ITEM 1. BUSINESS
Overview
VIASPACE Green Energy Inc., a British Virgin
Islands (“BVI”) international business company (“we”, “us”, “VGE” or the “Company”)
is a renewable energy company. Our renewable energy is based on biomass -- in particular our dedicated energy crop with the trademarked
name “Giant King
®
Grass”. VGE is the parent company of Inter Pacific Arts Corporation, a BVI international
business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a People’s Republic of China (“PRC”)
company (“IPA China”). IPA China is a wholly-owned foreign enterprise headquartered in Guangdong province of China.
IPA BVI owns all equity interests of IPA China. IPA BVI and IPA China specialize in the manufacturing of high quality, copyrighted,
wall décor sold in US retail chain stores. IPA China also has a license for and produces Giant King Grass (“GKG”),
a proprietary dedicated energy crop, which 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. GKG
can also be used as animal feed. 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.
We are growing GKG on approximately 457
acres of leased land in China, which serves as a nursery to provide seedlings for large bioenergy projects, a demonstration plantation
for potential partners and customers to visit, to provide samples for testing by potential customers, and as a grass source for
our own pellet products.
The Company’s web site is
www.VIASPACEGreenEnergy.com
. Information
contained on, or accessible through, our website should not be deemed as part of this report.
Corporate History
VGE was formed on July 1, 2008. Prior to
October 21, 2008, VGE was 100% owned by VIASPACE Inc. (“VIASPACE”) and had no active operations. On October 21, 2008,
the majority shareholder of IPA BVI and IPA China, Sung Hsien Chang (“Chang”), entered into a Securities Purchase Agreement
(the "Purchase Agreement") with VGE, VIASPACE and China Gate Technology Co., Ltd., a Brunei Darussalam company ("China
Gate"). Under the Purchase Agreement, VGE acquired 100% of IPA BVI and the entire equity interest of IPA China from Chang.
In exchange, VIASPACE agreed to pay approximately $16 million in cash and newly issued shares of VIASPACE and VGE stock. In addition,
VIASPACE issued shares of its common stock to China Gate for China Gate’s sublicense of certain grass technology to IPA China.
On September 30, 2012, VIASPACE, VGE and Chang entered into a recapitalization agreement whereby VIASPACE returned the shares it
owned in VGE back to VGE, and VGE subsequently issued 8,384,320 shares to Changs, LLC, a limited liability company controlled by
Chang. These shares represented 80% of the outstanding shares of VGE. The shares were issued to Changs, LLC during the fourth quarter
of 2012. As of December 31, 2013 and 2012, Changs, LLC owned 80% of the outstanding shares of the Company.
VGE Becomes Public
Company
As required by the Purchase Agreement,
VGE filed a Registration Statement on Form S-1 with the Securities and Exchange Commission on June 3, 2009 covering the resale
of a portion of VGE common stock issued pursuant to the Purchase Agreement. The Securities and Exchange Commission declared
such Registration Statement effective as of December 31, 2009. On January 14, 2010, VGE received approval from the Financial
Industry Regulatory Authority (“FINRA”) that its shares of common stock were approved for quotation on the OTC Bulletin
Board under the ticker symbol VGREF.OB. The first day the Company’s common stock was traded on the OTCBB was November 8,
2010.
Our Business
Grass Business Division
The Company focuses on the commercialization
of GKG, a natural hybrid, non-genetically modified, fast-growing, perennial grass which we are growing as a dedicated energy crop.
GKG can be used to generate low carbon and renewable electricity by direct burning in a biomass power plant or it can be formed
into pellets that can replace a portion of the coal burned in existing power plants to reduce carbon emissions. GKG
may also be used to produce bio methane through anaerobic digestion and as a feedstock for non-food liquid biofuels such as
bio ethanol and bio butanol. It can also be used as a feedstock for biochemicals and bio plastics. This perennial grass can grow
up to 14 feet high. It can be harvested at least twice a year in tropical and semitropical areas with a yield of up to 375
metric tons per hectare.
GKG has been independently tested by multiple
potential customers. To our knowledge, the results have been very positive and consistent. GKG has an energy content of 18.4
megajoules (MJ) per dry kilogram. Its chemical and physical properties are very similar to corn straw, which is material left behind
from the corn plant after the ears of corn have been harvested. Corn straw is used as fuel in many biomass power plants, and a
leading international biomass power provider has declared GKG as suitable for their power plants. The bio methane production from
GKG has been tested in three customer laboratories and shows the outstanding production of 91 liters of methane per kilogram of
fresh grass. The methane can be used to generate clean electricity or can be burned to produce process heat. There are potentially
thousands of biogas plants worldwide that could use GKG. A large European electric utility has tested GKG and examined
prototype pellets. In addition to these current markets, GKG can be used as animal feed and has been tested for this purpose.
GKG can also be used as a feedstock
to make cellulosic biofuels such as bio ethanol, bio butane and green gasoline. Three companies have recently tested GKG as a
potential feedstock for producing biofuels, biochemicals and bio plastics through fermentation method. Laboratory results
from these tests show that GKG has almost identical composition including sugar content as corn straw or wheat straw
which are the agricultural waste products often targeted as a feedstock for cellulosic biofuels. The projected bio
ethanol yield is approximately 80 gallons per dry ton of GKG based on these tests.
Corn straw and wheat straw are the leftovers
after food production. This agricultural waste material can only be collected after the food is harvested which means that the
feedstock supply is very seasonal and must be stored for a long time--up to one year-- between harvests. To support
a single biofuel or power plant, agricultural waste must be collected from farms up to 50 or more miles away. Giant
King Grass is a high yield dedicated nonfood energy crop that can be harvested at any time in a tropical or subtropical climate.
If the biofuel or power plant is co-located with a GKG plantation, the collection radius will only be about 3 miles. The high yield
and logistical advantages mean that GKG can be grown and delivered to a co-located plant at a substantially lower price than currently
paid for agricultural waste. The largest operating cost of a biomass power plant or biofuels plant is the cost of the fuel or feedstock,
and the low cost and high quality of GKG are of major interest to these customers.
