The accompanying notes are
an integral part of these consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes
are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
AND 2012
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
– VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) was founded
in July 1998 and is a renewable energy company with a global reach. Our renewable energy is based on biomass in particular
our license to a dedicated energy crop with the trademark “Giant King™ Grass” (“GKG”), which we
are able to commercialize throughout the world, except for the People’s Republic of China (“China”) and the
Republic of China (“Taiwan”), through a sublicense for Giant King Grass we obtained from VIASPACE Green Energy
Inc. (“VGE”).
GKG can be burned in 100% biomass power plants
to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power
plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation,
biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use corn or other food
sources as feedstock. GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide from the atmosphere
as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide
that was removed from the atmosphere, and so this process is carbon neutral. Small amounts of fossil fuel are used by the farm
equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon
dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy.
GKG has been independently tested by customers and been shown to have excellent energy content, high bio methane production, and
the cellulosic sugar content needed for biofuels and biochemicals.
Through September 30, 2012, VIASPACE owned
75.6% of the equity interests of VGE. VGE and its subsidiaries Inter Pacific Arts Corporation (“IPA BVI”) and Guangzhou
Inter Pacific Arts (“IPA China”) specialize in the manufacturing of high quality, copyrighted, framed artwork sold
in US retail chain stores. In addition, VGE has an exclusive license to Giant King Grass, a proprietary dedicated energy crop for
a period described in Note 10. On September 30, 2012, the Company executed agreements to formalize the separation of the Company
and VGE and cause the orderly transfer of all of the Company's equity interest in VGE to Changs, LLC, a company controlled by Sung
Chang, President of VGE and a former Director of the Company. In addition, agreements have been executed which give VGE the right
to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass
in the world other than China and Taiwan. Since the Company no longer has any equity interest in VGE, the Company can no longer
consolidate the operations of VGE into the operations of the Company. The operating results of VGE prior to September 30, 2012
are shown as discontinued operations in the Company’s financial statements.
Going Concern –
The
Company has incurred significant losses from operations, resulting in an accumulated deficit of $49,489,000. The Company
expects such losses to continue. However, on September 30, 2012, as discussed in Note 5, the Company entered into a Loan
Agreement with Dr. Kevin Schewe, a member of the Company’s Board of Directors, whereby Dr. Schewe agreed to fund the
Company up to $1,000,000 over the next five years in accordance with such agreement. The Company expects loans from Dr.
Schewe and revenue generated from future contracts using the sublicense it has for Giant King Grass to fund operations for
the foreseeable future. However no assurance can be given that Dr. Schewe will continue to fund the Company or that contracts
will be obtained in the future that will be profitable. Accordingly, there continues to be substantial doubt as to the
Company’s ability to continue as a going concern. The consolidated financial statements do not include any other
adjustments that might result from the outcome of these uncertainties.
Basis of Presentation
–
The accompanying audited consolidated financial statements of the Company were prepared in accordance with United States
generally accepted accounting principles (“US GAAP”) for financial information and with Securities and Exchange
Commission (“SEC”) instructions to Form 10-K. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated on
consolidation. Certain reclassifications were made to the December 31, 2012 consolidated financial statements to conform to
the December 31, 2013 consolidated financial statement presentation.
Principles of Consolidation
–
The Company is generally a major shareholder of its affiliated companies which are consolidated. The Company has no
affiliated companies which are consolidated at December 31, 2013. Any affiliated companies in which the Company owns,
directly or indirectly, a controlling voting interest, are consolidated. Under this method, an affiliated company’s
results of operations are reflected within the Company’s consolidated statement of operations. Transactions between the
Company and its consolidated affiliated companies are eliminated in consolidation. The Company adopted “Business
Combinations”, codified in FASB ASC Topic 805, which requires use of the purchase method for all business
combinations.
Noncontrolling Interest
- The
Company follows “Noncontrolling Interests in Consolidated Financial Statements, codified in FASB Accounting Standards Codification
(“ASC”) Topic 810 which establishes standards governing the accounting for and reporting of noncontrolling interests
(“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions
of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate
component of equity, not as a liability (as was previously the case); that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses;
and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in
a deficit balance. Noncontrolling interest in consolidated subsidiaries is the minority shareholders’ proportionate share
of equity of DMFCC and Ionfinity.
At January 1, 2012, the Company held ownership
positions in VGE, Direct Methanol Fuel Cell Corporation (“DMFCC”) and Ionfinity, LLC (“Ionfinity”). As
discussed in Note 2, the Company dissolved DMFCC on November 29, 2012 and sold its ownership position in Ionfinity on December
21, 2012. Additionally, on September 30, 2012, the Company entered into an agreement which resulted in the Company giving up its
ownership in VGE. At December 31, 2013 and 2012, the Company had NCI’s to report on its Balance Sheet.
