION)
THROUGH December 31, 2010
(Unaudited after March 31, 2010)

   
Preferred Stock
    
Common Stock
                    
   
Shares
    
Amount
    
Shares
    
Amount
    
Additional Paid in Capital
    
Accumulated Deficit
    
Total
  
 
Balance at March 15, 1990
         $ -       40     $ -     $ 370     $ (295 )   $ 75  
 
Common stock issued for services
                   352               2,424               2,424  
Acquire oil and gas properties
     7,000       280,000       493       1       82,807,828               83,087,829  
Additional capital contributed
                                     22,286               22,286  
Fair value of salaries donated
                                     151,500               151,500  
Reclassify common stock for repurchase obligation
                             (1 )     (212,500 )             (212,500 )
Rescission of oil and gas purchase:
                                                        
Common stock shares not returned in lieu of services
     (7,000 )     (280,000 )                     (82,804,200 )             (83,084,200 )
Cancellation of repurchase obligation
                             1       212,500               212,500  
Issuance of preferred stock for services
     1,100,000       2,200                                       2,200  
Common stock for services
                     27,741       28       9,972               10,000  
Conversion of preferred stock
     (1,100,000 )     (2,200 )     44,874       45       2,155                  
Stockholder advances contributed as additional paid in capital
                                     22,725               22,725  
Issuance of shares for acquisition of Mobile Nation, Inc.
                     3,520,000       3,520       31,680               35,200  
Common stock for services
                     480,000       480       4,320               4,800  
Shares returned to treasury
                     (3,520,000 )     (3,520 )     (31,680 )             (35,200 )
Common stock for services
                     20,000       20       1,980               2,000  
Additional capital contributed
                                     600               600  
Net loss
                                             (450,598 )     (450,598 )
Net income
                                             42,231       42,231  
Balance at March 31, 2008
             -       573,500       574       221,960       (408,662 )     (186,128 )
Issuance of shares, July 2008
                     19,426,500       19,426       188,074               207,500  
Stock compensation
                     300,000       300       2,791               3,091  
Issuance of options
                                     13,407               13,407  
Issuance of shares, March 2009
                     50,000       50       49,950               50,000  
Net loss
                                             (215,864 )     (215,864 )
Balance at March 31, 2009
             -       20,350,000       20,350       476,182       (624,526 )     (127,994 )
Capital contribution
                                     386,578               386,578  
Issuance of shares for services, May 2009
                     1,350,000       1,350       648,650               650,000  
Issuance of shares, September 2009
                     3,095,000       3,095       1,545,017               1,548,112  
Issuance of shares, October 2009
                     2,084,000       2,084       1,049,641               1,051,725  
Issuance of shares for services, November 2009
                     1,100,000       1,100       448,900               450,000  
Issuance of shares for services, March 2010
                     283,190       283       198,078               198,361  
Issuance of options
                                     56,887               56,887  
Offering costs related to share issuance
                                     (358,018 )             (358,018 )
Net loss
                                             (2,240,285 )     (2,240,285 )
Balance at March 31, 2010
             -       28,262,190       28,262       4,451,915       (2,864,811 )     1,615,366  
Issuance of options
                                     66,539               66,539  
Issuance of shares, July 2010
                     400,000       400       499,600               500,000  
Issuance of shares, August 2010
                     600,000       600       605,400               606,000  
Offering costs related to issuance
                                     (15,000 )             (15,000 )
Net loss
                                             (974,000 )     (974,000 )
Balance at December 31, 2010
     -     $ -       29,262,190     $ 29,262     $ 5,608,454     $ (3,838,811 )   $ 1,798,905  

 
The accompanying notes are an integral part of these consolidated financial statements.

