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EX-32 - EXHIBIT 32 - AuraSource, Inc.exhibit32.htm
EX-31.2 - EXHIBIT 31.2 - AuraSource, Inc.exhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - AuraSource, Inc.exhibit31_1.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

(Mark One)  

[X]

 

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

 

For the fiscal year ended March 31, 2017

OR

 

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from              to             

 

Commission file number: 000-28585

AURASOURCE, INC.

(Exact name of registrant as specified in its charter)

 

   
NEVADA 68-0427395  

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)  

 

1490 South Price Road, Suite 210, Chandler, AZ

85286  
(Address of principal executive offices) (Zip Code)  
       

 

Registrant’s telephone number, including area code:

(480) 292-7179

 

Securities registered pursuant to Section 12(b) of the Act:

   
Title of each class Name of each exchange on which registered
None None

 

Securities registered pursuant to Section 12(g) of the Act:

  Common Stock, par value $0.001 per share  

 

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

 
 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ]  No [x]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [ ]

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.  (Check one): 

       
  Large accelerated filer [ ] Accelerated filer [ ]  
       
  Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [x]  

 

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

 

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on September 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter was $410,967 (based on the closing sales price of the registrant's common stock on that date).  

 

At September 29, 2017, there were 66,311,973 shares of the Registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

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FORWARD-LOOKING STATEMENTS

 

This report includes forward-looking statements within the meaning of Section 27A of the Securities Act (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based these statements on our beliefs and assumptions, based on information currently available to us. These forward-looking statements are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations, our total market opportunity and our business plans and objectives set forth under the sections entitled “Business” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements are not guarantees of performance. Our future results and requirements may differ materially from those described in the forward-looking statements. Many of the factors that will determine these results and requirements are beyond our control. In addition to the risks and uncertainties discussed in “Business” and “Management's Discussion and Analysis of Financial Condition and Results of Operations,” investors should consider those discussed under “Risk Factors.”

 

These forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements to reflect changes in our business anticipated results of our operations, strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

PART I

 

Item 1.   Business

 

General

 

AuraSource, Inc. (“AuraSource” or “Company”) was incorporated on March 15, 1990 and is focused on the development and production of environmentally friendly and cost effective industrial energy and feedstock used for industrial applications. AuraCoal, AuraSource’s core technology, includes ultrafine grinding and impurities removal. Initial industrial applications of AuraSource technology are ultra-fine coal water mixture for heavy oil substitution, and low grade iron ore fine and slimes beneficiation. AuraSource formed AuraSource Qinzhou Co. Ltd., a wholly owned subsidiary in China (“Qinzhou”), to acquire these types of Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development related to the reduction of harmful emission and energy costs for HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology. We have developed seven patented technologies: 1) ultrafine grinding and 2) ultrafine separation.

 

On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”) to reserve export ready one million tons of 64% Fe higher content iron ore and 13 million of 45% grade lower content iron ore, and two million tons of manganese ore. We agreed to issue 16 million shares of our common stock to GCH or its assigns (“Mineral Deposit Shares”). The Mineral Deposit Shares shall vest and be delivered as follows; five million immediately, 11 million upon the successful completion of the first customer order of total revenue over $5 million. Success shall be defined as customer acceptance of order and final payment. To the extent a successful order does not occur, the unvested Mineral Deposit Shares shall be returned to our treasury and cancelled. Additionally, we entered into an agreement with Gulf Coast Mining Group, LLC (“GCM”) to purchase (i) higher content iron ore, lower content iron ore and manganese ore (collectively, the “Minerals”) which will be delivered loose in bulk modified FOB. We entered into an agreement with GCH appointing GCH as the exclusive North American licensee for use and exploitation of our technology as it relates to applications involving precious metals in exchange for royalty payments of 5% of gross revenues.

 

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AuraSource’s Key Technology

We believe our AuraCoalTM technology is a next generation of hydrocarbon clean fuel technology. It involves grinding coal into very fine particles, mixing it with water and selected additives to make slurry mixture and using a proprietary biological treatment of the coal slurry to reduce heavy minerals, such as sulfur.  We believe such fuel will have sufficient fluidity to move through pipelines, process delivery piping and burner injection nozzles. Our goal is to demonstrate to power plants, coal-gasification plants and similar users that our AuraCoal technology can convert their plants to use the technology at a lower cost than any current alternative.  Given sufficient capital and development of our AuraCoal technology, we plan to market it to plants in China and the United States (“US”) with the objective of having a beta demonstration site in each country.

Given sufficient capital, development and protection of our AuraCoal technology, among other factors, AuraSource plans to utilize the AuraCoal technology as follows:

 

- license AuraCoal technology to international clients in applicable industries, such as coal producers, power plants and coal-gasification plants;
- develop strategic partnerships to deliver consulting services with respect to design, engineering, procurement and construction for AuraCoal applications;
- enter into joint ventures with coal producers to supply AuraCoal treated coal to power plants;
- process coal using AuraCoal technology and sell such coal to end users at a marked-up price;
- assist customers to convert their plants to AuraCoal 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, coal-gasification plants, and other customers.

 

AuraCoalTM Clean Coal Technology

AuraCoal is patented 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 an alternative to oil or natural gas. AuraCoal can be delivered via pipeline in a non-volatile state. AuraSource’s intellectual property portfolio includes ultrafine grinding and ultrafine separation processes, which will enable us to produce a high purity, cleaner burning fuel and to reduce the cost for several industrial applications.

Ultrafine Grinding

 

Ultrafine grinding utilizes a fluid shock wave to grind slurry materials into ultrafine scale. The shock wave is generated when pressurized slurry (5-30 magapascal (Mpa)) goes through the grinding chamber. The shock wave carries energy and creates shear, collision and cavitation effects which cause particles in the slurry to reduce to an ultrafine size. As a result, when used in coal water slurry grinding, the coal water slurry can be pulverized and its fluidity improved.

Ultrafine Separation

 

Ultrafine separation separates different size particles with different densities in the slurry. The minimum particle size for conventional jigging and heavy media cycloning is 0.2 mm which makes it difficult to remove inorganic minerals. The settling velocity of particles in the slurry becomes very low under normal gravity when particles are fine. Particles settling may even stop due to interaction between particles and disturbance caused by other ultrafine particles in the slurry. Therefore, conventional separation equipment based on gravity is not effective. Our technology enables particles separation by applying 10-100 gravity which allows impurities and unwanted substances to be removed. 

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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. 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.

 

There can be no assurance we will be able to carry out our plans for our HCF technology. Our ability to pursue this strategy is subject to the availability of additional capital and further development of our HCF technology.  We will also need to finance the cost of effectively protecting our intellectual property rights in the US 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.

HCF 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 US 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, coal is a coal-water slurry processed with new products, consisting of 65% to 70% coal and 30% to 35% water and trace chemical additives prepared in a paste, commonly known as high concentration coal-water slurry, or water coal slurry.

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The Third Generation Hydrocarbon Clean Fuel (The Ultra-Fine Coal-Water Fuel Generation)

We believe our technology will be the third generation of HCF technology. We believe the third generation 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 HCF technology will contain only trace amounts of sulfur and ash, in fine particle sizes, which allows 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.

Competition

 

HCF Technology

 

We face competition from 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 which have greater financial, marketing, distribution and technological resources than we have, and  may have more well-known brand names.  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.

 

Patent and Trademarks

 

The Company currently relies on patents, unregistered trademarks, and confidentiality of trade secrets.  Our ability to compete effectively will depend on our success in protecting the HCF proprietary technology, both in the US and abroad.  There are numerous patents or patent applications relating to HCF technology. We have filed for patent protection and taken the steps required to obtain international patent protection. Currently, we have received seven patents for our proprietary clean coal technology, AuraCoal™, from the State Intellectual Property Office of the People's Republic of China. The AuraCoal™ patent covers a methodology for preparing an ultra-low ash coal-water-slurry that can significantly improve the yield of coal and improve the granularity of coal slurry fuel by improving the fluidity and increasing fuel particle concentration.

