viaspace_10k-123110.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|
x
|
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
| |
|
| |
For the fiscal year ended December 31, 2010
|
| |
|
| |
OR
|
| |
|
|
£
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission file number: 333-110680
VIASPACE INC.
(Exact name of registrant as specified in its charter)
|
Nevada
|
|
76-0742386
|
|
(State or other jurisdiction of
|
|
(I.R.S. Employer Identification No.)
|
|
incorporation or organization)
|
|
|
| |
|
|
|
2102 Business Center Drive, Suite 130
|
|
|
|
Irvine, California
|
|
92612
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(626) 768-3360
Issuer’s telephone number
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No o
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer o Accelerated filer o Non-accelerated filer o, and Smaller reporting filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No x
State issuer’s revenue for its most recent fiscal year: $4,376,000
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of March 28, 2011: $13,743,000
State the number of shares outstanding of each of issuer’s classes of common equity, as of March 28, 2011: 1,269,100,405
VIASPACE INC.
TABLE OF CONTENTS
| |
|
Page
|
|
Part I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Submission of Matters to a Vote of Security Holders
|
|
| |
|
|
|
|
|
|
|
|
Market for Common Equity and Related Stockholder Matters
|
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operation
|
|
|
|
|
|
|
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
|
|
|
|
|
|
|
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
|
|
|
Certain Relationships and Related Transactions, and Director Independence
|
|
|
|
|
|
|
|
Principal Accountant Fees and Services
|
|
| |
|
|
|
|
|
|
FORWARD-LOOKING STATEMENTS
This document and the documents incorporated by reference herein contain forward-looking statements. We have based these statements on our beliefs and assumptions, based on information currently available to us. These forward-looking statements are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations, our total market opportunity and our business plans and objectives set forth under the sections entitled “Description of Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are not guarantees of performance. Our future results and requirements may differ materially from those described in the forward-looking statements. Many of the factors that will determine these results and requirements are beyond our control. In addition to the risks and uncertainties discussed in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” investors should consider those discussed under “Risk Factors Which May Affect Future Results” and, among others, the following:
|
|
•
|
our ability to successfully implement our business strategy,
|
|
|
•
|
market acceptance of our products and product development,
|
|
|
•
|
the effect of regulation on our ability to commercialize our products,
|
|
|
•
|
the impact of competition and changes to the competitive environment on our products and services, and
|
|
|
•
|
other factors detailed from time to time in our filings with the Securities and Exchange Commission.
|
These forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements to reflect changes in our business anticipated results of our operations, strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events, except as required by law.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable and alternative energy company with a global reach. We operate four separate businesses. We have a majority ownership in VIASPACE Green Energy Inc., a British Virgin Islands (“BVI”) international business company (“VGE”) who is the parent company of Inter Pacific Arts Corporation, a BVI international business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a Peoples Republic of China (“PRC” or “China”) 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, framed artwork sold in US retail chain stores. IPA China also has a sublicense to a fast-growing, high yield, low carbon, nonfood energy crop called Giant KingTM Grass (“GKG”) 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. Cellulosic ethanol, bio butanol and other liquid biofuels, collectively called “Grassoline,” 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 that the process is approximately 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 satisfactory energy content, high bio methane production, and high potential for biofuels and biochemicals.
We are growing GKG on approximately 280 acres of leased land in China to serve 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 Green LogTM product.
We also produce disposable fuel cartridges that provide the energy source for portable electronics powered by fuel cells. We do not make fuel cells, but instead we make disposable fuel cartridges for fuel cell and electronics manufacturers such as Samsung. We are also working on a next-generation mass spectrometry technology for industrial process control and environmental monitoring.
VIASPACE is based in California with business activities in China, Korea and Japan.
The Company’s web site is www.VIASPACE.com.