Fiscal Year End –
The
Company’s fiscal year ends December 31.
Use of Estimates in the Preparation
of the Financial Statements
– The preparation of 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 financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents –
The
Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. The Company
had no cash equivalents as of December 31, 2013 or 2012.
Income Taxes
–
Income
taxes are accounted for under the asset and liability approach, where deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax
rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for uncertainty in income
taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position
for recognition by determining whether it is more likely than not that the position will be sustained on audit, including resolution
of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled on
completion of an examination by a taxing authority if certain other conditions are satisfied. Should the Company incur interest
and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense, net and other
income (expense), net, respectively.
Revenue Recognition
– The
Company has two revenue models for GKG: 1. grass plantation integrated with a power plant or processing facility such as a pellet
mill under company or joint venture control, and 2. contract plantation establishment, support and licensing for a customer
that owns and operates the plantation and power plant. During 2013 and 2012, the Company has not recognized revenues under either
of these revenue models.
With regard to revenue recognition in connection
with agreements that include multiple deliverables, management reviews the relevant terms of the agreements and determines whether
such deliverables should be accounted for as a single unit of accounting in accordance with FASB ASC 605-25, Multiple-Element Arrangements.
If it is determined that the items do not have stand-alone value, then such deliverables are accounted for as a single unit of
accounting and any payments received pursuant to such agreement, including any upfront or development milestone payments and any
payments received for support services, will be deferred and included in deferred revenue within our balance sheet until such time
as management can estimate when all of such deliverables will be delivered, if ever. Management reviews and reevaluates such conclusions
as each item in the arrangement is delivered and circumstances of the development arrangement change.
For the year ending December 31, 2013, revenue
includes amounts earned through consulting agreements and collaborative agreements for the joint operation of test plots to establish
that GKG grows well in the area and optimal agronomic practices are developed. Revenue earned from collaborative agreements is
comprised of negotiated payments for the operations of the test plots. Deferred revenue represents payments received which are
related to future performance.
Major Customers
– A
relatively small number of customers account for a significant percentage of the Company’s sales. Five customers
represented 93% of revenues for the year ending December 31, 2013.
Stock Based Compensation
–
VIASPACE has a stock-based compensation plan. The Company has adopted the accounting and disclosure provisions of
“Share-Based Payments”, codified in FASB ASC Topic 718, using the modified prospective application transition method. The
Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with
the provisions of FASB ASC Topic 505-50, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring,
or in Conjunction with Selling Goods or Services” and “Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other than Employees”. The measurement date for the fair value of the equity instruments
issued is determined at the earlier of: (i) the date at which a commitment for performance by the consultant or vendor is reached
or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued
to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance
with FASB ASC Topic 505-50, an asset acquired for the issuance of fully vested, non-forfeitable equity instruments should not be
presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting
purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for
future consulting services as prepaid expenses in its consolidated balance sheet.
Fair Value of Financial Instruments
–
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal
or most advantageous market in an orderly transaction between market participants at the measurement date.
Under the provisions of the Accounting Standards
Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), there are three levels of
inputs that may be used to measure fair value:
Level 1. Quoted prices in active
markets for identical assets or liabilities. The Company had no Level 1 assets or liabilities during any period presented.
Level 2. Observable inputs other
than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume
or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or
can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
The Company had no Level 2 assets or liabilities during any period presented.
Level 3. Unobservable inputs to
the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. The Company had no
Level 3 assets or liabilities during any period presented.
The carrying value of cash and cash equivalents,
prepaid expenses, trade payables and accrued expenses, payables to related parties and deferred revenue approximates fair value
due to the short period of time to maturity.
Net Income (Loss) Per Share
–
The
Company computes net loss per share in accordance with “Earnings per Share”, codified in FASB ASC Topic 260.
Under the provisions of this topic, basic and diluted net loss per share is computed by dividing the net loss available to
common shareholders for the period by the weighted average number of shares of common stock outstanding during the
period.
Research and Development
–
The Company did not record any research and development activities in 2013 or 2012. If we do in the future, it
will be expensed as incurred.
Recent Accounting Standards
-
There are currently no new accounting pronouncements with a future effective date that are of significance, or potential
significance, to us.
Subsequent Events –
Management
evaluates, as of each reporting period, events or transactions that occur after the balance sheet date through the date that
the financial statements are issued for either disclosure or adjustment to the consolidated financial results. The Company
has evaluated subsequent events up through the date of the filing of this report with the Securities and Exchange Commission.
See Note 11.