 

No assurance can be given that any patents relating to the HCF technology will be issued by the US 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 US 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 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.

 

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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 two 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.

 

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 US 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 US 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.

 

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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 4 full and part time employees and consultants.  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.  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 have a history of operating losses and we may never achieve or maintain profitability.

 

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, 2017, we had an accumulated deficit of $14,774,312. We expect to incur operating losses until such time, if ever, as we achieve sufficient levels of revenue from operations.  We anticipate our existing cash and equivalents will not be sufficient to fund our business needs. Our ability to 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 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 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.

 

A substantial portion our business activities will be overseas and we will be subject to all of the risks of international operations.

 

We expect that a substantial portion of our operations will involve performing R&D 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, a substantial portion 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 US 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 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.  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.   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 year ended March 31, 2017 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 their efforts will result in success.   Stockholders have no right or power to take part in the management of the Company.  

 

We may have difficulty managing growth in our business.

 

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 R&D 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 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 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:

 

- announcements concerning our strategy;
- litigation; and
- 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 Markets (“OTCMkts”) and it trades for less than $5.00 per share.  The OTCMKRTS are generally regarded as a less efficient trading market than the NASDAQ Capital or Global Markets or the New York Stock Exchange.

 

The Securities and Exchange Commission (“SEC”) has 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 per share (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 OTCMKRTS, 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 BOD 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

 

A substantial portion sales may be in China.

 

China is a developing country and has 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:

 

- local currency instability;
- inflation;
- the risk of realizing economic currency exchange losses when transactions are completed in the Chinese RMB and other currencies;
- the ability to repatriate earnings under existing exchange control laws; and
- 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:

 

- nationalization;
- expropriation;
- contract renegotiations; and
- 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:

 

-   the amount of government involvement;
-    the level of development;
-   the growth rate;
-    the control of foreign exchange; and
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.

-12
 

 

The Chinese economy has been transitioning from a planned 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 a substantial portion 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 Qinzhou and the HCF technology is at an 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 Qinzhou in protecting its proprietary technology, both in the U.S. and abroad.  We believe that many patents have already been issued in the area of HCF, both in the U.S. and abroad, although to date we have not conducted a patent search. Qinzhou directly, or through us, plans to file for patent protection in the U.S. and possibly outside the United States after it acquires the HCF technology.  No assurances can be given that any additional patents will be issued to Qinzhou or to us.

 

-13
 

 

No assurance can be given that any additional 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 U.S. will be sufficient to deter others, legally or otherwise, from developing or marketing competitive products utilizing Qinzhou’s HCF technologies.

 

If Qinzhou directly, or through us, obtains additional patents, there can be no assurance they will be enforceable to prevent others from developing and marketing competitive products or methods.  If Qinzhou 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 Qinzhou or we will be successful in enforcing our HCF patent rights.

 

Further, if any more patents are issued, there can be no assurance that patent infringement claims in the U.S. or in other countries will not be asserted against Qinzhou 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 Qinzhou 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 Qinzhou 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 maintain a competitive advantage with respect to the HCF technology.  Although we have entered into and Qinzhou 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 Qinzhou 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.

 

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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.

 

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 Qinzhou 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 Qinzhou 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.

 

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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 which 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 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 historically are "thinly-traded" on the OTCMKRTS, 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 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 September 29, 2017, our principal stockholders and their affiliated entities own 58.68% of our outstanding common shares, representing 58.68% 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.

 

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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 contain 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.

 

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.

 

-18
 

 

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.

 

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties.

 

We currently lease 260 square feet of office space at 1490 South Price Road, Suite 210C, Chandler, Arizona for $700 per month. The lease expires June 30, 2018 and $7,000 is due through the remainder of the lease. We leased 116 square meters of space in 129 Datian Street, Jiafa Building A33C, Jingan District, Shanghai, China for $1,068 per month expired in March 2018. We leased office space in Yong Fu West, Guangxi Province, Qinzhou, China for $266 per month which expires in March 2018. We believe that our facilities are adequate to meet our current and near-term needs.

 

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.  Mine Safety Disclosure

 

Not applicable.

 

-19
 

 

PART II

 

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 Markets under the trading symbol “ARAO”.

 

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 Markets. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Quarterly period   High   Low
Fiscal year ended March 31, 2016:                
First Quarter   $ 0.49     $ 0.17  
Second Quarter   $ 0.46     $ 0.15  
Third Quarter   $ 0.38     $ 0.10  
Fourth Quarter   $ 0.28     $ 0.03  
Fiscal year ended March 31, 2017:                
First Quarter   $ 0.22     $ 0.04  
Second Quarter   $ 0.25     $ 0.07  
Third Quarter   $ 0.17     $ 0.03  
Fourth Quarter   $ 0.08     $ 0.03  
                 
                         

 

Holders

 

On September 28, 2017, the closing sales price of our common stock as reported on the OTC markets was $0.08 per share.  As of September 29, 2017, there were approximately 900 record holders of our common stock. Our transfer agent is Issuer Direct Corporation.

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, 2017, the Company issued 1,646,985 shares of common stock as compensation for finance charge for loans to related parties.

 

During the year ended March 31, 2017, the Company issued 125,000 shares of common stock in exchange for debt.

 

During the year ended March 31, 2017, the Company issued 4,333,333 shares of common stock for $130,000.

 

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The above issuances of the shares of our common stock to investors is intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and Rule 506 of Regulation D (“Regulation D”) as promulgated by the SEC under the Securities Act, as the shares were sold to accredited investors and were not sold through any general solicitation or advertisement. The shares sold by the Company have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent such registration or an available exemption from registration.

Item 6.  Selected Financial Data.

 

Not Applicable.

 

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

 

We focus on the development and production of environmentally friendly and cost effective industrial energy and feedstock used for industrial applications. AuraCoal, AuraSource’s core technology, includes ultrafine grinding and impurities removal processes. Initial industrial applications of AuraSource technology are ultra-fine coal water mixture for heavy oil substitution, and low-grade iron ore fine and slimes beneficiation. AuraSource formed Qinzhou to acquire these types of HCF technologies, performing R&D 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. We have developed seven patented technologies: 1) ultrafine grinding and 2) ultrafine separation.

 

On February 15, 2012, we entered into an agreement with GCH to reserve export ready one million tons of 64% Fe higher content iron ore and 13 million tons of 45% grade lower content iron ore, and two million tons of manganese ore. We agreed to issue the Mineral Deposit Shares to GCH or its assigns. The Mineral Deposit Shares shall vest and be delivered as follows; five million immediately, 11 million upon the successful completion of the first customer order of total revenue over $5 million. Success shall be defined as customer acceptance of order and final payment. To the extent a successful order does not occur the unvested Mineral Deposit Shares shall be returned to our treasury and cancelled. As of September 29, 2017, this has not been achieved. Additionally, we entered into an agreement with GCM to purchase Minerals which will be delivered loose in bulk modified FOB. We entered into an agreement with GCH appointing GCH as the exclusive North American licensee for use and exploitation of our technology as relates to applications involving precious metals in exchange for royalty payments of five percent of gross revenues.

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 (“US GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, we evaluate our estimates which are based on historical experience and on 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:

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Revenue Recognition - The Company recognizes revenue in accordance with ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. When we are paid in advance for products or services we classify these amounts as deferred revenue. Upon the receipt of these products at the destination port, we recognize revenue. For services, and we amortized the price over the term of the agreement.

 

Cost of goods sold- Cost of goods sold includes cost of inventory sold during the period, net of discounts and inventory allowances, freight and shipping costs, warranty and rework costs, and sales tax.

 

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of- In accordance with ASC 360, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. We currently believe there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets. 