Corporate History
ViaSpace Technologies LLC (“ViaSpace LLC”) was founded in July 1998 as a private company to commercialize proven space and defense technologies from NASA and the Department of Defense. ViaSpace LLC had licensed patents, and software technology from California Institute of Technology (“Caltech”), which manages the Jet Propulsion Laboratory (“JPL”) for NASA. On June 22, 2005, ViaSpace LLC acquired the non-operating shell company Global-Wide Publication Ltd. (“GW”). GW was incorporated in the State of Nevada on July 14, 2003. At merger, GW was renamed VIASPACE Inc. The transaction was accounted for as a reverse merger and a recapitalization of the Company. VIASPACE became a public company on June 22, 2005.
On October 21, 2008, VIASPACE and VGE entered into a Securities Purchase Agreement (the "Purchase Agreement") with Sung Hsien Chang ("Chang"), and China Gate Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under the Purchase Agreement, we agreed to acquire 100% of Inter-Pacific Arts Corp., a BVI international business company ("IPA BVI"), and the entire equity interest of Guangzhou Inter-Pacific Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong province ("IPA China") from Chang, the sole shareholder of IPA BVI and IPA China. In exchange, VIASPACE agreed to pay $16 million in a combination of cash, and newly-issued shares of VIASPACE and our ordinary shares. In addition, VIASPACE issued shares of its common stock to Licensor and in exchange Licensor sub licensed certain grass technology to IPA China.
Initially, the transactions under the Purchase Agreement ("Acquisition") were to involve two phases. At the first closing (“First Closing”) on October 21, 2008, we issued 3,500,000 newly-issued shares to Chang and his designees. VIASPACE issued 215,384,615 shares of its common stock to Chang and 30,576,007 shares of common stock to Licensor. Chang delivered 70% of the outstanding common stock of IPA BVI to us. At that point, we controlled 70% of IPA BVI. Accordingly, we consolidated its results, assets and liabilities in our financial statements. IPA China became a wholly-owned subsidiary of IPA BVI subsequent to the First Closing on June 9, 2009.
The conditions to VIASPACE’s and VGE’s obligations to consummate the second closing (“Second Closing”) included: (1) representations and warranties of Chang and Licensor remained true at closing; (2) Chang complied with the material covenants under the agreement; (3) the issuance of the securities to Chang and Licensor were exempt from registration, including under Regulation D for which the issuance of the First Closing shares relied upon; (4) Chang executed certain compliance certificates; (5) customary permits, consents and waivers were obtained; (6) books and records were delivered to VIASPACE; (7) an officer’s certificate regarding each target’s charter documents were delivered; (8) due diligence had been satisfactorily completed; and (9) Chang shall have transferred his entire equity interest in IPA China to IPA BVI.
The conditions to Chang’s and Licensor’s obligation to consummate the second closing included: (1) representations and warranties of VIASPACE and us remained true at closing; (2) VIASPACE and we complied with the material covenants under the agreement; (3) books and records of VIASPACE were delivered or made available to Chang and his counsel; (4) any necessary third party consents shall have been obtained; and (5) VIASPACE shall deliver $4.8 million plus interest in cash to Chang. To our knowledge, all of these criteria, other than the cash payment were met. Even if the Second Closing did not occur, the remaining 30% of IPA BVI was to be transferred by Chang to VGE prior to the Second Closing deadline.
In addition, the Licensor and Chang, the seller of IPA China and IPA BVI, each represented that at least 100 hectares of arable land in Guangdong province in China will be available for grass farming by IPA China within 12 months after the First Closing Date. IPA China secured 45 hectares of arable land in the first quarter of 2009 and leased an additional 55 hectares in the third quarter of 2009. The requirement was met.
On August 21, 2009, the parties entered into a second Amendment to the Purchase Agreement whereby VIASPACE irrevocably assigned to Chang and Licensor the VIASPACE shares issued to Chang and Licensor in the First Closing of the Purchase Agreement. Licensor agreed to limit sales of VIASPACE common shares issued at the First Closing to 8,800,000 shares in any 90-day period.