Energy pellets made from dried GKG can
be used as a replacement for coal in electricity generating power plants. The Company started selling GKG pellets to
customers in China in the fourth quarter of 2012. Reports by the U.S. Department of Energy state that 15% to 20% of coal may be
replaced by burning grass in an existing power plant with only minor modifications. This process, called co-firing, allows utilization
of the large capital investment in existing coal fired power plants while reducing carbon dioxide emissions by 15 to 20%. GKG and
other biomass have lower mercury, arsenic and sulfur emissions than coal.
Our strategy has been to build up our grass
production capabilities in China where we have 185 hectare (457 acres) under cultivation. This land serves as a small-scale demonstration
plantation and also allows us to provide samples to potential partners and customers. The harvested grass is used in our factory
to produce energy pellets. The location also has a nursery to provide seedlings for expansion.
Having a reliable source of feedstock is
critical for all energy users of biomass. Today, power plants and pellet mills use agricultural and forestry waste such as corn
straw, wheat straw, rice husks and wood waste as feedstock. Increasing demand for biomass has caused the price of this agricultural
and forestry waste to rise dramatically and in some places it is in short supply. Biomass supply issues have caused power plants
to become unprofitable, idle or abandoned. It is now well-recognized that dedicated energy crops such as GKG are necessary for
successful operation of biomass processing facilities.
Because of its high yield, GKG provides
feedstock with less use of land and we believe therefore lower costs compared to alternatives.
Another major advantage of GKG is that
it can be harvested at any time -- particularly in a tropical or subtropical area. If the climate permits, GKG can
be planted so that it matures continuously and allows just-in-time harvesting, allowing for a continuous source of feedstock.
Higher food prices have led to food shortages
around the globe. This argument has resonated with many world leaders and resulted in a global effort to derive biofuels
from plants that are not in the human food chain, called cellulosic biofuels, and include grass, shrubs and trees. These
plants do not contain a lot of sugar and cannot be fermented directly like corn. They do, however, have a lot of cellulose
in their leaves, stalks and branches which contain carbon and hydrogen which can then be converted into cellulosic ethanol. GKG
has been recently tested and shown to have potential for producing cellulosic biofuels, including ethanol, and for making biochemicals
and bio plastics using a fermentation process.
The Company has two revenue models for
GKG: first, grass plantation integrated with a power plant or processing facility such as a pellet mill under company or joint
venture control; and second, contract plantation establishment, support and licensing for a customer that owns and operates
the plantation and power plant.
In China, we are pursuing the
integrated plantation and processing facility model. We lease the land and employ labor and management to grow GKG and use it
to produce pellets in our factory. The grass is to be used to supply domestic Chinese biomass energy markets or exported in
pelletized form to energy markets globally. We will manage and control the supply chain from initial land preparation through
the FOB source shipment point for the feed or energy market. We may pursue this model using only our own capital resources,
or we may elect to use joint ventures with local landowners, energy equipment manufacturers, power plant owner/operators
and/or capital providers. The terms of these joint ventures will be negotiated on a case-by-case basis.
Under a contract plantation establishment
and licensing model, the customer would provide the land, labor and management and be responsible for growing GKG. We will provide
initial seedlings, crop management services and knowledge transfer for a negotiated price. In addition, there would
be an ongoing license fee based on grass production.
Management believes both models will be
important contributors to our revenue streams. We believe all our revenues initially will result from the integrated plantation
and end-user model. Rapid global expansion requires local joint venture partners that have land and labor, but lack the energy
crop and the expertise to grow it. The contract plantation establishment and licensing model with joint venture partners will be
used for most of these projects. The Company may also serve as developer for integrated Giant King Grass plantations
and bioenergy projects.
Framed Art Business Division
Our subsidiaries, IPA BVI and IPA China
(collectively “IPA”) manufacture high quality, copyrighted, framed artwork in its factory in Guangzhou, China, and
targets selling the art to large US retailers through its sales organization in Marietta, Georgia.
The factory is located on 1.6 hectares
of land in China including two manufacturing buildings, one employee dorm and a dining facility. IPA has an established and stable
production facility in China and a sales and distribution network in the United States.
We strategically acquired IPA for its
framed art revenue and profits, as well as the grass business. With the profits from the framed art business, we are
able to develop the grass business without having to access external capital. We are committed to growing the framed art
business by providing top-quality products at attractive prices for our customers.
The Company works with buyers from retail
chains and their in-house designers to choose prints and other art forms from catalogs of copyrighted and licensed work. We only
purchase prints from reputable publishing companies with whom we have long-standing relationships, and such companies have represented
to us that there are no counterfeits and that all royalties have been paid. We then create mockup versions of various
combinations of art, mattes and frames for our customer. Once the customer decides on a print, matte and frame combination,
we ship the prints to our factory in Guangzhou, China. The mattes, frame moldings and glass are sourced in China. A
typical order is 1,400 units of a specific design and a customer usually orders several different designs, which are then packed
in containers and shipped directly to the customer in the US. Our framed artwork typically retails for $50-$300.
Suppliers
We purchase raw materials such as
glass panes, mattes and prints for framed art business from third party vendors. We do not rely on any sole source
vendor. We believe such a multiple source supplier base allows us to utilize numerous vendors and obtain competitive prices
for our supplies and components, thereby reducing product costs while maintaining high quality.
Marketing
We deploy a targeted partner-customer approach
intended to establish key relationships with the appropriate decision makers in the home décor market. This approach also
includes invited presentations at industry workshops and conferences and participation at trade industry events.
We send e-mails to current and prospective
users and partners regularly that contain invitations to visit various pages or features on our websites. Our ongoing effort
to update our customer list is also an opportunity to build and reinforce the personal contacts that are critical in servicing
our customer’s needs.
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.