 

Fiscal Year 2017 Compared to Fiscal Year 2016

 

Results from Operations

 

Revenues

 

Revenues were $0 and $0 for the years ended March 31, 2017 and 2016, respectively.

 

Cost of Sales

 

Cost of sales was $0 and $0 for the years ended March 31, 2017 and 2016, respectively.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses were $973,536 and $1,177,998 for the years ended March 31, 2017 and 2016, respectively.  The decrease in expense of $204,462 in selling, general and administrative expenses was due to a decrease in operations and specifically a decrease in professional fees, travel, insurance and rent.

 

Interest Income (Expense) and Other, Net

 

Interest income (expense) and other, net was $206,194 and $20,428 for the years ended March 31, 2017 and 2016, respectively.  The interest expense for the year ending March 31, 2017 was primarily due to the shares issued as a finance charge for liabilities owed to related parties and outstanding note payables. The interest expense for the year ending March 31, 2016 was primarily due to the outstanding note payables.

 

Liquidity and Capital Resources

 

Net cash provided by / (used) in operating activities was ($68,274) and ($903,890) for the years ended March 31, 2017 and 2016, respectively. The decrease in cash used was primarily due to a decrease in depreciation and equity issued and an increase in accounts payable to related parties from 2016 to 2017

 

Net cash used in investing activities was $915 and $0 for the years ended March 31, 2017 and 2016, respectively.

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Net cash provided by financing activities was $129,890 and $867,183 for the years ended March 31, 2017 and 2016, respectively.  The decrease in cash flows from financing activities was due to increases due to related parties in 2017 compared to 2016.

 

The Company suffered recurring losses from operations and has an accumulated deficit of $14,774,312 at March 31, 2017.  Currently, we have not generated consistent revenues as of March 31, 2017, had a cash balance of $88,423. The Company is seeking various forms of financing.  Currently, the Company’s CEO and CFO are accruing their compensation. To the extent additional funding is not achieved this will delay our business plans. We believe we have sufficient cash resources for the next 3 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.

 

Capital Expenditures

 

We had $0 capital expenditures for the years ended March 31, 2017 and 2016, respectively.

 

Commitments and Contractual Obligations

 

Effective January 1, 2014, 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.  Each quarter Mr. Liu shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. 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 January 1, 2014 to December 31, 2019. Mr. Liu has deferred his compensation under this agreement.

 

Effective January 1, 2014, we entered into an employment agreement with Eric Stoppenhagen, the Company’s CFO.  Under the employment agreement, Mr. Stoppenhagen will receive a base salary of $120,000 per year and a guaranteed bonus of $20,000 per year.  Each quarter Mr. Stoppenhagen shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. Mr. Stoppenhagen will be eligible for an incentive bonus based on his performance.  Additionally, Mr. Stoppenhagen will receive a car allowance of $250 per month and an office allowance of $250 per month.  The term of the contract is from January 1, 2014 to December 31, 2019. Mr. Stoppenhagen has deferred his compensation under this agreement.

 

We currently do not have any other material commitments and contractual obligations.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

 

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.  

 

Not Applicable.

 

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Item 8. Financial Statements and Supplementary Data

 

AURASOURCE, INC.

 

TABLE OF CONTENTS

 

 

    PAGE
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     25  
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED March 31, 2017 and 2016        
Consolidated Balance Sheets     26  
Consolidated Statements of Operations and Comprehensive Income     27  
Consolidated Statements of Stockholders' Equity (Deficit)     28  
Consolidated Statements of Cash Flows     29  
Notes to Consolidated Financial Statements     30-40  

 

-24
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

AuraSource, Inc.

 

We have audited the accompanying consolidated balance sheets of AuraSource, Inc. (the “Company”) as of March 31, 2017 and 2016 and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity (deficit) and cash flows for the years ended March 31, 2017 and 2016. These consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also include assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2017 and 2016, and the result of its operations and its cash flows for the years ended March 31, 2017 and 2016 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 $14,774,312 as of March 31, 2017. These conditions, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1, which includes raising additional capitals. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  

/s/ TAAD LLP

Diamond Bar, California

September 29, 2017

 

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AURASOURCE, INC.

CONSOLIDATED BALANCE SHEETS

 

   March 31,
   2017  2016
ASSETS      
CURRENT ASSETS          
Cash  $88,423   $3,550 
Deposits and other current assets – related party   516,045    526,963 
TOTAL CURRENT ASSETS   604,468    530,513 
Fixed assets, net   —      5,602 
Intangible assets, net   651,941    698,618 
TOTAL ASSETS  $1,256,409   $1,234,733 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
CURRENT LIABILITIES          
Accounts payable  $147,271   $171,016 
Due to related parties   970,642    2,376,137 
Note payable and accrued interest   156,598    143,459 
Note payable and accrued interest – related party   2,164,821    —   
TOTAL CURRENT LIABILITIES   3,439,332    2,690,612 
           
Commitments and contingencies          
           
STOCKHOLDERS' EQUITY (DEFICIT)          
Preferred stock, 10,000 shares authorized, no shares issued and outstanding, no rights or privileges designated   —      —   
Common stock, $0.001 par value, 150,000,000 shares authorized, 66,311,972 and 60,206,654 shares issued and outstanding at March 31, 2017 and 2016, respectively   66,310    60,206 
Additional paid in capital   12,470,434    12,048,024 
Accumulated other comprehensive income   54,645    30,473 
Accumulated deficit   (14,774,312)   (13,594,582)
Total stockholders' equity (deficit)   (2,182,923)   (1,455,879)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $1,256,409   $1,234,733 
           

 

 

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

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AURASOURCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

YEARS ENDED MARCH 31, 2017 AND 2016

 

    2017   2016
REVENUES        
Product   $     $  
Total revenues            
COST OF SALES            
GROSS PROFIT            
OPERATING EXPENSES                
General and administrative expenses     973,536       1,177,998  
Total operating expenses     973,536       1,177,998  
LOSS FROM OPERATIONS     (973,536 )     (1,177,998 )
                 
Interest income (expense), net     (206,194 )     (20,428 )
NET LOSS     (1,179,730 )     (1,198,426 )
                 
Other Comprehensive Income                
Foreign currency translation gain     24,172       30,473  
Total Comprehensive Loss   $ (1,125,085 )   $ (1,167,953 )
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted   $ (0.02 )   $ (0.02 )
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted     62,344,196       60,206,654  
                 

 

 

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

-27
 

 

AURASOURCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

YEARS ENDED MARCH 31, 2017 AND 2016 

 

      Preferred Stock          Common Stock                    
      Shares       Amount       Shares       Amount       APIC       Accumulated Deficit     Other Comprehensive Income       Total  
Balance at March 31, 2015     —       $ —         60,206,654     $ 60,206     $ 11,753,473     $ (12,396,156 )       $ (582,477)  
Issuance of options     —         —         —         —         294,551                 247,551  
Net loss     —         —         —         —               (1,198,426 )         (1,198,426)  
Foreign currency translation adjustment                                       30,473       30,473  
Balance at March 31, 2016     —       —         60,206,654         60,206         12,048,024       (13,594,582)     30,473       (1,455,879
Issuance of shares for cash                     4,333,333       4,333       125,557                 129,890  
Issuance of shares for retirement of debt                     125,000       125       18,625                 18,750  
Issuance of shares for finance charge to related parties                     1,646,985       1,646       195,992                 197,638  
Issuance of options     —         —         —         —         82,236                 82,236  
Net loss     —         —         —         —               (1,179,730 )         (1,179,730)  
Foreign currency translation adjustment                                       24,172       24,172  
Balance at March 31, 2017     —       $ —         66,311,972       $ 66,310       $ 12,470,434     $ (14,774,312)   $ 54,645     $ (2,182,923)  
                                                                   

 

 

 

 

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

 

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AURASOURCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2017 AND 2016

 