NOTE 2 – DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
– VGE
Recapitalization Agreement
Through September 30, 2012, VIASPACE owned
75.6% of the equity interests of VGE. Effective September 30, 2012, the Company entered into a Recapitalization Agreement (“Recap
Agreement”) with VGE. Pursuant to the Recap Agreement, the Company returned 6,503,920 shares of VGE Common Stock to VGE and
VGE issued to Changs, LLC, 8,384,320 shares of VGE common stock, representing an 80% interest in VGE. In exchange for the shares
of VGE common stock, Chang forgave the payment of the Secured Note issued to the Company in the amount of $5,131,000 plus accrued
interest of $626,000. The Company and Chang agreed that if the Company was to receive an amount from Chang pursuant to a future
claim, the Company could not collect unless the amount exceeded $5,640,000. In addition, the Company has agreed to pay up to $40,000,
in legal fees and costs in connection with the negotiation and preparation of the Recap Agreement and other related documents.
Loss on Discontinued Operations
Effective September 30, 2012, VIASPACE no longer
owns any equity interests in VGE and as a result, the operations of VGE were deconsolidated. As of September 30, 2012, we deconsolidated
$9,349,000 of assets and $705,000 of liabilities from our consolidated balance sheet. In addition, we eliminated debt and accrued
interest in the amount of $5,757,000 and recognized expense of $1,880,000 relating to the value of the additional stock issued
by VGE as part of the transaction, resulting in loss of $5,087,000. This loss as well as the revenues and expenses of VGE are included
in Discontinued Operations. The Company has historically reported the operations of VGE in the framed-art operating segment.
DISCONTINUED OPERATIONS
– DMFCC
As of December 31, 2011, the Company owned
71.4% of the outstanding shares of DMFCC. DMFCC was an inactive subsidiary that previously produced disposable fuel cartridges
that provided the energy source for portable electronics powered by fuel cells. On October 31, 2012, DMFCC entered into an Acknowledgment
and Mutual Release Agreement with the University of Southern California (USC) and California Institute of Technology (Caltech)
whereby DFMCC agreed to terminate the license agreements it had in place with USC and Caltech in exchange for Caltech and USC agreeing
to forgive any royalties, patent legal fees, or other amounts now due and owing from DMFCC under such license agreements. DMFCC
has no further obligations under the license agreements as of October 31, 2012 and no longer has rights under the license agreements
with USC and Caltech. As of September 30, 2012, DMFCC had accounts payable to USC of approximately $307,000 which was included
in the Company’s consolidate balance sheets. This amount was reversed on October 31, 2012 and is included in discontinued
operations on the Company’s consolidated statement of operations at December 31, 2012. Since DMFCC had no remaining operations
or assets remaining, DMFCC was formally dissolved on November 29, 2012.
DISCONTINUED OPERATIONS
– Ionfinity
At December 31, 2011, the Company owned 46.3%
of the outstanding membership interests of Ionfinity. Ionfinity was an inactive subsidiary that previously had US government contracts
for a next-generation mass spectrometry technology for industrial process control and environmental monitoring. On October
16, 2012, the Board of Directors of the Company approved a resolution to divest its ownership interests in Ionfinity. On December
31, 2012, the Company divested of its interest in Ionfinity and transferred its membership interests to the largest existing member
of Ionfinity LLC. The Company has no remaining interests or obligations in Ionfinity.
The revenues and expenses of discontinued operations
for year ended December 31, 2012 for VGE, DMFCC and Ionfinity were as follows:
|
|
VGE
|
|
|
DMFCC
|
|
|
Ionfinity
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
2,505,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,505,000
|
|
COST OF REVENUES
|
|
|
1,733,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,733,000
|
|
GROSS PROFIT
|
|
|
772,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
772,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
133,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
133,000
|
|
Selling, general and administrative
|
|
|
1,175,000
|
|
|
|
–
|
|
|
|
3,000
|
|
|
|
1,178,000
|
|
Total operating expenses
|
|
|
1,308,000
|
|
|
|
–
|
|
|
|
3,000
|
|
|
|
1,311,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(536,000
|
)
|
|
|
–
|
|
|
|
(3,000
|
)
|
|
|
(539,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(3,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(3,000
|
)
|
Other income
|
|
|
180,000
|
|
|
|
311,000
|
|
|
|
–
|
|
|
|
491,000
|
|
Total other income
|
|
|
177,000
|
|
|
|
311,000
|
|
|
|
–
|
|
|
|
488,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(359,000
|
)
|
|
|
311,000
|
|
|
|
(3,000
|
)
|
|
|
(51,000
|
)
|
Income taxes
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(359,000
|
)
|
|
$
|
311,000
|
|
|
$
|
(3,000
|
)
|
|
$
|
(51,000
|
)
|
Land use rights amortization included in discontinued
operations was $27,000 for the year ended December 31, 2012.
License to grass amortization included in discontinued
operations was $18,000 for the year ended December 31, 2012.
Rent expense included in discontinued operations
for the year ended December 31, 2012 was $24,000.