 
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AuraSource, Inc.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
Nine months Ended December 31, 2010 and 2009 and Period March 15, 1990 (Inception) through December 31, 2010
(Unaudited)
         
March 15, 1990
(Inception) to December 31,
  
   
2010
    
2009
    
2010
  
Cash flows from operating activities:
                  
   Net loss
  
$
(974,000)
    
$
(1,723,286
)
  
$
(3,838,811
)
   Adjustments to reconcile net loss to net cash used in operating activities:
                        
Depreciation
    
5,817
      
4,051
      
12,149
  
Stock issued for services
    
-
      
1,147,453
      
1,326,504
  
       Options issued for services
    
66,539
      
-
      
136,833
  
       Fair value of salaries donated as capital
    
-
      
-
      
151,500
  
   Changes in operating assets and liabilities:
                        
Due from affiliate
    
(25,437)
      
-
      
(25,437)
  
Prepaid expenses
    
(18,213)
      
(18,837)
      
(22,506)
  
Accounts payable and accrued expenses
    
(40,351)
      
52,701
      
22,108
  
Accrued interest payable – related parties
    
-
      
5,009
      
15,456
  
    Non-refundable deposits
    
-
      
-
      
(100,000
)
Net cash used in operating activities
    
(985,644)
      
(532,909)
      
(2,322,203)
  
                         
Cash flows from investing activities :
                        
   Advances to former stockholders
    
-
      
-
      
(14,018
)
   Repayment of advances from former stockholders
    
-
      
-
      
14,018
  
   Advances from stockholders, net
    
-
      
-
      
22,725
  
   Capital equipment purchases
    
(11,581)
      
(35,348)
      
(48,987)
  
   Cash paid for acquisition of intangible
    
(147,530)
      
-
      
(147,530)
  
   Sale of assets to MongSource net of cash on hand
    
-
      
(88,567)
      
(90,119)
  
Net cash used in investing activities
    
(159,111)
      
(123,915
)
    
(263,911)
  
                         
Cash flows from financing activities
                        
   Proceeds from issuance of common stock
    
500,000
      
2,600,937
      
3,644,193
  
   Offering costs
    
(15,000)
      
(358,018)
      
(365,518
)
   Net proceeds from issuance of note payable
    
-
      
205,724
      
459,690
  
   Repayment of debt
    
-
      
-
      
(170,000
)
Net cash provided by financing activities
    
485,000
      
2,448,643
      
3,568,365
  
                         
Net change in cash and equivalents
    
(659,755)
      
1,791,819
      
982,251
  
                         
Cash and equivalents - beginning balance
    
1,642,006
      
145,436
      
-
  
                         
Cash and equivalents - ending balance
  
$
982,251
    
$
1,937,255
    
$
982,251
  
                         
Supplemental disclosures of cash flows information:
                        
Cash received/(paid) during the period for:
                        
Interest
  
$
-
    
$
-
    
$
-
  
Income taxes
  
$
-
    
$
-
    
$
-
  
Stockholder Advances forgiven and converted to additional paid in capital
  
$
-
    
$
-
    
$
22,725
  
Non-Cash Financing Activity:
                        
Forgiveness of debt in exchange for all ownership interest in AuraSource, LLC, a Mongolian subsidiary
  
$
-
    
$
-
    
$
386,578
  
                         
 Non-Cash Investing Activity:
                        
The Company issued 600,000 shares of common stock for the acquisition of intangibles.    The shares issued in connection with the intangibles were valued at $1.01 per share or $606,000.
     $
-
    
$
-
    
$
-
  
The accompanying notes are an integral part of these consolidated financial statements.

 

 
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AURASOURCE, INC.
(A Development Stage Enterprise)
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and MARCH 31, 2010
(UNAUDITED)

NOTE 1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Current Operations and Background — AuraSource, Inc. (“AuraSource” or “Company”) focuses on clean energy technology development.  AuraSource developed the AuraFuelTM and AuraCoalTM processes. AuraSource formed AuraSource Qinzhou Co. Ltd., a wholly owned subsidiary in China (“Qinzhou”) to acquire these types of Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development related to the reduction of harmful emission and energy costs for HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology.

Through our wholly owned subsidiary, Qinzhou, we conduct operations in China to perform research and development related to HCF technology, sell services and products related to and licenses for our HCF technology, and to possibly acquire additional HCF-related technology.

AuraCoal has patent pending technology designed to remove sulfur and ash from coal pre-combustion. This reduces energy costs and helps eliminate harmful emissions. This proprietary clean coal technology produces a coal water mixture which contains only trace amounts of sulfur and ash and constitutes an alternative energy sources 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 commence construction of its pilot plant and distribute the coal based clean industrial fuel produced by this proprietary new generation of clean coal technology in 2011.