   2017  2016
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,179,730)  $(1,198,426)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   53,194    158,579 
Equity issued for services rendered   82,236    294,551 
Shares issued for debt   18,750    —   
Shares issued for finance charge – related party   197,638    —   
Changes in operating assets and liabilities          
Prepaid expenses and other assets   10,918    —   
Accounts payable and accrued expenses   (23,745)   (163,763)
Accounts payable and accrued expenses – related parties   759,326    —   
Interest payable   13,139    11,001 
Customer advances   —      (5,832)
Net cash used in operating activities   (68,274)   (903,890)
CASH FLOWS FROM INVESTING ACTIVITIES:          
Acquisition of intangible   (915)   —   
Net cash used in investing activities   (915)   —   
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock   129,890    —   
Due to related party   —      867,183 
Net cash provided by financing activities   129,890    867,183 
Effect of exchange rate fluctuation on cash   24,172    30,473 
NET INCREASE (DECREASE) IN CASH   84,873    (6,234)
CASH, Beginning of year   3,550    9,784 
CASH, End of year  $88,423   $3,550 
           

 

 

    2017   2016
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
Cash paid during the year for:                
Interest   $     $  
Income taxes   —       —    

 

NON-CASH INVESTING AND FINANCING ACTIVITY:

                 
Issuance of promissory note for settlement of accounts payable – related party   $ 1,976,383       $  
                 

 

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

-29
 

 

 

AURASOURCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017 and 2016

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Current Operations and Background — AuraSource, Inc. (“AuraSource” or “Company”) focuses on the development and production of environmentally friendly and cost effective industrial energy and fuel used for industrial applications. AuraCoal, AuraSource’s core technology, includes ultrafine grinding and impurities removal processes. Initial industrial applications of AuraSource technology are ultra-fine coal water mixture for heavy oil substitution, and low grade iron ore fine and slimes beneficiation. AuraSource formed AuraSource Qinzhou Co. Ltd., a wholly owned subsidiary in China (“Qinzhou”) to acquire these types of Hydrocarbon Clean Fuel (“HCF”) technologies, performing research and development (“R&D”) related to the reduction of harmful emissions and energy costs for HCF technology and products based on this technology, licensing HCF technology to third parties and selling services and products derived from this technology. Currently, we have seven patents issued related to our technologies: 1) ultrafine grinding and 2) ultrafine separation.

 

There can be no assurance we will be able to carry out our development plans for our HCF technology. Our ability to pursue this strategy is subject to the availability of additional capital and further development of our HCF technology.  We also need to finance the cost of effectively protecting our intellectual property rights in the United States (“US”) and abroad where we intend to market our technology and products.

 

Going Concern

The Company’s consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of and for the period ended March 31, 2017, the Company has incurred operating losses and working capital deficit. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Management’s Plan to Continue as a Going Concern

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such resources for the Company include (1) obtaining capital from the sale of its equity securities, (2) sales of its products, and (3) short-term or long-term borrowings from banks, stockholders or other party(ies) when needed. However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans. The Company plans to look for opportunities to merge with other companies in the graphite industry.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually to secure other sources of financing and attain profitable operations.

 

 

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”) and include the accounts of AuraSource, Inc. and its subsidiary, Qinzhou. All significant intercompany transactions and balances were eliminated in consolidation.

 

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.

-30
 

 

Cash and Cash Equivalents — We consider cash equivalent with original maturities of 90 days or less to be cash equivalents.

 

Property and Equipment - Property and Equipment are stated at historical cost less accumulated depreciation and amortization. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets' estimated useful lives. The useful lives of the assets are as follows: machinery and equipment 5 years, office equipment 5 to 7 years, vehicles 5 years, and leasehold improvements use the shorter of the estimated useful life or the remaining term of the agreements, generally ranging from 3 to 15 years. Additions and improvements are capitalized while routine repairs and maintenance are charged to expense as incurred. Upon sale or disposition, the historically recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to other income / expense.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of- In accordance with ASC 360, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable.  When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount.  Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.  We currently believe there is no impairment of our long-lived assets.  There can be no assurance, however, that market conditions will not change or demand for our products under development will continue.  Either of these could result in future impairment of long-lived assets.

Income Taxes — The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 — We periodically issue stock options and shares to employees and non-employees for services. We account for stock option grants issued and vesting to employees based on Financial Accounting Standards Board (FASB) ASC Topic 718, “Compensation – Stock Compensation”, whereas the award is measured at its fair value at the date of grant and is amortized ratably over the vesting period. We account for shares issued to non-employees in accordance with ASC Topic 505, “Equity”, whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

 

Comprehensive Income - We have adopted ASC 220, Comprehensive Income, formerly known as SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general purpose financial statements. We have chosen to report comprehensive income (loss) in the statements of operations and comprehensive income.

 

Foreign Currency Translation. - Our consolidated financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. Results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period and equity is translated at historical exchange rates. Translation adjustments resulting from the process of translating the financial statements denominated in RMB into U.S. dollars are included in determining comprehensive income. Our foreign currency translation gain for the year ended March 31, 2017 was $24,172, compared a translation gain of $30,473 for the year ended March 31, 2016.

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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 loss per share for the years ended March 31, 2017 and 2016 because their effect is anti-dilutive.

 

Concentration of Credit Risk — Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash.  The Company maintains its cash with high credit quality financial institutions; at times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits.  

 

Financial Instruments and Fair Value of Financial Instruments — Our financial instruments consist of cash, accounts payable and notes payable.  The carrying values of cash, accounts payable, and notes payable are representative of their fair values due to their short-term maturities. We measure the fair value (“FV”) of financial assets and liabilities on a recurring basis. FV is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FV measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. We also establish a FV hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring FV.

 

The standard describes three levels of inputs that may be used to measure FV:

 

Level 1:   Quoted prices in active markets for identical or similar assets and liabilities.
   
Level 2:   Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
   
Level 3:  

Unobservable inputs that are supported by little or no market activity and that are significant to the FV of the assets or liabilities.

 

The carrying value of cash, accounts receivable, accounts payables, and notes payable approximates their fair values due to their short-term maturities.  

   

Recently Issued Accounting Pronouncements  

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption is permitted for reporting periods beginning after December 15, 2016. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.

 

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In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements— Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. Currently, there is no guidance under U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). For the period ended June 30, 2016, management evaluated the Company’s ability to continue as a going concern and concluded that substantial doubt has not been alleviated about the Company’s ability to continue as a going concern. While the Company continues to explore further significant sources of financing, management’s assessment was based on the uncertainty related to the amount and nature of such financing over the next twelve months. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.

 

In November 2015, the FASB issued an ASU amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the consolidated balance sheet. The ASU is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The ASU may be adopted either prospectively or retrospectively. We have adopted guidance and believe it has not had a material impact on the Company’s financial statements.

 

In January 2016, the FASB issued a new standard to amend certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). The new standard will be effective for us beginning July 1, 2018. The application of the amendments will result in a cumulative-effect adjustment to our consolidated balance sheets as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new standard will be effective for us beginning July 1, 2019, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

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In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new standard to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. The new standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

 

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on our present or future consolidated financial statements. 

 

NOTE 2 – CONCENTRATION OF CREDIT RISK

 

We maintain our cash balances in financial institutions that from time to time exceed amounts insured by the FDIC (up to $250,000, per financial institution as of March 31, 2017). As of March 31, 2017 and 2016, our deposits did not exceed insured amounts. We have not experienced any losses in such accounts and we believe we are not exposed to any significant credit risk on cash.

 

Currently, we maintain a bank account in China. This account is not insured and we believe is exposed to credit risk on cash. The cash balance in China as of March 31, 2017 is $78,530.