In connection with the Recap Agreement, all
parties involved including CEO Dr. Carl Kukkonen, CFO Stephen Muzi, Director Kevin Schewe and Former Director Sung Chang executed
a Mutual and Limited Release Agreement, pursuant to which each of the parties released each other from any future claims that may
have against the other party. Pursuant to this agreement, the amount that the Company owed to VGE at September 30, 2012, of $2,351,000
was forgiven. As such, the Company wrote the related payable off, which was accounted for as a capital contribution from VGE.
NOTE 3 – PREPAID EXPENSES
The Company has entered into agreements with
certain of its consultants and vendors whereby the Company issued registered shares of its common stock under an existing registration
statement on Form S-8 as well as unregistered shares of common stock in exchange for future services to be provided to the Company.
At December 31, 2013 and December 31, 2012, the remaining value of these agreements was $182,000 and $245,000, respectively, which
is included in prepaid expenses in the accompanying consolidated balance sheets.
The Company has engaged a third
party provider to pay certain expenses of the Company on behalf of the Company. As compensation for the payment of these
expenses on behalf of the Company, the Company pays the provider in shares of common stock equivalent to the expense paid
plus a fee equal to 15% of the expense paid. The Company issued 24,000,000 unregistered shares of the Company’s common
stock with a value of $281,000 in advance of the payments made by the provider. As of December 31, 2013 and 2012, included in
prepaid expenses is $161,000 and $114,000, respectively for shares of stock issued to the provider in excess of amounts paid
on the Company’s behalf. Other prepaid expenses were $51,000 and $42,000 at December 31, 2013 and 2012,
respectively.
NOTE 4 – STOCK OPTIONS, WARRANTS AND ISSUED STOCKS
VIASPACE Inc. 2005 Stock Incentive Plan
On October 20, 2005, the BOD of the Company
adopted the 2005 Stock Incentive Plan (the “Plan”) including the 2005 Non-Employee Director Option Program (the “2005
Director Plan”). The Plan was also approved by the holders of a majority of the Company’s common stock. The
Plan originally provided for issuance of up to 28,000,000 shares of the Company’s common stock. On July 12, 2006,
the Company filed a Form S-8 Registration Statement with the SEC registering 28,000,000 shares of the Company’s common stock. On
February 14, 2008, the BOD and the holders of a majority of the Company’s common stock approved an amendment to the Plan
which increased the maximum aggregate number of shares which may be issued in the Plan to 99,000,000 shares. On April
30, 2008, the Company filed a Registration Statement on Form S-8 registering 71,000,000 shares of the Company’s common stock. In
addition, effective January 1, 2009 and each January 1 thereafter during the term of the Plan, the maximum number of shares under
the Plan are to be increased so that the maximum number of shares is equivalent to 30% of the total number of shares of common
stock issued and outstanding as of the close of business on the immediately preceding December 31. On February 4, 2009,
the Company filed a Registration Statement on Form S-8 registering 146,500,000 shares of the Company’s common stock based
on the number of shares of common stock outstanding on December 31, 2008.
The Plan is designed to provide additional
incentive to employees, directors and consultants of the Company through awarding incentive stock options, non-statutory stock
options, stock appreciation rights, restricted stock and other awards. On February 13, 2006, the BOD approved the 2006
Non-Employee Director Option Program (the “2006 Director Plan”) replacing the 2005 Director Plan and the 2006 Director
Plan was approved by the holders of a majority of the Company’s common stock. The 2006 Director Plan awards a one-time grant
of 125,000 options, or such other number of options as determined by the BOD as plan administrator of the 2006 Director Plan, to
newly appointed outside members of the Company’s BOD and annual grants of 50,000 options, or such other number of options
as determined by the BOD, to outside members of the BOD that have served at least nine months.
The Company’s BOD administers the Plan,
selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise
price of each option. Stock options granted pursuant to the terms of the Plans generally cannot be granted with an exercise
price of less than 100% of the fair market value on the grant date. The term of the options granted under the Plan cannot
be greater than 10 years. Options to employees and directors generally vest over four years but the actual length of the vesting
term is determined by the BOD. At December 31, 2013, there were 24,870,002 shares available for future grant.
During 2013, the Company granted 7,000,000
stock options to directors and employees to purchase common shares. During 2013, 1,000,000 stock options were cancelled
due to consultants terminating employment or service with the Company.
FASB ASC Topic 718 requires the measurement
and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair
values using the modified prospective transition method. FASB ASC Topic requires companies to estimate the fair value
of share-based payment awards to employees and directors on the date of grant using an option pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite services periods on
a straight-line basis in the Company’s Consolidated Statements of Operations.
The Company adopted the detailed method provided
in FASB ASC Topic 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 upon the adoption
of FASB ASC Topic.