As required by the Purchase Agreement, VGE filed a Registration Statement on Form S-1 with the SEC on June 3, 2009 covering the resale of a portion of VGE common stock issued pursuant to the Purchase Agreement as permitted by SEC regulations. The SEC declared the VGE Registration Statement on Form S-1 effective 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 listing on the OTC Bulletin Board (“OTCBB”) under the ticker symbol VGREF.OB. This satisfied the requirement in the Purchase Agreement that VGE stock be listed on a Trading Market.
Following various additional amendments to the Purchase Agreement, the deadline for the Second Closing in which the remaining minority interest of 30% of IPA BVI equity holdings would be transferred to us was February 15, 2010. At the Second Closing deadline, VIASPACE was to pay $4.8 million ("Cash Consideration") plus Interest (as determined below) since the First Closing, in cash to Chang. Interest on the Cash Consideration was to accrue at 6% for the first nine months after the First Closing, and then 18% until June 10, 2009, and then at 6% thereafter. We had control of the assets of IPA BVI through our majority ownership position in VGE and there was no restriction on the Company’s ability to transfer or capitalize on such assets at any time, including prior to the cash payment due Chang from VIASPACE.
The Second Closing did not occur on the February 15, 2010 deadline. As a result, VIASPACE had a contractual obligation to deliver all of the VGE shares it holds to Chang and Chang has an obligation to deliver the remaining 30% of IPA BVI equity to us. However, Chang, VIASPACE and VGE continued negotiating an alternative closing and purchase of IPA.
On April 16, 2010, VIASPACE and Chang entered into a Share Purchase Agreement ("Share Purchase Agreement") pursuant to which Chang would transfer controlling interest of VGE to VIASPACE, or 6,506,000 shares of VGE capital stock, and VIASPACE would grant Chang (i) 241,667,000 newly-issued shares of its common stock, (ii) one share of its Series A Preferred Stock which controls 50.1% of the voting power of VIASPACE equity securities, and (iii) a secured promissory note in the principal amount of $5,331,025 (the "Note").
On May 14, 2010, VIASPACE, Chang and other VGE shareholders closed the transactions contemplated by the Share Purchase Agreement (the "Closing") and in connection with the Closing, VIASPACE, VGE, IPA BVI and IPA China entered into certain agreements with Chang. In particular, each executed (i) a Guarantee with Chang pursuant to which each company guaranteed VIASPACE’s repayment of the Note and (ii) a Security Agreement with Chang in which such company granted a security interest in a significant amount of assets of each company. In addition, VIASPACE also executed stock pledge agreement pledging all of the securities it owns in VGE as collateral for repayment of the Note. VIASPACE also executed a registration rights agreement in which it granted Chang rights to register his newly issued shares of VIASPACE common stock. VGE also executed employment agreements for Carl Kukkonen, CEO; Sung Hsien Chang, President; and Stephen Muzi, Chief Financial Officer.
Grass Business Division
Through our acquisition of IPA BVI and IPA China we obtained a worldwide sublicense to cultivate and sell GKG, a natural hybrid, non-genetically modified, fast-growing, perennial grass which we are growing as a dedicated energy crop that can be used to generate low carbon and renewable electricity by direct burning in a biomass power plant, and can be made into pellets that can replace some of the coal in existing power plants thus reducing 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 in height. It can be harvested several times a year in tropical and semitropical areas with a yield of up to 375 metric tons per hectare (freshly cut, referred to as wet yield). We believe that GKG has the highest yield of any crop. Note that one hectare (ha) is 10,000 square meters and equal to 2.47 US acres or approximately the size of two US football fields.
GKG has been independently tested by multiple potential customers. To our knowledge, the results have been very positive and consistent. GKG has excellent 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 ear of corn has been harvested. Corn straw is used as fuel in many biomass power plants, and DP Clean Tech, 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 may 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, collectively called “Grassoline.” 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.
GKG as a dedicated energy crop has generated widespread interest from the renewable energy community. VIASPACE has been invited to make presentations on GKG at international conferences in the US, China, Singapore, Indonesia, Mexico and India.