 

NOTE 3 – DEPOSITS AND OTHER CURRENT ASSETS – RELATED PARTY

 

Deposits and other current assets were $516,045 and $526,963 as of March 31, 2017 and 2016, respectively, and were comprised of the following:

 

   March 31, 2017  March 31, 2016
Shipping deposits   —      10,918 
Mineral reserve deposits   516,045    516,045 
           
Ending Balance  $516,045   $526,963 

  

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On February 15, 2012, we entered into an agreement with Gulf Coast Holdings, LLC (“GCH”), an affiliate common ownership with HKM which owns over 10% voting rights, to reserve export ready one million tons of 64% Fe higher content iron ore and 13 million tons of 45% grade lower content iron ore, and two million tons of manganese ore. We issued the Mineral Deposit Shares to GCH or its assigns. On February 19, 2012, GCH assigned 100% of its interest in the Mineral Reserve Agreement to Hong Kong Minerals Holdings, Ltd. The Mineral Deposit Shares shall vest and be delivered as follows: five million immediately and 11 million upon the successful completion of the first customer order of total revenue over $5 million. Success shall be defined as customer acceptance of order and final payment. To the extent a successful order does not occur, the unvested Mineral Deposit Shares shall be returned to our treasury and cancelled. To date, the Company has not achieved $5 million in revenue, as such the 11 million shares is being held by the Company. As of March 31, 2017, the Company has obtained possession a small amount of the above noted minerals. As such, the issuance of the shares have been recorded as a charge to additional paid in capital and a credit to common stock at par value of $0.001 per share for a total of $16,000. GCH has the right to designate two members on the Board of Directors (“BOD”), one of whom is to be mutually agreed. To date GCH has not designated any board members. Additionally, we entered into an agreement with Gulf Coast Mining Group, LLC (“GCM”) to purchase Minerals which will be delivered loose in bulk modified FOB. We entered into an agreement with GCH appointing GCH as the exclusive North American licensee for use and exploitation of our technology as it relates to applications involving precious metals in exchange for royalty payments of 5% of gross revenues. GCH, GCM and HKM all have the same beneficial owner. HKM is considered an affiliate as it owns greater than 10% of our outstanding common stock.

 

For the year ended March 31, 2013, the Company paid $400,000 to GCM and $125,000 cash to HKM Minerals as deposit for mineral reserve.

  

NOTE 4 – FIXED ASSETS, NET

 

Fixed assets, net consisted of the following:

 

    March 31,   March 31,
    2017   2016
Office equipment   $ 5,013     $ 5,013  
Vehicles     147,390       147,390  
Equipment     391,118       391,118  
Total fixed assets     543,521       543,521  
Less accumulated depreciation     (543,521 )     (537,919 )
Total fixed assets, net   $ -     $ 5,602  

 

The depreciation expense for the years ended March 31, 2017 and 2016 was $5,602 and $123,734, respectively.

 

NOTE 5 – INTANGIBLE ASSETS, NET

 

We entered into an agreement with Beijing Pengchuang Technology Development Co. (“Pengchuang”), Ltd., an independent Chinese company, to purchase 50% of the intellectual property related to ultrafine particle processing. Pengchuang developed a highly efficient and low energy consumption grinding technology, which utilizes fluid shock waves to make ultrafine particles. This technology can be applied to the coal water slurry, solid lubricant and other material grinding processes. Through a joint development and ownership agreement, AuraSource will enrich its intellectual property portfolio, enabling the further development of AuraCoal, its HCF 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.

 

The net intangibles were $651,941 and $698,618 as of March 31, 2017 and 2016. We issued 600,000 shares of common stock for the acquisition of certain intangibles. The shares issued in connection with $753,530 of the acquired intangibles were valued at $606,000 or $1.01 per share which was the share price on August 8, 2010, the acquisition date. The Company paid cash for the remainder of the amount due. The Company recorded $47,592 and $47,358 in amortization expense for the years ended March 31, 2017 and 2016, respectively. 

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NOTE 6 – DUE TO RELATED PARTIES

 

As of March 31, 2017 and 2016, $970,642 and $2,376,137, respectively, is owed to the officers and directors and a company owned by the CEO of the Company. As of March 31, 2017, $414,729 is from the advancement of expenses and $393,990 is for past due compensation. Since December 2011, the officers and directors of the Company agreed to accrue compensation for their services until such time the Company had sufficient funds to pay this liability.

 

NOTE 7 – NOTE PAYABLE – RELATED PARTY

 

On December 31, 2012, the Company received $500,000 from Pelican Creek, LLC (Pelican Creek”), a former related party who resigned in June 2014, and recorded the corresponding note as a current liability on the balance sheet. Our former director, Larry Kohler, manages Pelican Creek. The coupon interest on this note accrues daily on the outstanding principal amount at 8% per annum. On March 26, 2014, the Company issued 2,000,000 shares of common stock in exchange for the cancelation of a $500,000 note payable. As such, as of March 31, 2017, the Company accrued interest of $83,738 and remains in the note payable account with no conversion right. This will be settled upon the Company having a gross profit of $1 million.

 

On April 26, 2016, we entered into a note payable with Philip Liu, our CEO, whereby he converted amounts owed of $1,565,169. $148,439 of interest is owed as of March 31, 2017. The note has an interest rate of 10% which is compounded quarterly and is due on March 31, 2017. The note is in default.

 

On April 26, 2016, we entered into a note payable with Eric Stoppenhagen, our CFO, whereby he converted amounts owed of $411,214. $38,999 of interest is owed as of March 31, 2017. The note has an interest rate of 10% which is compounded quarterly and is due on March 31, 2017. The note is in default.

 

NOTE 8 – NOTE PAYABLE

 

In September 30, 2014, we entered into a note payable for $63,357 which bears an interest rate of 6% per year as a settlement for previously due amounts recorded in accounts payable. The principle and interest was due on September 15, 2016 and the note is in default. As of March 31, 2017, the balance is $72,861.

 

NOTE 9 – STOCK ISSUANCE

  

During the year ended March 31, 2017, the Company issued 1,646,985 shares of common stock as finance charge for loans to related parties. We valued these shares at fair value of $197,638 using a 10% interest rate and the share price of $.12.

 

During the year ended March 31, 2017, the Company issued 125,000 shares of common stock to settle a note signed in 2016 with principal amount of $15,000 plus interest, and no gain or loss resulted from the settlement.

 

During the year ended March 31, 2017, the Company issued 4,333,333 shares of common stock for cash of $130,000.

 

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NOTE 10 - STOCK OPTIONS

 

In April 2015, we granted an additional 40,000 options to purchase shares of our common stock at $0.49 per share to certain members of our BOD. In April 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In July 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In October 2015, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In January 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In April 2016, we granted an additional 40,000 options to purchase shares of our common stock at $0.15 per share to certain members of our BOD. In April 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In July 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In October 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In January 2017, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements.

 

We will record stock based compensation expense over the requisite service period at grant date fair value, which in our case approximates the vesting period of the options. During the year ended March 31, 2017, the Company recorded $152,126 in compensation expense arising from the vesting of options. The Company assumed all stock options issued during the quarter will vest. Though these expenses result in a deferred tax benefit, we have a full valuation allowance against the deferred tax benefit.

 

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

 

The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option pricing model (“BSOPM”). The BSOPM has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. The expected life of an option grant is based on management’s estimate. The fair value of each option grant, as calculated by the BSOPM, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.