The fair value of each stock option granted
is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing
model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The
risk free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining
on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based
on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s
estimate as no options have been exercised in the Plan to date. The Company calculated a forfeiture rate for employees
and directors based on historical information. A forfeiture rate of 0% is used for options granted to consultants. The
fair value of each option grant to employees, directors and consultants is calculated by the Black-Scholes method and is recognized
as compensation expense on a straight-line basis over the vesting period of each stock option award. For stock options
issued to employees, directors, consultants and advisory board members for 2013 and 2012, the fair value was estimated at the date
of grant using the following range of assumptions:
|
|
2013
|
|
|
2012
|
|
Risk free interest rate
|
|
|
2.00% - 2.06%
|
|
|
|
0.99% - 1.40%
|
|
Dividends
|
|
|
0%
|
|
|
|
0%
|
|
Volatility factor
|
|
|
134.81% - 138.17%
|
|
|
|
124.48% - 134.79%
|
|
Expected life
|
|
|
6.67 years
|
|
|
|
6.67 years
|
|
Annual forfeiture rate
|
|
|
0%
|
|
|
|
34.4% - 35.2%
|
|
Employee and Director Option Grants
The following table summarizes activity for employees and directors
in the Company’s Plan at December 31, 2013:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2012
|
|
|
67,408,000
|
|
|
$
|
0.0131
|
|
|
|
|
|
|
|
Granted
|
|
|
7,000,000
|
|
|
|
0.0135
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,000,000
|
)
|
|
|
0.0076
|
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
|
|
73,408,000
|
|
|
$
|
0.0132
|
|
|
|
6.77
|
|
|
$
|
235,000
|
|
Exercisable at December 31, 2013
|
|
|
66,283,000
|
|
|
$
|
0.0132
|
|
|
|
6.59
|
|
|
$
|
230,000
|
|
The weighted-average grant date fair
value of stock options granted during 2013 and 2012 was $0.0135 and $0.004 per share, respectively. The Plan
recorded $20,000 and $86,000 of compensation expense for employee and director stock options for the years ending December
31, 2013 and 2012, respectively. At December 31, 2013, there was $78,000 of unrecognized compensation costs related to
non-vested share-based compensation arrangements under the Plan that is expected to be recognized over a weighted average
period of approximately one year and 9 months. For the years ending December 31, 2013 and 2012, the fair value of
options vested for employees and directors was $875,000 and $800,000, respectively. There were no options
exercised during 2013.
NOTE 5 –
SHORT-TERM AND LONG-TERM
DEBT
Loan Agreement with Dr. Kevin Schewe
Effective September 30, 2012, the Company entered
into a Loan Agreement with Director Kevin Schewe whereby Dr. Schewe agreed to loan up to $1 million to the Company over a five-year
period based on requests from the Company. The loans would be evidenced by a Secured Convertible Note. Each individual loan will
accrue interest at 6% per annum and are secured by all assets of the Company. Each note would mature on the second anniversary
of the issuance date of such note. Each note is convertible at Dr. Schewe’s request, into a fixed number of shares of the
Company’s common stock based on the closing price of the Company’s common stock for the twenty trading days prior to
the issuance of the loan, less a 20% discount. In connection with the separation from VGE as discussed in Note 2, Chang granted
Dr. Schewe an irrevocable proxy that permits him to vote the Preferred Share, giving him the majority shareholder vote. As the
controlling shareholder of the Company he has the ability to increase the number of authorized shares without additional shareholder
approval. As such, if the outstanding balance on the loan was convertible into more shares than the Company has authorized, he
has the ability to increase the authorized shares. As a result, the conversion feature is not deemed to be a derivative instrument
subject to bifurcation.
From January through December 2013, Dr. Schewe
made loans of $207,000 to the Company. The Company recorded a discount on the loans of $65,000 as a result of a beneficial conversion
feature, which will be amortized over the term of the note on a straight-line basis, which approximates the effective interest
method. During 2013, Dr. Schewe converted loans totaling $207,000 into 20,281,331 common shares of the Company. At the time of
the conversions, the company recorded the discount as additional interest expense. As of December 31, 2013, the Company had remaining
availability under the note of $658,000.
NOTE 6 – SHAREHOLDERS’ EQUITY
(DEFICIT)
Preferred Stock
At December 31, 2013 and 2012, the number of
authorized shares of the Company’s preferred stock was 10,000,000. The par value of the preferred stock is $0.001.
On May 14, 2010, the Company filed with the
Secretary of State of the State of Nevada a Certificate of Designation of Series A Preferred Stock. The Certificate was approved
by the Board and did not require shareholder vote.The Certificate created a new class of preferred stock known as Series
A Preferred Stock. There is one share designated as Series A Preferred Stock. One share of Series A Preferred Stock is entitled
to 50.1% of the outstanding votes on all shareholder voting matters. Series A Preferred Stock has no dividend rights and no rights
upon a liquidation event and is subject to cancellation when certain conditions are met. On May 14, 2010, the Company
issued one share of Series A Preferred Stock to Mr. Chang related to the acquisition of IPA by VIASPACE and VGE, effectively giving
him a controlling interest in VIASPACE.