Competition
Framed Art Business
There are many framed art companies
that compete with IPA, including, for example, ICA Home Decor, Crown Arts, Wendover Art Group, Midwest Art and Frame,
and many more companies in the US, China and other countries. IPA benefits from having its own factory in China
and concentrates on large customers that typically order framed artwork by the container load with a typical order of 1,400
copies of a single design. IPA only manufactures art after an order is placed and generally does not stock finished goods
inventory, only raw materials inventories are maintained. IPA guarantees its customers that all art is legitimate with full
royalties paid, and that it will not sell the same product to another customer. IPA is able to control its expenses through
its relationships with suppliers of high quality frame moldings, mattes and glass in China and control quality by assembly at
its factory in China. We believe that these processes allow IPA's products to be sold at favorable prices in a competitive
environment.
Grass Business Division
Many companies, universities and research
laboratories worldwide are researching grass as a feedstock for cellulosic ethanol and other applications. Monsanto
is an example of a large company focusing on developing grass as a feedstock. Ceres is a group focusing on biomass and grass in
particular. Much of the competition is researching utilization of miscanthus or switchgrass. These grasses are suitable
for temperate areas. Much of the competition also is focused on selling seeds. GKG is a natural hybrid that is not genetically
modified or generally available, and to our knowledge no one else is growing GKG as a commercial crop. Based on publicly available
data on switchgrass and miscanthus, compared to our data on GKG, we believe that GKG has higher productivity than these and other
competing grasses. GKG is most suitable for tropical and subtropical areas, which are the focus of our efforts. Because
GKG is propagated by seedlings and not by seeds, it is not an invasive species. The Company is focusing on projects
involving growing the grass and securing long-term supply contracts for biofuel production, as a replacement for coal and electricity
generation, and as animal feed. With long-term supply contracts and joint ventures, we plan to capture these recurring
revenue streams. Other grasses such as alfalfa are suitable for animal feed and are also competitors of GKG in that market.
Dependence on a Few Major Customers
For 2013 and 2012, the Company had one
customer in our framed artwork business, which made up 96% and 93%, respectively, of our total revenues. We believe
this concentration of sales made to a small number of customers will continue in the near future. A loss of any customer
by the Company could significantly reduce our future revenues.
Intellectual Property
Grass License Agreements
On or about October 20, 2008, IPA China
entered into an agreement with China Gate whereby VGE purchased seedlings of GKG and other grasses from China Gate and the parties
agreed to assist each other in growing, developing and commercializing GKG. The agreement does not limit IPA China’s right
to grow, harvest and market the grass anywhere in the world. No term was specified in the agreement. To our knowledge, China Gate
has not entered into similar agreements with any other party.
On September 30, 2012, IPA China granted
to VGE a reciprocal worldwide license for GKG, not to exceed the rights IPA China had in GKG. Additionally on 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 everywhere
in 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.
VIASPACE agreed that it would not during
the term of the License Agreement and for a three-year period thereafter, 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.
In accordance with the License Agreement,
VGE will provide VIASPACE with Giant King Grass seedlings at an agreed upon price. Further, VIASPACE will pay VGE a royalty of
eight percent (8%) on net sales made in its territory. The initial term of the License Agreement is for two years, thereafter,
upon the achievement of certain milestones, VIASPACE has the right to renew the agreement for additional two-year terms.
Art License
We purchase the copyrighted artwork that
is placed into our picture frames from reputable publishers who pay the appropriate royalties to the artists. We have
long standing relationships with these are companies, and we believe that the risk of copyright infringement by the artwork we
sell is minimal.
Trademarks
The Company has registered United States
trademarks for “GREEN LOG
®
” and “GIANT KING
®
”.
Employees
As of December 31, 2013, we had 67 full
time employees, 64 of whom are based in China and three in the US. We also have 12 part time employees, 11 of whom are
based in China and one in the US. We believe that our relations with our employees are good. We have never had a work
stoppage, and our employees are not subject to a collective bargaining agreement.
Regulatory Issues
None.
ITEM 1A. RISK FACTORS
Our business is subject to a number
of risks. You should carefully consider the following risk factors, together with all of the other information included or
incorporated by reference in this report, before you decide whether to purchase our common stock. The risks set out below are
not the only risks we face. If any of the following risks occur, our business, financial condition and results of
operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you
may lose all or part of your investment. We wish to caution that the following important factors, among others, in some cases
have affected and in the future could affect our actual results and could cause such results to differ materially from those
expressed in forward-looking statements made by or on behalf of us.
Risks Related to Our Business
Our limited operating history makes
it difficult to evaluate our future prospects and results of operations.
We have a limited operating history. Our
consolidated affiliated entities, IPA BVI and IPA China, each commenced operations in the artwork business in 2003 and although
we have profit from our artwork business, we have yet to achieve net profitability from our grass business. Accordingly,
you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in the manufacturing
and agricultural industries in China. Some of these risks and uncertainties relate to our ability to:
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maintain or establish a competitive position and compete in each of our business segments with Chinese and international companies, many of which have longer operating histories and greater financial resources than we do, and thus making it difficult to compete;
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offer commercially successful products to attract and retain a larger base of customers of both of our artwork and grass business goods and products;
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retain access to the crop land we currently use for production of our products and obtain access to additional crop land for expansion;
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maintain effective control of our costs and expenses in the grass business due to our start-up nature and inexperience in managing growth; and
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retain our management, including our president Sung Hsien Chang, and skilled technical staff and recruit additional key employees.
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If we are unsuccessful in addressing any
of these risks and uncertainties, our business, financial condition and results of operations may be materially and adversely affected.
Our future growth prospects may be
affected if we are unable to obtain additional capital.
While we believe we have sufficient cash
for the next 12 months, we may require additional cash to grow our grass business. We may conduct additional debt or
equity financings to provide such capital. The sale or issuance of additional 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 may not be able to obtain financing in amounts or on terms acceptable
to us, if at all. We may also not be able to secure or repay debt incurred to fund operations. As a result, our operating results
and financial condition may be materially and adversely affected.
Any employee share options, restricted
shares or other share incentives we grant in the future may adversely affect our net income.