Energy pellets made from dried GKG can be used as a replacement for coal in electricity generating power plants. 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 their carbon dioxide emissions by 15 to 20%. GKG and other biomass have lower mercury, arsenic and sulfur emissions than coal.
There is a growing trend towards small dedicated power plants (5-30 megawatts) that are fueled exclusively by biomass such as grass and agricultural waste. For example, since its founding in 2004, Dragon Power (which is now known as DP Clean Tech) in China has built and is operating 20 power plants powered by 100% biomass. On September 2, 2009, VGE and our parent VIASPACE signed a non-binding Memorandum of Understanding (“MOU”) with DP Clean Tech Co. Ltd. of Beijing China. As part of their due diligence, DP Clean Tech commissioned an independent analysis of GKG by the China National Center for Quality Supervision and Test of Coal which confirmed that GKG has an energy content of 18.4 megajoules (MJ) per dry kilogram (4402 kilocalories (kcal) per kilogram). DP Clean Tech declared GKG suitable as a renewable feedstock for generating electric power in their power plants.
On February 9, 2011, our parent VIASPACE signed an MOU with PT Provident Agro of Jakarta Indonesia with the goal to use Giant King Grass as feedstock for a large scale pellet mill to manufacture a minimum of 300,000 metric tonnes per year of pellets for the export market, primarily in Europe. An initial 10 hectare test plot will be established by PT Provident Agro. Provident Agro owns extensive oil palm plantations and land in Sumatra, Kalimantan, and Sulawesi, Indonesia with a total land bank of 150,000 hectares (370,000 acres) producing more than 23,500 tons of crude palm oil each year. Provident Agro is owned 50% by the Saratoga Group and 50% by Provident Capital Indonesia.
On February 23, 2011, our Parent VIASPACE and General Biofuels signed a non-binding MOU that may become an exclusive agreement to develop a large Giant King Grass Plantation and a 250,000 to 400,000 tonne per year biomass pellet plant in the Dominican Republic.
Our strategy has been to build up our grass production capabilities in China where we have 113 ha (280 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 Green Log TM fireplace and campfire logs for the US market; and it is a nursery to provide seedlings for a major expansion. We are in discussions with customers worldwide on GKG plantations co-located with power plants, pellet mills, biogas facilities and biofuel plants. Most of these discussions are covered by executed nondisclosure and non-circumvention agreements.
We are considering leasing additional land in China. We plan to expand our grass business into other areas of the world, and are in discussions with owners and developers of power plants, pellet mills and biogas facilities in Indonesia, Thailand, Malaysia, Cambodia, Singapore, Philippines, India, Africa, United States and Europe.
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. Agricultural waste will still be used, but the dedicated energy crop will provide a reliable and consistent base. In part because of the feedstock uncertainty issue, many proposed biomass power plant and biogas projects have been unable to obtain financing. A dedicated energy crop will help solve this obstacle.
Because of its high yield, GKG provides feedstock with the lowest use of land and we believe therefore the lowest cost. Any other energy crop with half the yield requires twice the land and other costs are nearly doubled. GKG not only allows a reliable source of feedstock supply, but offers lower cost.
Another major advantage of GKG is that it is not tied to a food crop, and it can be harvested at any time-- particularly in a tropical or subtropical area. When corn straw is used, you have to wait for the corn to mature before you have any feedstock. At the corn harvest, a lot of feedstock is available all at one time. This corn straw has to be collected, stored and used until the next corn harvest. This is a major logistics issue. If the climate permits, GKG can be planted so that it matures continuously and allows just-in-time harvesting.