Effective as of September 30, 2012, and pursuant
to an Agreement to Grant Voting Rights and Transfer Preferred Share executed by Chang and Director Kevin Schewe, Chang granted
Schewe an irrevocable proxy that permitted Schewe to vote the Preferred Share. This proxy lasts so long as the License (discussed
in Note 2) remained exclusive to the Company. Upon the earlier of (i) the expiration of five years or (ii) the date when the Company
reached a market capitalization of at least $50 million, the proxy would be cancelled as the Preferred Share would be transferred
from Chang to Schewe.
At December 31, 2013 and December 31, 2012,
there is one share of Series A Preferred Stock outstanding.
Common Stock
As of December 31, 2013, the number of authorized
shares of the Company’s common stock was 1,800,000,000. On December 31, 2013, a majority of the common stockholders of the
Company and the Board of Directors of the Company voted to amend the Company's Articles of Incorporation and increase the number
of shares of authorized common stock from 1,500,000,000 to 1,800,000,000 shares. The par value of the common stock is $0.001. Common
shareholders are entitled to one vote for each share held on all matters voted on by shareholders.
As of December 31, 2012, there were 1,433,366,223
shares of common stock outstanding. During 2013, the Company issued 9,125,000 shares of common stock under an existing Registration
Statement on Form S-8 to employees and consultants for services provided or to be provided to the Company. In addition, the Company
issued 28,232,686 unregistered shares of common stock to employees, consultants and vendors for services provided or to be provided
to the Company. These share issuances were recorded at $456,000 which is the fair market value determined by the price of the Company’s
common stock trading on the OTC Markets on the date of grant. During 2013, 1,672,241 shares of common stock were returned by a
vendor to the Company and cancelled. During 2013, the Company issued 20,281,331 shares of common stock to Director Kevin Schewe
as he converted loans into shares of common stock as allowed under an agreement he has with the Company as discussed in Note 5.
As of December 31, 2013, there were 1,489,332,999 shares of common stock outstanding.
NOTE 7 – INCOME TAX
The Company did not record a provision for
income taxes for 2013 or 2012 as a result of operating losses. The Company recorded valuation allowances to fully reserve
its deferred tax assets, as management believes it is more likely than not that these assets will not be realized.
The valuation allowance decreased by approximately $5,140,000 for the year ended December 31, 2013 and increased by $394,000 for
the year ended December 31, 2012. It is possible that management’s estimates as to the likelihood of realization of its
deferred tax assets could change as a result of changes in estimated operating results. Should management conclude
that it is more likely than not that these deferred tax assets are, at least in part, realizable, the valuation allowance will
be reduced and recognized as a deferred income tax benefit in the statement of operations in the period of change.
The Company has Federal net operating
loss carryovers of approximately $18,836,000 available at December 31, 2013 and State net operating loss carryovers of
approximately $18,755,000 available at December 31, 2013, which expire through 2033. Additionally, the Company has capital
loss carryforwards of approximately $13,231,000 available at December 31, 2013, which expire through 2017. Due to the
uncertainty surrounding the realization of the capital loss carryforwards in future tax returns, the tax effect of the
capital loss carryfowards is not recognized in the income tax provision.
FASB ASC 740 also addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification,
interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. During the years ended
December 31, 2013 and 2012, the Company did not recognize any tax liabilities related to uncertain tax positions and does not have
a balance for such liabilities as of December 31, 2013.
The Company recognizes accrued interest and
penalties, if any, associated with uncertain tax positions as part of the income tax provision. There was no accrued interest or
penalties associated with uncertain tax positions recognized in the Company’s balance sheets as of December 31, 2013 and
2012. The Company is subject to income tax in the United States federal jurisdiction and various state jurisdictions and has identified
its federal tax return and tax returns in state jurisdictions below as “major” tax filings. These jurisdictions, along
with the years still open to audit under the applicable statutes of limitation, are as follows:
Jurisdiction
|
|
Tax Years
|
Federal
|
|
2010 - 2012
|
California
|
|
2010 - 2012
|
The following table reconciles the US statutory
rates to the Company’s effective tax rate for 2013 and 2012.