We adopted a 2009 share incentive plan
and reserved 1,400,000 shares of common stock for grant under the plan in June 2009. We are required to account for
share-based compensation in accordance with FASB ASC Topic 718, Share-Based Payment, which requires a company to recognize, as
an expense, the fair value of share options and other share-based compensation to employees based on the fair value of equity awards
on the date of the grant (taking into account the prices payable by the award recipients), with the compensation expense recognized
over the period in which the recipient is required to provide service in exchange for the equity award. There are 1,400,000
shares reserved for grant as options under the stock incentive plan at December 31, 2013. There are no stock options issued and
outstanding at December 31, 2013.
If we grant any additional options, restricted
shares or other equity incentives in the future, we could incur significant compensation charges equal to the fair value of the
additional options, restricted shares and other equity incentives (taking into account the prices payable by the award recipients)
and our net income could be adversely affected.
We are substantially dependent upon
our key personnel, particularly Sung Hsien Chang, our president.
Our performance is substantially dependent
on the performance of our executive officer Sung Hsien Chang. The loss of his services could adversely impact our day-to-day operations
and customer relationships.
We do not have “key person”
life insurance policies on any of our employees. The loss of the services of any of our executive officers or other key employees
could substantially impair our ability to successfully implement our business plan.
We rely on our management’s experience
in product development, business operations, sales and marketing, and on their relationships with distributors and relevant government
authorities. If one or more of our key management personnel are unable or unwilling to continue in their present positions, we
may not be able to replace them easily or at all. The loss of the services of our key management personnel, in the absence of suitable
replacements, could have a material adverse effect on our operations and financial condition, and we may incur additional expenses
to recruit and train personnel. Each member of our management team has entered into an employment agreement with us.
In 2012 we recorded an impairment
expense on goodwill, any further impairment in the carrying value of goodwill would negatively impact our consolidated results
of operations and net worth.
Goodwill is initially recorded at fair
value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present.
In assessing the carrying value of goodwill, we make estimates and assumptions about sales, operating margins, growth rates and
discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There
are inherent uncertainties related to these factors and management’s judgment in applying these factors. Our goodwill valuations
are calculated using an income approach based on the present value of future cash flows of each reporting unit and are believed
to reflect market participant views which would exist in an exit transaction. Under the income approach, we are required to make
various judgmental assumptions about appropriate discount rates. Disruptions in global credit and other financial markets and deterioration
of economic conditions, could, among other things, cause us to increase the discount rate used in the goodwill valuations. We could
be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience disruptions to the business,
unexpected significant declines in operating results, divestiture of a significant component of our business or sustained market
capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future,
which could be substantial.
As part of the Company’s annual impairment
review as of December 31, 2012, a $4,413,000 goodwill impairment charge was recorded in 2012 within the Company’s framed-artwork
reportable segment due to lower than expected revenue and operating income growth. No annual impairment charge was necessary in
2013. Goodwill was $602,000 at December 31, 2013 and 2012.
Goodwill represents 11.7% of total assets
at December 31, 2013.
We have limited insurance coverage
in China.
The insurance industry in China is still
at an early stage of development. Insurance companies in China offer limited insurance products. Other than automobile insurance
on certain vehicles and property and casualty insurance on some of our assets, we do not have insurance coverage on our other assets
or inventories and do not have insurance to cover our business or interruption of our business, litigation or product liability.
We determined the costs of insuring these risks and the difficulties associated with acquiring such insurance on commercially reasonable
terms make it impractical for us to have such insurance. Any uninsured occurrence of loss or damage to property, litigation or
business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect
on our operating results and financial condition.
We may not pay dividends.
We have not previously paid any cash dividends,
and we do not anticipate paying any dividends on our common stock. Our dividend policy is subject to the discretion of our board
of directors and will depend on, among other things, our earnings, financial condition, capital requirements and other factors.
Under BVI law, we may only pay dividends from profits or credit from the share premium account (the amount paid for shares over
par value), and we must be solvent before and after the dividend payment. If we determine to pay dividends on any of our common
stock in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries.
Risks Related to our Grass Business
Our agreement with China Gate does
not provide for any protection of the Giant King Grass intellectual property. If a party, which could include China Gate, disputes
our rights to, development or commercialization of GKG, our grass business may be severely limited or terminated.
We entered into an agreement with China
Gate to purchase seedlings of GKG and other grasses and to cooperate with China Gate to grow, develop and commercialize GKG in
China and North America. This agreement did not grant any specific rights to the GKG intellectual property, which we believe to
be owned by a third party from which China Gate acquired GKG; however, our agreement with China Gate does not restrict our right
to grow, develop or commercialize GKG. China Gate has orally informed us that they have an exclusive license to the GKG in Guangdong
province and North America and it has orally granted to us an exclusive sublicense in the same region. Our written and oral agreements
with China Gate have no term or notice provision and, therefore, can be terminated at any time without notice. However, because
we do not have a direct relationship with the owner of the intellectual property, any material adverse effect to the GKG license
held by China Gate would affect our rights as an oral sublicensee.
It is our understanding that the original
licensor is aware of our oral and written agreements with China Gate and has consented to them. However, because our license with
respect to GKG is oral, not in writing, a party, including China Gate or the original licensor, could challenge our right to grow,
develop or commercialize GKG. If we chose not to dispute any such challenge, our grass business may be severely limited or terminated.
If we elected to argue against any such challenge, we could expend significant resources and still not be assured that our grass
business would not be severely limited or terminated.
We could be subject to intellectual
property rights claims regarding the seedlings.
We are subject to the risk that the seedlings
we grow infringe or will infringe upon patents, copyrights, trademarks or other intellectual property rights held by third parties. We
acquired rights to grow GKG from a seller that we believe held such rights. If that party does not hold such rights, we may
be subject to legal proceedings and claims relating to the intellectual property of others. If any such claim arises
in the future, litigation or other dispute resolution proceedings may be necessary to retain our ability to offer our current and
future products, which could result in substantial costs and diversion of our management resources and attention even if we prevail
in contesting such claims. If we are found to have violated the intellectual property rights of others, we may be enjoined from
using such intellectual property rights, incur additional costs to license or develop alternative products and be forced to pay
fines and damages, any of which could materially and adversely affect our business and results of operations, or terminate our
grass business entirely.
We currently have few meaningful
customers for our grass business purchasing GKG pellets. If we are unable to maintain our existing customers or attract
new customers, our grass business will fail.