AuraFuel utilizes a low temperature catalytic process to convert oil shale, asphalt shale and low-ranking coal to hydrocarbon clean fuel products in an efficient manner.  We formed Qinzhou Kai Yu Yuan New Energy Co., Ltd., a joint venture between AuraSource and Kaiyuyuan Mineral Investment Group (“KMIG”) to build an AuraFuel plant. KMIG provided the funding for this plant.  AuraSource is providing project management and its 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 government 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 also need to finance the cost of effectively protecting 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 we will continue as a going concern.  We have suffered recurring losses from operations since inception and have an accumulated deficit of $3,838,811 at December 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 we be unable to continue our existence.  The recovery of our assets is dependent upon our continued operations.

In addition, our recovery is dependent upon future events, the outcome of which is undetermined.  We intend to continue to attempt to raise additional capital, but there can be no certainty that such efforts will be successful.  

Basis of Presentation and Principles of Consolidation — The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

The unaudited consolidated financial statements were prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with US GAAP was omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited

 
- 7 -
 

consolidated financial statements and footnotes for the year ended March 31, 2010 included in our Annual Report on Form 10-K. The results of the nine months ended December 31, 2010 are not necessarily indicative of the results to be expected for the full year ending March 31, 2011.

Use of Estimates — The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Cash and Equivalents — We consider investments with original maturities of 90 days or less to be cash equivalents.

Income Taxes — The Company accounts for income taxes in accordance with ASC Topic 740.  Deferred tax assets and liabilities are recognized to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized.

Stock-Based Compensation — The Company recognizes the cost of employee services received for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services.

Foreign Currency Transactions —  The Company recognizes foreign currency gains and losses in other income (expense) on the accompanying statement of operations.    Foreign currency gains and losses arise as the Company conducts business with other entity’s whose functional currency is not in U.S. dollars.  Generally, these gains and losses are recorded at an exchange rate difference between the foreign currency and the functional currency that arises between the transaction date and the payment date.

Net 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 nine months ended December 31, 2010 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 and accounts payable are representative of their fair values due to their short-term maturities. We measure the fair value of financial assets and liabilities on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1:
  
Quoted prices in active markets for identical or similar assets and liabilities.
   
Level 2:
  
Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
   
Level 3:
  
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The Company had no assets or liabilities recorded to be valued on the basis above at December 31, 2010.
 
Recent Accounting Pronouncements
 
In January, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, “Improving Disclosure about Fair Value Measurements.” This ASU added new requirements for disclosures into and out of Levels 1 and 2 fair value measurements and information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. It also clarifies existing fair value disclosures about the level of disaggregation, inputs and valuation techniques. The guidance in the ASU is effective for annual and interim reporting periods in fiscal years beginning after November 15, 2010.  We do not anticipate the adoption of the new guidance to have any effect on our financial statements or results of operations.

 
- 8 -
 


 

 
There were no other significant changes in the Company’s critical accounting policies and estimates during the nine months ended December 31, 2010 compared to what was previously disclosed in the Company’s Form 10-K for the year ended March 31, 2010.

NOTE 2 – DISCONTINUED OPERATIONS

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 AuraSource LLC, a Mongolian subsidiary, for the forgiveness of the Note and all amounts due under the Note.

NOTE 3 - CONCENTRATION OF CREDIT RISK

  We maintain our cash balances in financial institutions that from time to time exceed amounts insured by the Federal Deposit Insurance Corporation (up to $250,000, per financial institution as of December 31, 2010). As of December 31, 2010, our deposits exceeded insured amounts by approximately $757,688.  We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash.
 
Currently, we maintain a bank account in China.  This account is not insured and we believe is exposed to significant credit risk on cash.  

NOTE 4 – DUE FROM AFFILIATE

As of December 31, 2010, an affiliated party holds in trust $25,437.  This money is used to pay various day to day expenses.  The Company is controlled by our CEO.