Transportation applications requiring liquid fuels and biofuels have great potential. Most biofuels are made from plants which are a renewable resource, and use of some biofuels can significantly reduce carbon emissions. Growing grass or any plant matter absorbs carbon dioxide from the atmosphere during photosynthesis and stores it in the plant tissue. Subsequent burning of the grass does emit carbon dioxide into the atmosphere; however the next crop of grass 60 days later absorbs carbon dioxide. If the process of growing, fertilizing, harvesting and transporting the grass can be done with minimal use of fossil fuels, a grass-based fuel can be a carbon neutral or low carbon process. Burning coal, oil, or natural gas emits carbon dioxide without any mechanism to remove this carbon dioxide from the atmosphere.
Ethanol, which is the same alcohol in beer, wine or liquor, is the most well-known biofuel. Ethanol is blended with gasoline and burned in conventional automobile engines that have minor modifications. In the U.S. today almost all ethanol is made from corn. Government subsidies for ethanol have made ethanol price competitive with gasoline and much of the US corn crop now goes toward ethanol production. These subsidies have led to an increased demand for corn for ethanol production. According to the Money Morning Corn Price Report (quoting the US Department of Agriculture) one third of U.S. corn is devoted to ethanol production, and this is expected to increase in the future. Corn prices have risen from about $2.00 per bushel at the beginning of 2006 to a peak of $7.65 in mid-2008. Corn prices dropped during the economic recession, but have been rising rapidly, and corn is currently $6.71 per bushel. More land in the U.S. is devoted to corn production at the expense of other crops and the prices of these other crops have risen as well.
Higher food prices have led to food shortages around the globe and it has been argued that people are starving so we can make the fuel to drive our cars. 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. These are called cellulosic biofuels.
Cellulosic biofuels are based on nonfood plants including grass, shrubs and trees. These plants do not have 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 ethanol called 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.
VGE 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.
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 Green LogsTM in our factory. The grass 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.
We are in discussions with potential joint venture partners and customers that have land and the ability to grow the grass in other countries in Asia, Africa, India and the America’s.
Management believes both models will be important contributors to our revenue streams. We believe all our revenues initially will result from the integrated plantation & 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
In May 2010, the Company announced its first renewable energy/biomass product for sale: Green LogTM fireplace and campfire logs manufactured from Giant King Grass. The U.S. distributor of Green Logs is Georgia-based JJ International, Inc., since 1988 a nationwide supplier of indoor and outdoor products for the home. JJ International is a related party of the Company as it is solely owned by Sung Hsien Chang, our President. We believe Green Logs are the first manufactured fire logs to be produced solely from a dedicated renewable energy crop. Green Logs have a zero net-carbon footprint, completely avoid the use of petroleum products which also produce net carbon emissions, and burn up to 66% longer compared to conventional manufactured logs currently being sold. Since the Company is vertically integrated-- both growing Giant King Grass and manufacturing and distributing Green Logs-- we can offer Green Logs as a quality product and at a lower price than competitors. Green Logs are the Company’s first product for the renewable energy market and exemplify the Company's ability to convert Giant King Grass into beneficial, competitive biomass products. Manufactured fire logs represent a $400 million annual market in North America. With more than 100 million logs-made primarily of wood chips and sawdust-burned each year, we see an opportunity for Green Logs, which offer an environmentally friendly manufactured log. Green Logs also generate greater heat output than conventional logs, and its non-chemical, natural campfire aroma we believe makes it an even more appealing alternative.
Green Logs are manufactured at the Company's grass plantation and processing facility in China's Guangdong province. The factory was completed and manufacturing equipment was installed in April.
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 sell the art to large US retailers through its sales organization in Atlanta, Georgia. IPA is a manufacturer and wholesaler of framed art.
The factory is on 1.6 hectares of land in China including two manufacturing buildings and one employee dorm and a dining facility. IPA, with its framed art business, has an established and stable production facility in China and a sales and distribution network in the United States.