We commenced our grass business in October
2008 and only started recording revenues in the grass business in the fourth quarter of 2012. Grass sales were minimal
in 2013. While we believe we will be able to attract customers and achieve revenues, we cannot assure you we will. There
is no assurance that our potential customers will determine that using GKG for biomass or animal feed purposes will be commercially
viable. Further such customers may find other grass or plant products superior to GKG for their needs. If
we fail to attract a sufficient number of customers that purchase a sufficient amount of grass, our grass business will fail.
Natural or man-made disasters could
damage our crop production, which would cause us to suffer losses of production and a material reduction of revenues.
We produce GKG in the Guangdong province
of China. This grass is subject to the risks associated with growing crops, including natural disasters such as drought,
pestilence, plant diseases and insect infestations, and man-made disasters such as environmental contamination. Other man-made
incidents may damage our products, such as arson or other acts that may adversely affect our grass inventory in the winter storage
season. Furthermore, natural or man-made disasters may cause farmers to migrate from the farmland, which would decrease
the number of end users of our products. We are particularly susceptible to disasters or other incidents in the Guangdong province,
where we have the greatest concentration of our operations. In the event of a widespread failure of our grass, we could likely
sustain substantial loss of revenues and suffer substantial operating losses. We do not have insurance to protect against such
a risk and we are not aware of the availability of any such insurance in China.
Our growth prospects may be materially
and adversely affected if we are unable to develop or acquire new products or to produce our existing products in sufficient quantities.
We believe the future growth of our company
will depend on the value of our grass business for biofuel, power plant, or animal feed purposes. The ability to obtain
orders from customers, if at all, is uncertain due to several factors, many of which are beyond our control. These include changing
customer preferences, competitive price pressures, the failure to adapt products to meet the evolving demands of customers in China,
the development of higher-quality products by our competitors, and general economic conditions. If we are unable to develop or
acquire additional products that meet the demands of our customers, if our competitors develop products that are favored by our
customers in China, or if we are unable to produce our existing products in sufficient quantities, our growth prospects may be
materially and adversely affected and our revenues and profitability may decline or never develop.
Our plans to increase production
capacity in the grass business and expand into new markets may not be successful, which could adversely affect our operating results.
Our plans to develop our grass business
and its production capacity has placed and will continue to place, substantial demands on our managerial, operational, technological
and other resources. We are addressing three markets for GKG: pellets for producing heat and steam; fuel to burn in electricity
generating power plants; and animal feed. We are also reviewing opportunities to grow grass in other areas of China and Taiwan. These
represent growth opportunities for the company, but also represent a potential risk in losing focus and diverting management attention.
If we fail to establish and manage the growth of our product offerings, operations and distribution channels effectively and efficiently
in such business, we could suffer a material and adverse effect on our operations and our ability to capitalize on new business
opportunities, either of which could materially and adversely affect our operating results.
We will need to develop new sales channels
into the agricultural pellet, electric power plant, and animal feed markets. Expansion into new markets may present operating and
marketing challenges. If we are unable to anticipate the changing demands that expanding operations will impose on our production
systems and distribution channels, or if we fail to develop our production systems and distribution channels to meet the demand,
we could experience an increase in expenses and our results of operations could be adversely affected.
Our financial results are sensitive
to fluctuations in market prices of the products that we offer.
The profitability of our operations is
affected by the selling prices of our products. We intend to benchmark the prices of our grass against the prevailing domestic
market prices of grass of similar quality and attributes, and set the prices accordingly. Historically, prices of grass and other
agricultural products in China have been volatile, primarily due to fluctuations in supply and demand. If the prices for such
products decline in the future, and we are unable sell more products and/or reduce our cost of sales, our revenues will decrease
and our profitability will be adversely affected.
The Chinese agricultural market is
highly competitive and our growth and results of operations may be adversely affected if we are unable to compete effectively.
The agricultural market in China
is highly fragmented, largely regional and competitive and we expect competition to increase and intensify within the sector.
We face significant competition in our grass business. Many of our competitors have greater financial, research
and development and other resources than we have. Competition may also develop from consolidation or other market forces
within the grass industry in China. Because our licensor has no restrictions outside of Guangdong province and North America,
we have no means to restrict our licensor from selling GKG to third parties throughout the rest of the world. Although we
believe we are the only business that will grow a significant amount of GKG sufficient to support biomass related power
plants in China, we have no assurance this is the case. Other growers of GKG could potentially compete with us. In addition,
our competitors may develop other types of grasses that are superior to GKG and more favored by our potential
customers. Our business could be materially and adversely affected by such competition.
Our competitors may be better able to take
advantage of industry consolidation and acquisition opportunities than we are. In China, the reform and restructuring of state-owned
equity in agricultural enterprises could likely lead to the reallocation of market share in the grass industry, and our competitors
may increase their market share by participating in the restructuring of the state-owned seed companies. Such privatization would
likely mean that these producers will need to develop more efficient and commercially viable business models in order to survive.
In addition, the PRC government currently restricts foreign ownership of any domestic agricultural development and production business
to no more than 50% unless otherwise approved by the PRC government. When and if such restrictions are lifted, multinational corporations
engaged in the seed business may expand into the agricultural market in China. These companies have significantly greater financial,
technological and other resources than we do and may become our major competitors in China. As competition intensifies, our margins
may be compressed by more competitive pricing in the short term and may continue to be compressed in the long term and we may lose
our market share and experience a reduction in our revenues and profit.
If we are unable to estimate customers’
future needs accurately and to match our production to the demand of our direct customers, our business, financial condition and
results of operations may be materially and adversely affected.
Due to the nature of the grass industry,
we normally grow according to our production plan before we sell and deliver grass to distributors and our direct customers. The
potential end users of our grass, such as biofuel providers and livestock owners, generally make purchasing decisions for our products
based on market prices, economic and weather conditions and other factors that we may not be able to anticipate accurately
in advance. If we fail to accurately estimate the volume and types of products sought by our customers, we may produce more grass
that is in demand by our distributors resulting in aged crops. In the event we decide not to sell the crop due to our concerns
about the quality, the aged inventory could eventually be sold at greatly reduced prices. Aged inventory could result in asset
impairment, in which case we would suffer a loss and incur an increase in our operating expenses. On the other hand, if we underestimate
demand, we may not able to satisfy our customers’ demand for grass, and thus damage our customer relations and end-user loyalty.