NOTE 5 – INTANGIBLE

We entered into an agreement with Beijing Pengchuang Technology Development Co. (“Pengchuang”), Ltd., an independent Chinese company,  to purchase a fifty percent of the intellectual property related to ultrafine particle processing. Pengchuang developed a highly efficient and low energy consumption grinding technology, which utilizes fluid shock waves to make ultrafine particles. This technology can be applied to the coal water slurry, solid lubricant and other material grinding processes. Through the joint development and ownership agreement, AuraSource will enrich its intellectual property portfolio, enabling the further development of AuraCoal, its Hydrocarbon Clean Fuel technology. AuraSource Qinzhou will utilize the particle grinding technology in its AuraCoal Qinzhou production line, as well as license it to others in non-related industries.

We issued 600,000 shares of common stock for with the acquisition of certain intangibles.  We acquired intangibles of $753,530.  The shares issued in connection with the acquired intangibles were valued at $606,000 or $1.01 per share which was the share price on August 8, 2010, the acquisition date.  The Company paid cash for the remainder of the amount due.

NOTE 6 – STOCK ISSUANCE

On May 28, 2009, we granted 1,000,000 restricted shares for Mr. Liu, our CEO’s services from July 8, 2008 to May 31, 2009.   During such time, Mr. Liu received no other compensation. Additionally, Mr. Liu, Mr. Kohler, our Secretary, and Mr. Stoppenhagen, our CFO, were granted 100,000 shares of restricted stock which vests the earlier of two years or termination from the board.  The Company recorded stock compensation arising from the grants of $13,407 and $650,000.

On October 22, 2009, the Company completed a private placement with certain institutional and accredited investors (“Investors”) pursuant to which the Company sold 5,279,693 shares of the Company’s common stock for $2,639,847. The Company 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, the Company paid $263,985 to Source Capital Group, Inc. as agent for the private placement  and issued Source Capital Group, Inc. 527,969 three year warrants.

 
- 9 -
 


On November 2, 2009, the Board of Directors (“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 compensation arising from the grants of $150,000.

On December 18, 2009, the BOD granted two consultants 800,000 shares of restricted stock 600,000 of which vested immediately and 200,000 of which vests quarterly over three years.  

On March 1, 2010, the BOD granted two consultants 283,000 shares of common stock.  The Company recorded compensation arising from the grants of $198,000 during the year ended March 31, 2010.

During the nine months ended December 31, 2010, the Company issued 1,000,000 shares of common stock.  The Company issued 400,000 shares for $1.25 per share.  In connection with this transaction, the Company incurred costs of $15,000.  The Company recorded net proceeds from the sale of these shares of $485,000.  The Company issued 600,000 shares of common stock for with the acquisition of certain intangibles.  The Company acquired intangibles of $753,530.  The shares issued in connection with the acquired intangibles were valued at $1.01 per share or $606,000.

NOTE 7 - STOCK OPTIONS

In January 2009, we granted 60,000 options to purchase shares of our common stock at $3.50 per share to members of our BOD. In April 2010, we granted an additional 60,000 options to purchase shares of our common stock at $1.00 per share to certain executives of the Company.  The options vest quarterly and have an expiration period of 10 years.  The total grant date fair value of the outstanding options was $109,014.  We will record stock based compensation expense over the requisite service period, which in our case approximates the vesting period of the options.  During the nine months ended December 31, 2010, the Company recorded $66,359 in compensation expense related to the vesting of options.  The Company assumed all stock options issued during the quarter will vest.   Though these expenses will result in a deferred tax benefit, we have a full valuation allowance against the deferred tax benefit.

The Company adopted the detailed method provided in ASC 718 for calculating the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the income tax effects of employee stock-based compensation awards that are outstanding.

The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option pricing model.  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.

These assumptions were used to determine the fair value of stock options granted using the Black-Scholes option-pricing model:
 
       
Dividend yield
    
0.0%
  
Volatility
    
25% to 155%
  
Average expected option life
  
10.00 years
  
Risk-free interest rate
    
1.76% to 2.59%
  
 
The following table summarizes activity in the Company's stock option grants for the nine months ending December 31, 2010:
 
   
Number of
Shares
    
Weighted Average Price Per Share
  
Balance at March 31, 2010
    
60,000
    
$
3.50
  
Granted
    
60,000
      
1.00
  
Balance at December 31, 2010
    
120,000
      
2.25
  
 

 
- 10 -
 


The following summarizes pricing and term information for options issued to employees and directors outstanding as of December 31, 2010:

   
Options Outstanding
  
Options Exercisable
  
Range of Exercise Prices
  
Number Outstanding at September 30, 2010
  
Weighted Average Remaining Contractual
Life
  
Weighted Average Exercise Price
  
Number Exercisable at December 31, 2010
  
Weighted Average Exercise Price
  
                                 
$3.50
    
60,000
    
9.00
    
$3.50
    
60,000
    
$3.50
  
$1.00
    
60,000
    
10.00
    
$1.00
    
30,000
    
$1.00
  
Balance at December 31, 2010
    
120,000
    
9.50
    
$2.25
    
90,000
    
$2.67
  
    

NOTE 8 - LOSS PER SHARE

The following table sets forth common stock equivalents (potential common stock) for the nine months ended December 31, 2010 and 2009 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the period indicated:

   
Nine months Ended December 31,
  
   
2010
    
2009
  
Weighted average common stock equivalents:
            
Non-Plan Stock Options
    
120,000
      
60,000
  
 

 
- 11 -
 

ITEM 2 .  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-K for the year ended March 31, 2010 and presume readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in such Form 10-K.  The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-Q.

The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.  Forward-looking statements speak only as of the date of this quarterly report. You should not put undue reliance on any forward-looking statements.  We strongly encourage investors to carefully read the factors described in our Annual Report on Form 10-K for the year ended March 31, 2010 in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this quarterly report on Form 10-Q. The following should also be read in conjunction with the unaudited consolidated financial statements and notes thereto that appear elsewhere in this report.

Overview

AuraSource, Inc., a Nevada corporation, (“AuraSource” or the “Company”) focuses on clean energy technology development.  AuraSource developed the AuraFuel  TM  and AuraCoal  TM  processes. AuraSource formed AuraSource Qinzhou Co. Ltd. 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 wholly owned subsidiary in China, we 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 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 and 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 fine particles, mixing it with water and selected chemicals to make a slurry and using a proprietary biological treatment of the coal slurry mixture to reduce heavy minerals, such as sulfur.  We believe such slurry 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. Given sufficient capital, development and protection of our HCF technology, among other factors, AuraSource plans to utilize the HCF technology as follows:
 
·
license HCF technology to international clients in applicable industries, such as coal producers and power plants;
·
develop strategic partnerships to deliver consulting services with respect to design, engineering, procurement and construction for HCF applications;
·
enter into joint ventures with coal producers to supply HCF treated coal to power plants;
·
process coal using HCF technology and sell such coal to end users at a marked-up price;
·
assist customers to convert their plants to HCF rather than oil, gas or other natural resources in order to save energy costs; and
·
establish centers for processing coal with our HCF technology to supply power plants and other customers.
 

 
- 12 -
 



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 eliminate harmful emissions. This proprietary clean coal technology produces a coal water mixture, which contains only trace amounts of sulfur and ash and constitutes an 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 commence construction of its pilot plant 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:
 
   ·
reduce harmful emissions and energy costs;
   ·
reduce and/or eliminate the need for scrubbers;
   ·
reduce a power plant’s need for related precipitators and/or sulfur acceptors; and
   ·
enable a power plant to effectively manage its carbon emissions.
  
AuraFuel TM
 
AuraSource 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 the Energy and Environmental Research Institute of Heilongjiang (“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 through its joint venture, China Qinzhou KaiYuYuan New Energy Co., Ltd. started construction on a pilot plant in April 2010 with production expected 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.
 
     The AuraFuel process consists of these 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 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.

 
- 13 -
 


 
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 coal was liquefied to be transported economically.
 
Second Generation Hydrocarbon clean fuel (Mixture Generation)
 
In the second generation process, 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.
 
Third Generation Hydrocarbon clean fuel (The Ultra-Fine Coal-Water Fuel Generation)
 
We believe our technology will be the third generation of HCF. 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.
 
Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 1 - "Summary of Accounting Policies" to the Financial Statements contained in this Quarterly Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.

 
Results of Operations

For the Three Months Ended December 31, 2010 and 2009

General and Administrative Expenses

General and administrative expenses were $283,271 and $785,284 for the three months ended December 31, 2010 and 2009, respectively.  The decrease of approximately $502,000 in expense was due to decrease in corporate expenses associated with stock compensation expense.