 

These assumptions were used to determine the FV of stock options granted:

       
Dividend yield     0.0%  
Volatility     25% to 382%  
Average expected option life   2.5 to 5 years  
Risk-free interest rate     0.68% to 2.59%  

 

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The following table summarizes activity in the Company's stock option grants for the year ended March 31, 2017:

 

    Number of 
Shares
  Weighted Average Price Per Share
  Balance at March 31, 2015       4,210,000      $ 0.36  
  Granted       840,000      $ 0.25  
  Balance at March 31, 2016       5,050,000     $ 0.35  
  Granted       840,000     $ 0.25  
  Balance at March 31, 2017       5,890,000     $ 0.32  

 

The following summarizes pricing and term information for options issued to employees and directors outstanding as of March 31, 2017 and 2016:

 

    Options Outstanding   Options Exercisable  
Range of Exercise Prices   Number Outstanding at March 31, 2017  

Weighted Average Remaining Contractual

Life

  Weighted Average Exercise Price   Number Exercisable at March 31, 2017   Weighted Average Exercise Price  
                                 
$3.50     60,000     3.00     $3.50     60,000     $3.50  
$1.00     60,000     4.00     $1.00     60,000     $1.00  
$0.75     60,000     5.00     $0.75     60,000     $0.75  
$0.50     60,000     7.00     $0.50     60,000     $0.50  
$0.49     40,000     8.00     $0.49     40,000     $0.49  
$0.45     60,000     7.00     $0.45     60,000     $0.45  
$0.28     2,850,000     1.38     $0.28     -     -  
$0.27     60,000     6.00     $0.27     60,000     $0.28  
$0.25     2,600,000     8.75     $0.25     2,6000,000     $0.25  
$0.15     40,000     9.00     $0.15     40,000     $0.15  
Balance at March 31, 2017     5,890,000     7.64     $0.32     3,040,000     $0.35  

 

    Options Outstanding   Options Exercisable  
Range of Exercise Prices   Number Outstanding at March 31, 2016  

Weighted Average Remaining Contractual

Life

  Weighted Average Exercise Price   Number Exercisable at March 31, 2016   Weighted Average Exercise Price  
                                 
$3.50     60,000     4.00     $3.50     60,000     $3.50  
$1.00     60,000     5.00     $1.00     60,000     $1.00  
$0.75     60,000     6.00     $0.75     60,000     $0.75  
$0.50     60,000     8.00     $0.50     60,000     $0.50  
$0.49     40,000     9.00     $0.49     40,000     $0.49  
$0.45     60,000     8.00     $0.45     60,000     $0.45  
$0.28     2,850,000     2.38     $0.28     -     -  
$0.27     60,000     7.00     $0.27     60,000     $0.28  
$0.25     1,800,000     8.75     $0.25     1,800,000     $0.25  
Balance at March 31, 2016     5,050,000     4.08     $0.36     2,200,000     $0.82  

 

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NOTE 11 - LOSS PER SHARE

 

The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2017 and 2016 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:

 

The following table sets forth common stock equivalents (potential common stock) for the years ended March 31, 2017 and 2016 that are not included in the loss per share calculation above because their effect would be anti-dilutive for the periods indicated:

 

    2017   2016
Weighted average common stock equivalents:                
Non-plan stock options     5,890,000       5,050,000  
                 

 

NOTE 12 - INCOME TAX

 

The deferred tax asset as of March 31, 2017 and 2016 consisted of the following:

    2017   2016
Net operating loss carryforwards   $ 5,364,553     $ 4,936,193  
Less valuation allowance     (5,364,553 )     (4,936,193 )
    $ —       $ —    

 

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. The Company has not filed its tax returns for the years ending March 31, 2014, 2015, 2016 and 2017.

 

As of March 31, 2017, the Company has net operating loss carryforward of $14,774,312 which is available to offset future taxable income that expires by year 2034.

 

Reconciliation between the provision for income taxes and the expected tax benefit using the federal statutory rate of 34% for 2016 and 2015 is as follows:

 

    2017   2016
Income tax benefit at federal statutory rate     (34.00 )%     (34.00 )%
Foreign tax rate difference     1.49 %     1.49 %
State income tax benefit, net of effect on federal taxes     (3.80 )%     (3.80 )%
Increase in valuation allowance     36.31 %     36.31 %
Income tax expense     —         —    

 

NOTE 13 - COMMITMENTS AND CONTINGENCIES

 

Leases — We currently lease 260 square feet of office space at 1490 South Price Road, Suite 210C, Chandler, Arizona for $700 per month. The lease expires June 30, 2018 and $7,000 is due through the remainder of the lease. We leased 116 square meters of space in 129 Datian Street, Jiafa Building A33C, Jingan District, Shanghai, China for $1,068 per month expired in March 2018. We leased office space in Yong Fu West, Guangxi Province, Qinzhou, China for $266 per month which expires in March 2018. We believe that our facilities are adequate to meet our current and near-term needs.

 

Litigation — The Company is currently not a party to any material legal proceedings.

 

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Employment Agreement — Effective January 1, 2014, 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.  Each quarter Mr. Liu shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. 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 January 1, 2014 to December 31, 2019. Mr. Liu is currently deferring his compensation until such time as the Company can afford payment.

 

Effective January 1, 2014, the Company entered into an employment agreement with Eric Stoppenhagen, the Company’s CFO.  Under the employment agreement, Mr. Stoppenhagen will receive a base salary of $120,000 per year and a guaranteed bonus of $20,000 per year.  Each quarter Mr. Stoppenhagen shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. Mr. Stoppenhagen will be eligible for an incentive bonus based on his performance.  Additionally, Mr. Stoppenhagen will receive a car allowance of $250 per month and an office allowance of $250 per month.  The term of the contract is from January 1, 2014 to December 31, 2019. Mr. Stoppenhagen is currently deferring his compensation until such time as the Company can afford payment.

 

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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

Item 9A.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures: We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term "disclosure controls and procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended ("Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC`s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2017, that our disclosure controls and procedures are not effective at a reasonable assurance level and are designed to provide reasonable assurance that the controls and procedures will meet their objectives. However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Management's Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.  The internal controls for the Company are provided by executive management's review and approval of all transactions.  Our ICFR also includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
   
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
   
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, ICFR may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company's ICFR as of March 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our ICFR and testing of the operational effectiveness of these controls.  

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Based on this assessment, management has concluded that as of March 31, 2017, our ICFR was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP.

This annual report 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.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B.  Other Information.

 

None

 

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PART III

 

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, 2017, and their positions with the Company, are as follows:

 

Name Age Position
     
Philip Liu 54 Chief Executive Officer, President and Chairman of the Board  
       
Eric Stoppenhagen 43 Chief Financial Officer, Treasurer and a Director  

 

Directors are elected for a period of one year and until their successors are duly elected.  Executive officers are elected by the BOD. 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 30 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. Liu is a resident of Phoenix, Arizona and is a U.S. Citizen.

 

Eric Stoppenhagen was appointed Chief Financial Officer (“CFO”) 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, including transaction advice, preparation of security filings and advice regarding compliance with corporate governance requirements.  Mr. Stoppenhagen has more than 15 years of financial experience having served in an executive capacity for several public and private companies, including 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 BOD will consist of no less than three members. Officers are elected by and serve at the discretion of the BOD. 

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Board Experience

Our BOD has diverse and extensive knowledge and expertise in a broad range of industries that is of particular importance to us. This knowledge and experience includes operating, acquiring, financing development stage companies. In addition, our BOD has extensive and broad legal, auditing and accounting experience. Our BOD has numerous years of hands-on and executive experience drawn from a wide range of disciplines. Our current director was nominated to the BOD on the basis of the unique skills he brings to the board. We will select additional directors based upon the experience and unique skills they bring as well how these collectively enhance our BOD. On an individual basis:

 

Mr. Liu has 30 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. Mr. Stoppenhagen, has over 15 years of experience in managing publicly traded companies and brings insight into all aspects of our business due to both his current role with the company. His comprehensive experience and extensive knowledge and understanding of the healthcare and specifically digital pathology has been instrumental in the creation, development and launching of our company, as well as our current strategy.

 

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 10% 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, 2017, our executive officers and directors have not complied with all Section 16(a) filing requirements.

 

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 and Audit Committee Financial Expert

 

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: Philip Liu, with Eric Stoppenhagen serving as Chairman of the committee. Our board of directors has determined that Mr. Stoppenhagen serves as the “audit committee financial expert” within the meaning of the rules and regulations of the SEC.

 

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 BOD 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.