Our failure to estimate our customers’ future needs and to match our production to the demand of our direct customers may
materially and adversely affect our business, financial condition and results of operations.
Grass prices and sales volumes may
decrease in any given year with a corresponding reduction in sales, margins and profitability.
There may be periods of instability during
which commodity prices and sales volumes may fluctuate greatly. Commodities can be affected by general economic conditions, weather,
disease outbreaks and factors affecting demand, such as availability of financing and competition. Our attempts to differentiate
our products from those of other grass producers have not prevented the grass market from having the characteristics of a commodity
market. As a result, the price we are able to demand for our grass is dependent on the size of the supply of our grass and the
grass of other producers. Therefore, the potential exists for fluctuation in supply, and consequently in price, in our own markets,
even in the absence of significant external events that might cause volatility. As a result, the amount of revenue that we receive
in any given year is subject to change. As production levels are determined prior to the time that the volume and the market price
for orders is known, we may have too much or too little product available, which may materially and adversely affect our revenues,
margins and profitability.
Risks Related to our Framed Art Business
We are heavily dependent on one
major customer for our revenues
For 2013 and 2012, sales to one customer
comprised 96% and 93%, respectively, of our total revenues. We believe this concentration of sales to one customer will continue
in the near future. We do not have a long-term contract with this customer. A loss of this customer or even a dramatic reduction
in sales could significantly reduce our future revenues and profitability.
Failure of our internal controls
over financial reporting could harm our business and financial results.
Our management is responsible for establishing
and maintaining effective internal control over financial reporting. Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States. Because of its inherent limitations, internal control
over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial
statements or fraud. Our growth could place significant additional pressure on our system of internal control over financial
reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our
ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial
reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and
decline in the market price of our common stock.
We may not be able to compete with
existing or potential competitors in our framed art business
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The visual content and art framing businesses
are highly competitive. We believe competitive factors include quality of images, branding, reputation, service, breadth of content,
depth of content, technology, pricing, and sales and marketing. Overall, many of our competitors are significantly larger,
have far greater resources, a notably larger customer base, a far greater content provider base, significantly more technology
infrastructure, and more well-recognized names in the marketplace than we do, all of which may make it difficult for us to compete
effectively.
We rely on outside content providers;
therefore, our revenues will be materially and adversely affected without adequate supply of content.
We rely on outside sources to provide us
visual content for our artwork, which we aggregate and make available to our customers. Although we work with entities we believe
are reputable vendors, we cannot assure you such outside content provider will have the resources or personnel to provide us with
content and artwork that is attractive to potential customers. If we are not able to acquire quality content in sufficient quantities
that are favored by our customers, our revenue will be materially and adversely affected.
We may be subject to intellectual
property rights claims or other claims in the future which could result in substantial costs and diversion of our financial and
management resources away from our business.
We are subject to the risk that the
products, technology and processes we license infringe or will infringe upon patents, copyrights, trademarks or other
intellectual property rights held by third parties. We purchase copyrighted artwork prints from reputable
publishers that have license agreements with the copyright holders. These publishers will indemnify us in the event
that an infringement action occurs. We may be subject to legal proceedings and claims relating to the intellectual
property of others. If any such claim arises in the future, litigation or other dispute resolution proceedings may be
necessary to retain our ability to offer our current and future products, which could result in substantial costs and
diversion of our management resources and attention even if we prevail in contesting such claims. If we are found to have
violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, incur
additional costs to license or develop alternative products and be forced to pay fines and damages, any of which could
materially and adversely affect our business and results of operations, or terminate our grass business entirely.
Our failure to protect our intellectual
property rights may undermine our competitive position, and legal action to protect our intellectual property rights may be costly
and divert our management resources.
We rely primarily on trademark law, and
other contractual restrictions to protect our intellectual property. We also rely on China Gate and its licensor to
protect our licensed intellectual properties. These afford only limited protection and the actions we take to protect
our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our licensed proprietary technologies
or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating
results. Preventing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary
to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights
of others. There is a risk the outcome of such potential litigation will not be in our favor. Such litigation may be costly and
may divert management attention as well as expend other resources which could otherwise have been devoted to our business. An adverse
determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation.
In addition, we have no insurance coverage against litigation costs and would have to bear all costs arising from such litigation
to the extent we are unable to recover them from other parties. The occurrence of any of the foregoing may have a material adverse
effect on our business, results of operations and financial condition.
Historically, implementation of PRC intellectual
property-related laws has been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly,
intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other
countries, which increases the risk that we may not be able to adequately protect our intellectual property.
We may not possess all the licenses
required to operate our business, or may fail to maintain the licenses we currently hold. This could subject us to fines and other
penalties, which could have a material adverse effect on our results of operations.
We are required to hold a variety of permits
and licenses to conduct our framed art and grass businesses in China. To our knowledge, we hold all the permits and licenses required
for each of our business segments, however, we cannot assure you we possess all the permits and licenses required for each of our
business segments. In addition, there may be circumstances under which the approvals, permits or licenses granted by the governmental
agencies are subject to change without substantial advance notice, and it is possible we could fail to obtain the approvals, permits
or licenses required to expand our business as we intend. If we fail to obtain or to maintain such permits or licenses or renewals
are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality
of the products that we would be able to offer. As a result, our business, result of operations and financial condition could be
materially and adversely affected.
We may be subject to product quality
or liability claims, which may cause us to incur litigation expenses and to devote significant management time to defending such
claims and, if determined adversely to us, could require us to pay significant damage awards.
Although we are not subject to any claims
now, we may be subject to legal proceedings and claims from time to time relating to, among other things, our products in the future.
The defense of these proceedings and claims could be costly and time-consuming and significantly divert the efforts
and resources of our management personnel. An adverse determination in any such proceedings could subject us to significant liability.