Interest Income, Interest Expense and Other

Interest income/(expense) and other was $5,291 and $3,852 for the three months ended December 31, 2010 and 2009, respectively.  The increase is due to foreign currency exchange gains the Company incurred in the three months ended December 31, 2010.  
 

 
- 14 -
 


For the Nine Months Ended December 31, 2010 and 2009

General and Administrative Expenses

General and administrative expenses were $987,065 and $1,722,347 for the nine months ended December 31, 2010 and 2009, respectively.  The decrease of approximately $735,000 in expense was due to a decrease in stock compensation related expenses associated with stock compensation expense.

Interest Income, Interest Expense and Other

Interest income/(expense) and other was $13,065 and $(939) for the nine months ended December 31, 2010 and 2009, respectively.  The increase is due to foreign currency exchange gains the Company incurred in the nine months ended December 31, 2010.  

Liquidity and Capital Resources

Net cash used in operating activities was $985,644 and $532,909 in the nine months ended December 31, 2010 and 2009, respectively.  The increase was primarily due to non-cash transaction of stock options issued for services rendered added back to operating activities in the prior year.  There were no such amounts added back in the current period.

Net cash used in investing activities was $159,111 and $123,915 in the nine months ended December 31, 2010 and 2009, respectively.  The change was due to having transferred of all rights and ownership interests in assets relating to the exploration and development of mineral resources to Mongsource for $88,567 in the nine months ended December 31, 2009 and in the current period, the acquisition of intangibles for $147,530.  The remaining difference is the decrease in capital equipment purchases for the nine months ending December 31, 2010.

Net cash provided by financing activities was $485,000 and $2,448,643 in the nine months ended December 31, 2010 and 2009, respectively.  The difference of $1,963,643 in cash flows from financing activities was primarily due to proceeds from the issuance of common stock in 2009.

The Company suffered recurring losses from operations and has an accumulated deficit of $3,838,811 at December 31, 2010.  The Company has incurred losses of $277,980 and 1,723,286 for the three and nine months ended December 31, 2010, respectively.  Currently, we have not generated any revenues. During the nine month period ended December 31, 2010, the Company has received proceeds from the issuance of common stock of $500,000 and incurred costs associated with the financing of $15,000.The Company seeks various forms of financing.  

Inflation and Seasonality

Inflation has not been material to us during the past five years. Seasonality has not been material to us.

Recent Accounting Pronouncements

Refer to the notes to the consolidated financial statements in our March 31, 2010 Form 10-K for a complete description of recent accounting standards which we have not yet been required to implement and may be applicable to our operation, as well as those significant accounting standards that have been adopted during the current year.

Off-Balance Sheet Arrangements

As of December 31, 2010, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. 
 

 
- 15 -
 


ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

  As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.


ITEM 4 - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.   Our management, with the participation of our president and our chief financial officer, carried out an evaluation of the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our President and our Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to our management, including our President and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.   There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

  PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS

We are not a party to any current or pending legal proceedings that, if decided adversely to us, would have a material adverse effect upon our business, results of operations, or financial condition, and we are not aware of any threatened or contemplated proceeding by any governmental authority against us.  To our knowledge, we are not a party to any threatened civil or criminal action or investigation.  
 
  ITEM 1A – RISK FACTORS

In addition to the other risk factors and information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K is not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, operating results and/or cash flows.
 
  ITEM 2
- UNREGISTERED SALES OF EQUITY SECURITIES

None

  ITEM 3
- DEFAULTS UPON SENIOR SECURITIES
 
None

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None
 
ITME 5
 - OTHER INFORMATION
 
None 

 
- 16 -
 


ITEM 6.
Exhibit
  
Description
31.1
  
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32
  
Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
- 17 -
 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
AURASOURCE, INC.
  
     
     
Date: February 2, 2011
/s/  PHILIP LIU
  
 
Name: Philip
  
 
Title: Chief Executive Officer
  
     
Date: February 2, 2011
/s/  ERIC STOPPENHAGEN
  
 
Name: Eric Stoppenhagen
  
 
Title: Chief Financial Officer
  



 
- 18 -
 

EXHIBIT INDEX

Exhibit
  
Description
31.1
  
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2
  
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32
  
Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     


 
- 19 -
 

AuraSource, Inc. Reports