|
|
2013
|
|
|
2012
|
|
U.S Statutory rates
|
|
|
34.0%
|
|
|
|
34.0%
|
|
State taxes, net of Federal benefit
|
|
|
5.8%
|
|
|
|
5.7%
|
|
Permanent differences
|
|
|
(0.1%
|
)
|
|
|
(0.4%
|
)
|
Change in Valuation allowance
|
|
|
(39.7%
|
)
|
|
|
(39.3%
|
)
|
Other
|
|
|
–
|
|
|
|
–
|
|
Effective income tax rate
|
|
|
0.0%
|
|
|
|
0.0%
|
|
The following are the components of the Company’s deferred
tax assets and liabilities at December 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,499,000
|
|
|
$
|
10,183,000
|
|
Stock compensation expense
|
|
|
4,002,000
|
|
|
|
3,995,000
|
|
Intangibles
|
|
|
–
|
|
|
|
2,176,000
|
|
Related party interest
|
|
|
–
|
|
|
|
287,000
|
|
Total Deferred Tax Assets
|
|
|
11,501,000
|
|
|
|
16,641,000
|
|
Less: Valuation allowance
|
|
|
(11,501,000
|
)
|
|
|
(16,641,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
–
|
|
|
$
|
–
|
|
NOTE 8 – NET LOSS PER SHARE
The Company computes net loss per share in
accordance with FASB ASC Topic 260. Under its provisions, basic loss per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings would customarily
include, if dilutive, potential shares of common stock issuable upon the exercise of stock options and warrants. The
dilutive effect of outstanding stock options and warrants is reflected in earnings per share in accordance with FASB ASC Topic
260 by application of the treasury stock method. For the periods presented, the computation of diluted loss per share
equaled basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings
per share calculation in the periods presented.
The following table sets forth common stock
equivalents (potential common stock) at December 31, 2013 and 2012 that are not included in the loss per share calculation since
their effect would be anti-dilutive for the periods indicated:
|
|
2013
|
|
|
2012
|
|
Stock Options
|
|
|
73,408,000
|
|
|
|
67,408,000
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the computation
of basic and diluted net loss per share for 2012 and 2012, respectively:
|
|
2013
|
|
|
2012
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to common stock
|
|
$
|
(699,000
|
)
|
|
$
|
(5,740,000
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
1,466,620,587
|
|
|
|
1,385,168,793
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock, basic and diluted
|
|
$
|
*
|
|
|
$
|
*
|
|
_______________
* Less than $0.01
NOTE 9 – RELATED PARTY TRANSACTIONS
Included in the Company’s consolidated
balance sheets at December 31, 2013 and December 31, 2012 are Related Party Payables. The Company has a payable of $680,000 at
December 31, 2013 and December 31, 2012. Included in the amount is $640,000 owed to Dr. Kukkonen, CEO of the Company. Of the amount
to Dr. Kukkonen, there is a cash component totaling $136,000 and a common stock component totaling $504,000. Dr. Kukkonen deferred
a portion of his 2009, 2010 and 2011 stock awards and is entitled to the following unregistered shares of Company common stock
at December 31, 2013: 11,195,707 shares for deferred 2009 compensation; 8,467,939 shares for deferred 2010 compensation; and 24,730,678
shares for deferred 2011 compensation.
Additionally, the Company has agreed to pay
VGE $40,000 as reimbursement for legal fees and costs in connection with the separation of the Company and VGE. This amount is
due by September 30, 2014.
The Company has a loan agreement with Director Dr. Kevin Schewe
which is described in Note 5.
On December 18, 2013, the Company entered into
a Representation in Pakistan and Giant King Grass Supply contract with Winergy Pakistan Private Limited (“Winergy”),
a company incorporated and existing under the laws of Pakistan. Mr. Khurram Irshad, a director of the Company, is a director and
shareholder of Winergy. Winergy was also appointed the exclusive representative of the Company in Pakistan. Winergy is developing
bioenergy and animal feed projects in Pakistan and seeking a biomass source. The Company's Giant King Grass will be supplied to
Winergy and a propagation nursery and test plot is to be established in Pakistan. Winergy will operate and pay the expenses for
a Giant King Grass propagation nursery and test plot in Pakistan. Winergy has agreed to pay a one-time fee of $5,000 to the Company
upon the signing of the contract. The Company will receive license fees in the future from Winergy when they are able to secure
customer relationships who will use the Company's Giant King Grass in their particular application.
NOTE 10 – OTHER COMMITMENTS AND CONTINGENCIES
Leases
The Company currently has no long term office
lease. The Company leases land in San Diego County, California where it grows Giant King Grass. Rent expense charged
to operations for the year ended December 31, 2013 and December 31, 2012, was $10,000 and $12,000, respectively.
Collaborative Agreements
We are a party to certain collaborative agreements
with various entities for the joint operation of test plots to establish that GKG grows well in the area and optimal agronomic
practices are developed. These agreements are in the form of development collaborations and licensing agreements. Under these agreements,
we have granted rights to grow and use of GKG. In return, we are entitled to receive certain payments for the operations of the
test plots and license fees on the harvesting of GKG should it ultimately be commercialized.