 

-44
 

 

Director Independence

 

Our BOD currently consists of two members: Philip Liu and Eric Stoppenhagen.

 

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 determined that no member is “independent” as that term is defined in Section 5605 of the NASDAQ Listing Rules as required by the NASDAQ Stock Market.

 

Item 11.  Executive Compensation

 

The following table and related footnotes show the compensation paid during the fiscal years ended March 31, 2017 and 2016 and to the Company's executive officers.

 

SUMMARY COMPENSATION TABLE

                 
Name and Principal Position     Year       Salary ($)       Bonus ($)       Stock Awards ($)       Option Awards ($)       All Other Compensation ($)       Total ($)  
                                                         
Philip Liu (1)     2016       —         —               123,776 (2)      —         123,776  
Chief Executive Officer     2017             —               44,119  (2)     —         44,119  
                                                         
Eric Stoppenhagen (1)     2016             —         -       123,776  (2)     -       123,776  
Chief Financial Officer     2017       —         —               44,119  (2)     -       44,119  
                                                         

__________________________

(1)   Mr. Liu and Mr. Stoppenhagen accrued their compensation.
(2)  

In April 2016, we granted an additional 40,000 options to purchase shares of our common stock at $0.15 per share to certain members of our BOD. In April 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In July 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In October 2016, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements. In January 2017, we granted 200,000 options to purchase shares of our common stock at $0.25 per share to certain our CEO and CFO per their employment agreements.

 

On April 1, 2015, Mr. Liu and Mr. Stoppenhagen were granted 20,000 options at an exercise price of $0.49 for serving on the BOD. On April 1, 2015, Mr. Liu and Mr. Stoppenhagen were granted 100,000 options at an exercise price of $0.25 for serving as executive officers. On July 1, 2015, Mr. Liu and Mr. Stoppenhagen were granted 100,000 options at an exercise price of $0.25 for serving as executive officers. On October 1, 2015, Mr. Liu and Mr. Stoppenhagen were granted 100,000 options at an exercise price of $0.25 for serving as executive officers. On January 1, 2016, Mr. Liu and Mr. Stoppenhagen were granted 100,000 options at an exercise price of $0.25 for serving as executive officers. The options will expire in 10 years after issuance.

   

 

-45
 

 

Narrative Disclosure to Summary Compensation Table

 

Effective January 1, 2014, 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.  Each quarter Mr. Liu shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. 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 January 1, 2014 to December 31, 2019. Mr. Liu is currently deferring his compensation until such time as the Company can afford payment.

 

Effective January 1, 2014, the Company entered into an employment agreement with Eric Stoppenhagen, the Company’s CFO.  Under the employment agreement, Mr. Stoppenhagen will receive a base salary of $120,000 per year and a guaranteed bonus of $20,000 per year.  Each quarter Mr. Stoppenhagen shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. Mr. Stoppenhagen will be eligible for an incentive bonus based on his performance.  Additionally, Mr. Stoppenhagen will receive a car allowance of $250 per month and an office allowance of $250 per month.  The term of the contract is from January 1, 2014 to December 31, 2019. Mr. Stoppenhagen is currently deferring his compensation until such time as the Company can afford payment.

 

 In our fiscal year ending March 31, 2017, the Company did not retain outside consultants to provide advice in relation to executive compensation.

 

Outstanding Equity Awards at Fiscal Year-End March 31, 2017

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, 2017.

    Option Awards
Name   Grant Date   Number of
Securities Underlying
Unexercised Options
  Option Exercise Price ($)   Option Expiration Date
                 
                     
Philip Liu   1/1/2009     20,000       0       3.50     12/31/2019
Eric Stoppenhagen   1/1/2009     20,000       0       3.50     12/31/2019
Philip Liu   4/1/2010     20,000       0       1.00     3/31/2020
Eric Stoppenhagen   4/1/2010     20,000       0       1.00     3/31/2020
Philip Liu   4/1/2011     20,000       0       0.75     3/31/2021
Eric Stoppenhagen   4/1/2011     20,000       0       0.75     3/31/2021
Philip Liu   2/15/2012     0       950,000       0.28     2/15/2017
Eric Stoppenhagen   2/15/2012     0       950,000       0.28     2/15/2017
Philip Liu   4/1/2012     20,000       0       0.27     3/31/2022
Eric Stoppenhagen   4/1/2012     20,000       0       0.27     3/31/2022
Philip Liu   4/1/2013     20,000       0       0.45     3/31/2023
Eric Stoppenhagen   4/1/2013     20,000       0       0.45     3/31/2023
-46
 

 

Philip Liu   1/1/2014     100,000       0       0.25     12/31/2023
Eric Stoppenhagen   1/1/2014     100,000       0       0.25     12/31/2023
                                 
Philip Liu   4/1/2014     20,000       0       0.50     3/31/2024
Eric Stoppenhagen   4/1/2014     20,000       0       0.50     3/31/2024
Philip Liu   4/1/2014     100,000       0       0.25     3/31/2024
Eric Stoppenhagen   4/1/2014     100,000       0       0.25     3/31/2024
                                 
Philip Liu   7/1/2014     100,000       0       0.25     6/30/2024
Eric Stoppenhagen   7/1/2014     100,000       0       0.25     6/30/2024
                                 
Philip Liu   10/1/2014     100,000       0       0.25     9/30/2024
Eric Stoppenhagen   10/1/2014     100,000       0       0.25     9/30/2024
                                 
Philip Liu   1/1/2015     100,000       0       0.25     12/31/2024
Eric Stoppenhagen   1/1/2015     100,000       0       0.25     12/31/2024
                                 
Philip Liu   4/1/2015     20,000       0       0.49     3/31/2025
Eric Stoppenhagen   4/1/2015     20,000       0       0.49     3/31/2025
Philip Liu   4/1/2015     100,000       0       0.25     3/31/2025
Eric Stoppenhagen   4/1/2015     100,000       0       0.25     3/31/2025
                                 
Philip Liu   7/1/2015     100,000       0       0.25     6/30/2025
Eric Stoppenhagen   7/1/2015     100,000       0       0.25     6/30/2025
                                 
Philip Liu   10/1/2015     100,000       0       0.25     9/30/2025
Eric Stoppenhagen   10/1/2015     100,000       0       0.25     9/30/2025
                                 
Philip Liu   1/1/2016     100,000       0       0.25     12/31/2025
Eric Stoppenhagen   1/1/2016     100,000       0       0.25     12/31/2025
                                 
Philip Liu   4/1/2016     20,000       0       0.15     3/31/2026
Eric Stoppenhagen   4/1/2015     20,000       0       0.15     3/31/2026
Philip Liu   4/1/2016     100,000       0       0.25     3/31/2026
Eric Stoppenhagen   4/1/2016     100,000       0       0.25     3/31/2026
                                 
Philip Liu   7/1/2016     100,000       0       0.25     6/30/2026
Eric Stoppenhagen   7/1/2016     100,000       0       0.25     6/30/2026
                                 
Philip Liu   10/1/2016     100,000       0       0.25     9/30/2026
Eric Stoppenhagen   10/1/2016     100,000       0       0.25     9/30/2026
                                 
Philip Liu   1/1/2017     100,000       0       0.25     12/31/2026
Eric Stoppenhagen   1/1/2017     100,000       0       0.25     12/31/2026

  

-47
 

 

(1) Mr. Liu and Mr. Stoppenhagen were granted 20,000 options at the beginning of each fiscal year with an exercise price equal to the market price on that date for serving on the BOD.  In the year ending March 31, 2016, Mr. Liu and Mr. Stoppenhagen were granted 400,000 options each for their services as officers of the Company. In the year ending March 31, 2017, Mr. Liu and Mr. Stoppenhagen were granted 400,000 options each for their services as officers of the Company.

(2) Mr. Liu and Mr. Stoppenhagen were granted 950,000 options with an exercise price of $0.28. The options will vest upon the Company earning $5 million in revenues. The options will expire in 5 years.

