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.
AuraSource’s
Key Technology
We
believe our AuraCoal
TM
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:
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license
AuraCoal technology to international clients in applicable industries, such as coal producers, power plants and coal-gasification
plants;
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develop
strategic partnerships to deliver consulting services with respect to design, engineering, procurement and construction for
AuraCoal applications;
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enter
into joint ventures with coal producers to supply AuraCoal treated coal to power plants;
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process
coal using AuraCoal technology and sell such coal to end users at a marked-up price;
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assist
customers to convert their plants to AuraCoal rather than oil, gas or other natural resources in order to save energy costs;
and
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establish
centers for processing coal with our HCF technology to supply power plants, coal-gasification plants, and other customers.
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AuraCoal
TM
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.
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:
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reduce
harmful emissions and energy costs;
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reduce
and/or eliminate the need for scrubbers;
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reduce
a power plant’s need for related precipitators and/or sulfur acceptors; and
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enable
a power plant to effectively manage its carbon emissions.
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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.
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.
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.
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.
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.
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.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock,
which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our
common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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announcements
concerning our strategy;
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litigation;
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general
market conditions.
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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.
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:
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local
currency instability;
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inflation;
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the
risk of realizing economic currency exchange losses when transactions are completed in the Chinese RMB and other currencies;
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the
ability to repatriate earnings under existing exchange control laws; and
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political
unrest.
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Changes
in import and export laws and tariffs can also materially impact international operations. In addition, international
operations involve political, as well as economic risks, including:
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nationalization;
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expropriation;
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contract
renegotiations; and
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changes
in laws resulting from governmental changes.
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In
addition, we may be subject to rules and regulations of the PRC or the jurisdiction of other governmental agencies in the PRC
that may adversely affect our ability to perform under, or our rights and obligations in, our contracts with Chinese companies
or government entities. In the event of a dispute, we will likely be subject to the exclusive jurisdiction of foreign
courts. We may also be hindered or prevented from enforcing our rights with respect to a governmental instrumentality
because of the doctrine of sovereign immunity.
Adverse
changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic
growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position.
Some
or all of our sales may be made in China. Accordingly, our business, financial condition, results of operations and prospects
are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies
of most developed countries in many respects, including:
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the
amount of government involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign exchange; and
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the
allocation of resources.
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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.
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.
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.
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:
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cost-effectiveness
of HCF as compared with conventional and other alternative energy products and technologies;
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performance
and reliability of HCF as compared with conventional and other alternative energy products and technologies;
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capital
expenditures by customers that tend to decrease if the PRC or global economy slows down; and
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availability
of government subsidies and incentives.
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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.
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.
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.
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:
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actual
or anticipated fluctuations in our quarterly operating results;
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changes
in financial estimates by securities research analysts;
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conditions
in alternative energy and coal-based product markets;
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changes
in the economic performance or market valuations of other alternative energy and coal-based products companies;
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announcements
by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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intellectual
property litigation; and
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general
economic or political conditions in China.
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In
addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our stock.
We
may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution
to our shareholders.
We
may require additional cash resources due to changed business conditions or other future developments, including any investments
or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may
seek to sell equity or debt securities or obtain a credit facility. The sale of equity securities could result in dilution
to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result
in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations.
In general, pursuant to amended Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current
public information requirement (which disappears after one year). Affiliates may sell after six months subject to the Rule 144
volume, manner of sale (for equity securities), current public information and notice requirements.
We
will incur increased costs as a result of being a public company.
As
a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In
addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by SEC, has required changes in corporate governance
practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial
compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional
costs associated with our public company reporting requirements. We are currently evaluating and monitoring developments with
respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such
costs.