In addition, any such proceeding, even if ultimately determined in our favor, could damage our market reputation and prevent us
from maintaining or increasing sales and market share. Protracted litigation could also result in our customers or potential customers
deferring or limiting their purchase of our products.
Risks Related to Doing Business in China
PRC laws and regulations governing
our businesses are uncertain. If we are found to be in violation, we could be subject to sanctions. In addition, changes in such
PRC laws and regulations may materially and adversely affect our business.
The PRC government has broad discretion
in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring
actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental bodies may
be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing or new PRC
laws or regulations on our businesses. We cannot assure you our current ownership and operating structure would not be found in
violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including fines, and could
be required to restructure our operations or cease to provide certain services. Any of these or similar actions could significantly
disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially
and adversely affect our business, financial condition and results of operations.
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 adversely affect our competitive position.
We conduct substantially all of our operations
and generate most of our revenues in China. Accordingly, our business, financial condition, results of operations and prospects
are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of
most developed countries in many respects, including:
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the higher level of government involvement;
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the early stage of development of the market-oriented sector of the economy;
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the higher level of control over foreign exchange; and
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the allocation of resources.
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While the PRC economy has grown significantly
since the late 1970s, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government
has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit
the overall PRC economy, but may also have a negative effect on our business. 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 PRC economy has been transitioning
from a planned to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing
the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic
growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy and imposing policies that impact particular industries or companies in different ways.
Uncertainties with respect to the
PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business
through our operating subsidiary in the PRC, IPA China, which is a wholly foreign owned enterprise in China. IPA China is generally
subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited
precedential value. Since 1979, a series of new PRC laws and regulations has 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 involve uncertainties, which may limit legal protections available to you and us. In addition,
any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
China’s economic policies could affect our business.
A substantial portion of our assets are
located in China and a significant portion of our revenue is derived from our operations in China. Accordingly, our results of
operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China. While
China’s economy has experienced significant growth in the past twenty years, such growth has been uneven, both geographically
and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the overall economy of the PRC, but they may also have a
negative effect on us. For example, our operating results and financial condition may be adversely affected by the government control
over capital investments or changes in tax regulations. The economy of the PRC has been changing from a planned economy to a more
market-oriented economy. In recent years, the Chinese government has implemented measures emphasizing the utilization of market
forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance
in business enterprises. However, a substantial portion of productive assets in the PRC are still owned by the Chinese government.
In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial
policies. It also exercises significant control over the PRC’s economic growth through the allocation of resources, the control
of payment of foreign currency-denominated obligations, the setting of monetary policy and the provision of preferential treatment
to particular industries or companies.
Restrictions on currency exchange
may limit our ability to receive and use our revenues effectively.
Most of our revenues and expenses are denominated
in Renminbi. Under PRC law, the Renminbi is currently convertible under the “current account,” which includes dividends
and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign
direct investment and loans. Currently, IPA China may purchase foreign currencies for settlement of current account transactions,
including payments of dividends to us, without the approval of the State Administration of Foreign Exchange (“SAFE”),
by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our
ability to purchase foreign currencies in the future. Since a significant amount of our future revenues will be denominated in
Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi
to fund our business activities outside China that are denominated in foreign currencies.
Foreign exchange transactions by IPA China
under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to
register with PRC government authorities, including SAFE. In particular, if IPA China borrows foreign currency through loans from
us or other foreign lenders, these loans must be registered with SAFE, and if we finance IPA China by means of additional capital
contributions, these capital contributions must be approved by certain government authorities, including the National Development
and Reform Commission, or the NDRC, the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations
could affect IPA China’s ability to obtain foreign exchange through debt or equity financing.
Recent PRC regulations relating to
the establishment of offshore special purpose vehicles by PRC residents, if applied to us, may subject the PRC resident shareholders
of us or our parent company to personal liability and limit our ability to acquire PRC companies or to inject capital into our
PRC subsidiary, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect
us.
In October 2005, the SAFE issued a public
notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose
Companies by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural
persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China, referred
to as an “offshore special purpose company,” for the purpose of overseas equity financing involving onshore assets
or equity interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company
is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in
connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any
security interest over any assets located in China. Moreover, if the offshore special purpose company was established and owned
the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required
to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make
the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special
purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result
in liability under PRC laws for evasion of applicable foreign exchange restrictions.
Due to lack of official interpretation,
some of the terms and provisions in the SAFE notice remain unclear and implementation by central SAFE and local SAFE branches of
the SAFE notice has been inconsistent since its adoption. Because of uncertainty over how the SAFE notice will be interpreted and
implemented, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective
PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated
borrowings, may be subject to compliance with the SAFE notice by our or our parent company’s PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required by the SAFE notice.
We also have little control over either our present or prospective direct or indirect shareholders or the outcome of such registration
procedures. A failure by our PRC resident beneficial holders or future PRC resident shareholders to comply with the SAFE notice,
if SAFE requires it, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities,
limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which could adversely
affect our business and prospects.
The Chinese government could change
its policies toward private enterprise or even nationalize or expropriate private enterprises, which could result in the total
loss of our investment in that country.
Our business is subject to significant
political and economic uncertainties and may be adversely affected by political, economic and social developments in China. Over
the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may significantly
alter them to our detriment from time to time with little, if any, prior notice.
Changes in policies, laws and regulations
or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions
on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business. Nationalization or expropriation could even result in the total loss of our
investment in China and in the total loss of your investment in us.
Shareholder rights under British
Virgin Islands law may differ materially from shareholder rights in the United States, which could adversely affect the ability
of us and our shareholders to protect our and their interests.