All of our collaborative agreements are subject
to termination by either party, without significant financial penalty to them. Under the terms of these agreements, upon a termination
we are entitled to reacquire all rights in our technology at no cost and are free to re-license the technology to other collaborative
partners.
Revenue earned from collaborative agreements
is comprised of negotiated payments for the establishment and operations of the test plots. Deferred revenue represents customer
payments received which are related to future performance. Generally for collaborative agreements establishing test plots, the
Company recognizes revenue only after the Giant King Grass is planted in the customer’s location. Until that time any money
received is recorded as deferred revenue. Once the planting is complete, the collaborative agreement payments are amortized over
a period of six and one-half months which represents the growing season of Giant King Grass. During the years ending December 31,
2013 and 2012, the Company received $71,000 and $72,000, respectively, in payments under these collaborative agreements. The payments
were deferred until the planting of the seedlings and then recorded as revenue through the date of the first harvest. The Company
recognized revenue from these collaborative agreements of $105,000 and $5,000 for the years ending December 31, 2013 and 2012,
respectively.
License Agreement
Effective of as September 30, 2012, VIASPACE
and VGE entered into a Supply, License and Commercialization Agreement (“License Agreement”) pursuant to which VGE
granted to VIASPACE a nontransferable, royalty-bearing exclusive license to commercialize Giant King Grass anywhere within the
world other than China and Taiwan. Additionally, the License Agreement allows VIASPACE to use the Giant King Grass intellectual
property and VIASPACE Green Energy trade name in connection with its efforts to commercialize Giant King Grass. The Company assigned
no value to the sublicense due to uncertainties of future revenues.
VIASPACE agreed that it would not during the
term of the License Agreement and a three-year period thereafter, (i) manufacture, commercialize or otherwise engage in any research
or development of a grass or any other product or material having similar or otherwise competitive properties to Giant King Grass.
VGE agreed to provide VIASPACE with Giant King
Grass seedlings that will be filled at an agreed upon price as set forth in the License Agreement. VIASPACE agreed to pay VGE for
and during the Term a royalty of eight percent (8%) on net sales made in its territory.
The initial term of the License Agreement is
for two years (“Initial Term”). As a condition to the right to renew after the first two-year term for an additional
two year term, VISPACE needs to achieve the milestones in the first two year period:
|
·
|
One or more fully-executed, third party sales contracts for the
sale of Giant King Grass shall have been entered into during the Initial Term, pursuant to which VIASPACE is to be paid an
aggregate amount of at least $200,000 within that 24 consecutive monthly period; and two or more, third party growing
locations of at least 10 hectares in total shall have been obtained and planted during the Initial Term. The Company expects
to meet the milestones by September 30, 2014 and renew the license for an additional two year term. However, there can be no assurance that the Company will meet the
milestones prior to the renewal date.
|
There are additional milestones that need to
be met as a condition to renew the license for subsequent two year periods, in order for VIASPACE to maintain the license.
Employment Agreements
Effective October 1, 2013, the Company entered
into one-year employment agreements with Carl Kukkonen and Stephen Muzi. Dr. Kukkonen serves as Chief Executive Officer of the
Company and Mr. Muzi serves as Chief Financial Officer, Treasurer and Secretary. Dr. Kukkonen will receive a salary of $164,800
per annum and Mr. Muzi would receive $61,800 per annum. Each of them would also be entitled to a bonus as determined by the Company’s
Board of Directors, customary insurance and health benefits, and reimbursement for out-of-pocket expenses in the course of his
employment. Additionally, Dr. Kukkonen is to receive 20 business days paid leave per year and Mr. Muzi is to receive 10 business
days paid leave.
Litigation
The Company is not party to any material legal
proceedings at the present time.
NOTE 11 – SUBSEQUENT EVENTS
On January 6, 2014, the Company issued 10,000,000
unregistered shares of the Company’s common stock with a value of $120,000 to a third party who pays certain expenses of
the Company on behalf of the Company.
On January 24, 2014, the Company issued 73,846
unregistered shares of the Company’s common stock with a value of $960 for consulting services.
On January 29, 2014, Kevin Schewe, advanced
an additional $12,000 pursuant to the convertible loan agreement and immediately converted the $12,000 loan into 1,188,119 shares
of Company common stock at a conversion price of $0.0101 per common share.
On February 26, 2014, Kevin Schewe, advanced
an additional $17,000 pursuant to the convertible loan agreement and immediately converted the $17,000 loan into 1,954,023 shares
of Company common stock at a conversion price of $0.0087 per common share.
On March 19, 2014, Kevin Schewe, advanced an
additional $17,000 pursuant to the convertible loan agreement and immediately converted the $17,000 loan into 1,789,474 shares
of Company common stock at a conversion price of $0.0095 per common share.