 

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, 2017.

 

Name  

Number of Securities

Underlying Options

and Warrants Granted

   

Percent of Total

Options and Warrants

Granted in Fiscal Year

   

Exercise or Base

Price($/Share)

 
Philip Liu     20,000       100 %     3.50  
Eric Stoppenhagen     20,000       100 %     3.50  
Philip Liu     20,000       100 %     1.00  
Eric Stoppenhagen     20,000       100 %     1.00  
Philip Liu     20,000       100 %     0.75  
Eric Stoppenhagen     20,000       100 %     0.75  
Philip Liu     950,000       0 %     0.28  
Eric Stoppenhagen     950,000       0 %     0.28  
Philip Liu     20,000       100 %     0.27  
Eric Stoppenhagen     20,000       100 %     0.27  
Philip Liu     20,000       100 %     0.45  
Eric Stoppenhagen     20,000       100 %     0.45  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     20,000       100 %     0.50  
Eric Stoppenhagen     20,000       100 %     0.50  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     20,000       100 %     0.49  
Eric Stoppenhagen     20,000       100 %     0.49  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
-48
 

 

Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     20,000       100 %     0.15  
Eric Stoppenhagen     20,000       100 %     0.15  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  
Philip Liu     100,000       100 %     0.25  
Eric Stoppenhagen     100,000       100 %     0.25  

 

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 2016 and year-end option values for the Company's Executive Officers.

 

Name  

Shares Acquired

on Exercise (#)

    Value Realized ($)    

Number of

Securities Underlying

Unexercised Options

and Warrants

at March 31, 2017

   

Value of Unexercised

In-the-Money Options

and Warrants

at March 31, 2017

 
Philip Liu     0       N/A       2,410,000       0  
Eric Stoppenhagen     0       N/A       2,410,000       0  

 

Compensation of Directors

 

The following table details the total compensation paid to the company’s non-employee directors in our fiscal year ending March 31, 2017:

 

None

 

  (1) 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.  

 

-49
 

 

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 September 29, 2017 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 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 66,311,972 shares of our common stock outstanding on September 29, 2017.  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 210C, Chandler, AZ 85286.

 

Name of Beneficial Owner   Amount and Nature of Beneficial Ownership   Percentage Ownership of Common Stock (1)
Hong Kong Minerals, Ltd       16,000,000       24.13%
Mongolia Natural Resource Investment Group       9,625,000       14.51%
Philip Liu (2)       9,364,303       14.12%
Eric Stoppenhagen(2)       3,924,844       5.92%
All officers and directors                
as a group (two persons)       13,289,147       20.04%
        38,914,147       58.68%
                 

 

 

-1 The percent of common stock owned is calculated using the sum of (A) the number of shares of common stock owned and (B) the number of warrants and options of the Beneficial Owner that are exercisable within 60 days, as the numerator, and the sum of (Y) the total number of shares of common stock outstanding (66,311,972) and the number of warrants and options of the Beneficial Owner that are exercisable within 60 days, as the denominator.
-2 Officer and director of the Company.

 

-50
 

 

Equity Compensation Plan Information

 

The following table sets forth certain information regarding the Company’s equity compensation plans as of March 31, 2017:

 

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

Weighted-average exercise price of outstanding options, warrants and rights

(b)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

Equity compensation plans approved by security holders 0 0 0
Equity compensation plans not approved by security holders 5,890,000 $ 0.32 0
Total 5,890,000 $ 0.32 0

 

 

 

Changes in Control Arrangements

 

There existed no change in control arrangements at March 31, 2017.

 

Item 13.   Certain Relationships and Related Transactions, and Director Independence.

  

Other than the employment arrangements described above in “Executive Compensation”, since April 1, 2012, 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 the lesser of $120,000 or one percent of the average of our total assets at year end for our last two completed fiscal years; 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.

 

Effective January 1, 2014, 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.  Each quarter Mr. Liu shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. 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 January 1, 2014 to December 31, 2019. Mr. Liu is currently deferring his compensation until such time as the Company can afford payment.

 

Effective January 1, 2014, the Company entered into an employment agreement with Eric Stoppenhagen, the Company’s CFO.  Under the employment agreement, Mr. Stoppenhagen will receive a base salary of $120,000 per year and a guaranteed bonus of $20,000 per year.  Each quarter Mr. Stoppenhagen shall receive 100,000 options to purchase the Company’s common at an exercise price of $0.25 per share. Mr. Stoppenhagen will be eligible for an incentive bonus based on his performance.  Additionally, Mr. Stoppenhagen will receive a car allowance of $250 per month and an office allowance of $250 per month.  The term of the contract is from January 1, 2014 to December 31, 2019. Mr. Stoppenhagen is currently deferring his compensation until such time as the Company can afford payment.

 

-51
 

 

Item 14.  Principal Accountant Fees and Services

 

Independent Public Accountants

 

On April 4, 2014, we engaged TAAD, LLP (“TAAD”) our new independent registered public accounting firm. The appointment of TAAD was approved by our Board of Directors. During the fiscal years ended March 31, 2017 and 2016, we did not consult with TAAD on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on the Company's financial statements, and TAAD did not provide either a written report or oral advice to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) the subject of any disagreement, as defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.

 

Audit Fees

 

The aggregate fees billed by TAAD for the audit of the Company’s consolidated financial statements in the years ended March 31, 2017 and 2016, the reviews of the quarterly reports on Form 10-Q for the same fiscal years and statutory and regulatory filings was $0 and $24,950 for 2017 and 2016 for the years ended March 31, 2017 and 2016, respectively.

 

 

Audit-Related Fees

 

There were no fees billed by TAAD for audit-related services for the years ended March 31, 2017 and 2016.

 

Tax Fees

 

The aggregate fees billed by TAAD for tax-related services for the years ended March 31, 2017 and 2016 were zero.

 

 

All Other Fees

 

There were no fees billed by TAAD for other services not described above for the years ended March 31, 2017 and 2016.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors

 

The BOD’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 BOD 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 BOD may also pre-approve particular services on a case-by-case basis. No services were approved by the BOD in accordance with Item 2-01(c)(7)(i)(C) of Regulation S-X.

 

The BOD has determined that the rendering of the services other than audit services by GKM is compatible with maintaining the principal accountant’s independence.

 

-52
 

 

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.

 

-53
 

 

PART IV

 

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.

 

-54
 

 

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.

 

AuraSource, Inc.  
             
Date: September 29, 2017     By:

/s/   PHILIP LIU

-----------------------------------------------------------

Name: Philip Liu

Title: Chief Executive Officer

 (Principal Executive Officer)

 

   
Date: September 29, 2017     By:

/s/   ERIC STOPPENHAGEN

-----------------------------------------------------------

Name: Eric Stoppenhagen

Title: Chief Financial Officer

 (Principal Financial and Accounting Officer)

   

 

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 SEC 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.

 

SIGNATURE   TITLE   DATE    

 

/s/   PHILIP LIU

------------------------------------

 Philip Liu

 

 

Chief Executive Officer

(Principal Executive Officer)

 

 

September 29, 2017

 

 

/s/   ERIC STOPPENHAGEN

------------------------------------

 Eric Stoppenhagen

 

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

 

September 29, 2017

 

 

/s/   PHILIP LIU

------------------------------------

 Philip Liu

 

 

Chairman

 

 

September 29, 2017

 

 

/s/ ERIC STOPPENHAGEN

-------------------------------------

Eric Stoppenhagen

 

 

Director

 

 

September 29, 2017

 
           

 

-55
 

 

 

  Index to Exhibits:

 

Exhibit Number   Description of Exhibit  
       
*3.1   Articles of Incorporation effective as of November 6, 1998  (incorporated herein by reference to Exhibit 3.1 of the Company’s Form 10SB12G filed December 21, 1999)  
*3.2