Our corporate affairs are governed by our
amended and restated memorandum and articles of association, by the Business Companies Act (No 16 of 2004) and the common law of
the BVI. The rights of shareholders to take action against the directors, actions by minority shareholders, and the fiduciary responsibilities
of our directors to us under BVI law are to a large extent governed by the common law of the BVI. The common law in the BVI is
derived in part from comparatively limited judicial precedent in the BVI as well as from English common law, the decisions of whose
courts are of persuasive authority but are not binding on a court in the BVI. The rights of our shareholders and the fiduciary
responsibilities of our directors under BVI law in this area may not be as clearly established as they would be under statutes
or judicial precedent in existence in some jurisdictions in the United States. In particular, the BVI has a less developed body
of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate laws. Moreover, our company could be involved in a corporate combination in which dissenting shareholders
would have no rights comparable to appraisal rights which would otherwise ordinarily be available to dissenting shareholders of
United States corporations. Also, we are not aware of a significant number of reported class actions or derivative actions having
been brought in BVI courts. Such actions are ordinarily available in respect of United States corporations in US courts. Finally,
BVI companies may not have standing to initiate shareholder derivative action before the federal courts of the United States. As
a result, our public shareholders may face different considerations in protecting their interests in actions against the management,
directors or our controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United
States, and our ability to protect our interests may be limited if we are harmed in a manner that would otherwise enable us to
sue in a United States federal court.
As we are a British Virgin Islands
company and most of our assets are outside the United States, it will be extremely difficult to acquire jurisdiction and enforce
liabilities against us and our officers, directors and assets based in China.
We are a BVI international business company,
and our corporate affairs are governed by our Memorandum and Articles of Association and by the BVI Business Companies Act (No
16 of 2004) and other applicable BVI laws. Certain of our directors and officers primarily reside outside of the United States.
In addition, the Company’s assets will be located outside the United States although we do sell our products into the United
States. As a result, it may be difficult or impossible to effect service of process within the United States upon our directors
or officers and our subsidiaries, or enforce against any of them court judgments obtained in United States’ courts, including
judgments relating to United States federal securities laws. In addition, there is uncertainty as to whether the courts of the
BVI and of other offshore jurisdictions would recognize or enforce judgments of United States’ courts obtained against us
predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent
to hear original actions brought in the BVI or other offshore jurisdictions predicated upon the securities laws of the United States
or any state thereof. Furthermore, because the majority of our assets are located in China, it would also be extremely difficult
to access those assets to satisfy an award entered against us in United States court.
The laws of the British Virgin Islands
provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders
are dissatisfied with the conduct of the affairs of our company.
Under the laws of the BVI, there is some
statutory law for the protection of minority shareholders under the Act. The principal protection under statutory law is that shareholders
may bring an action to enforce our Amended and Restated Memorandum and Articles of Association. The Act sets forth the procedure
to bring such a claim. Shareholders are entitled to have the affairs of the company conducted in accordance with the general law
and the Amended and Restated Memorandum and Amended and Restated Articles of Association. Companies are not obligated to appoint
an independent auditor and shareholders are not entitled to receive the audited financial statements of the company.
There are common law rights for the protection
of shareholders that may be invoked (such rights have also now been given statutory footing under the Act), largely dependent on
English company law, since the common law of the BVI for business companies is limited. Under the general rule pursuant to English
company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company
at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company’s affairs
by the majority of the board of directors. However, every shareholder is entitled to have the affairs of the company conducted
properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s memorandum or articles of association, then
the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (i) an act complained
of which is outside the scope of the authorized business or is illegal or not capable of ratification by the majority, (ii) acts
that constitute fraud on the minority where the wrongdoers control the company, (iii) acts that infringe on the personal rights
of the shareholders, such as the right to vote, and (iv) where the company has not complied with provisions requiring approval
of a special or extraordinary majority of shareholders, which are more limited than the rights afforded minority shareholders under
the laws of many states in the US.
Risks Related To An Investment In Our
Stock
There may not be an active, liquid
trading market for our common stock.
Our common stock is quoted for trading
on the OTC Bulletin Board. The first public trading in our Company stock began on November 8, 2010. There
is no active liquid market for our shares and there is no guarantee of an active trading market in the future.
The market price for our common stock
may be volatile, which could result in substantial losses to investors.
The market price for our common stock is
likely to 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 the Chinese energy and livestock
industries;
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changes in the Chinese economy;
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announcements by our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital commitments;
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additions or departures of key personnel;
or
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potential litigation.
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In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular
companies. As a result, to the extent shareholders sell our common stock in negative market fluctuation, they may not receive a
price per share that is based solely upon our business performance. We cannot guarantee that shareholders will not lose some or
all of their investment in our common stock.
Future sales of our common stock
may depress our share price.
The market price of our common stock
could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these
sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of
equity. There were 8,600,000 shares of common stock registered for resale to the public by certain of our current
shareholders pursuant to our Form S-1 Registration Statement declared effective by the Securities and Exchange Commission
(“SEC”) on December 31, 2009. All of the shares of common stock registered for resale pursuant to such
registration statement are freely transferable without restriction or further registration under the Securities Act, except
for any shares sold by our “affiliates,” as defined in Rule 144 of the Securities Act. At December 31, 2013, the
Company had 606,680 common shares that are unrestricted securities and freely-tradeable. The remaining 9,873,720 issued and
outstanding shares of our common stock are “restricted securities” as defined in Rule 144. These shares may be
sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions
under the Securities Act. We have also registered, on a Form S-8 registration statement, 1,400,000 shares of common stock
which may be sold upon the exercise of options that may be granted under the VIASPACE Green Energy Inc. 2009 Stock Incentive
Plan. There are no stock options issued and outstanding at December 31, 2013. If future options are granted and
later exercised and resold under this registration statement, such sales could have a further depressing effect on the share
price of our common stock.
Changs, LLC controls a majority of
our common stock, decreasing your influence on shareholder decisions.
Our major shareholder is Changs, LLC, a
limited liability company controlled by our president Sung Hsien Chang, which held 8,384,320 shares of common stock at December
31, 2013, or approximately 80% of our outstanding shares of common stock. A party related to our president Sung Hsien
Chang owns 400,000 shares of common stock. This concentration of ownership and voting power may also discourage, delay
or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for
their shares as part of a sale of our company and might reduce the price of our common stock. These actions may be taken even if
they are opposed by our other shareholders, including those who purchase shares in the Company. See “Principal Shareholders.”