The acquisition of IPA was a strategic move to acquire its revenue and profit from its current framed art business, as well as the grass business. With the profits from the framed art business, we are aggressively building the grass business without having to access external capital. We are committed to grow this business by providing top-quality product at an attractive price for our retail chain and other 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 guaranteed to us that there are no counterfeits and that all royalties have been paid. We then mockup the combination of art, mattes and frames for the 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 packed in several containers and shipped directly to the customer in the US We provide prints, frames and packaging that are all of high quality. An example of quality packaging is our use of protective clear plastic covers on the corners of the frame. The covers provide protection during shipping and handling, but are transparent and do not obscure the artwork on the display shelf as conventional cardboard corner protectors do. Our customers interact closely with our quality control department in China. The customers make detailed inspections of the artwork before they authorize shipment to the US. Our framed artwork typically retails for $50-$300.
VIASPACE Subsidiary - Direct Methanol Fuel Cell Corporation (“DMFCC”)
DMFCC is engaged in the development of disposable fuel cell cartridges for fuel-cell powered portable electronics such as notebook computers and mobile phones. VIASPACE owns 71.4% of the outstanding common shares of DMFCC.
Fuel cells are expected to replace batteries in some very important portable electronics markets including notebook computers and cell phones in the future according to Frost & Sullivan. Fuel cells convert a fuel such as methanol directly into electricity without burning. The fuel cell would be permanently built into the computer or cell phone and there would be a slot to insert a disposable fuel cartridge.
The advantages of the fuel cell over a battery are longer operating time on a single cartridge and instantaneous refueling by replacing the disposable cartridge. Fuel cells allow complete independence from the electrical grid. There will be no need to wait several hours while a lithium battery is being recharged.
Fuel cells and fuel cell powered portable electronics are being developed by large electronics companies like Samsung, and by Toshiba commercialized their first product an external power source and battery charger in 2009 . DMFCC does not make fuel cells, but rather we make the disposable fuel cartridges that are the energy source for these devices. The fuel cell and cartridge is analogous to the “razor and blades” business model. The fuel cell is like a razor and the cartridges are like razor blades. Cartridges represent a recurring revenue stream.
DMFCC continues to work as a cartridge partner of Samsung. DMFCC has also delivered cartridges and cartridge components to other companies.
DMFCC is developing the global capability to manufacture, fill and distribute cartridges through a network of partners. With these partners in Japan, Korea and the US, we are well positioned for large-scale production.
Fuel cells are electrochemical “engines” that convert a fuel such as methanol directly into electricity without burning. Fuel cells produce electricity as long as fuel is available. Fuel cells are being developed by OEMs of portable electronic devices in the fuel cell “engine” and will likely be permanently built into notebook computers or mobile phones. There are also major global efforts to utilize fuel cells in UPS (Uninterrupted Power Supply) applications, along with remote sensing and switching equipment, and hybrid electric/fuel cell powered vehicles.
Safety regulations developed by the International Electro-technical Commission (“IEC”) require that the fuel must be contained in a safe sealed container called a cartridge. Unlike the gas tank of an automobile, the cartridge should not be refillable by the consumer and is preferably a disposable product. Fuel cartridges are the consumable in the fuel cell business.
DMFCC is co-located with VIASPACE headquarters and also has representatives in Japan and Korea. More information on DMFCC can be found on the web site www.DMFCC.com.
DMFCC Disposable Cartridge Design and Safety Certification
DMFCC has expertise in fuel cell cartridge design and safety certification. Since 2002, DMFCC has been working with the fuel cell industry, Underwriters Laboratories (“UL”), CSA International (“CSA”) and the IEC to develop international standards for the safety and performance of fuel cells and disposable fuel cartridges. The IEC is the electrical counterpart of the International Standards Organization (“ISO”). The US Department of Transportation issued a rule in 2008 allowing methanol fuel cell cartridges in the passenger compartment of commercial aircraft. It was also stipulated that the fuel cartridges should not be refillable by the user. DMFCC disposable fuel cartridges are designed to comply with the challenging international safety requirements. DMFCC is focusing on methanol fuel cartridges, but may produce cartridges for any liquid fuel.
DMFCC Cartridge Manufacturing
DMFCC designs, safety tests and markets fuel cell cartridges. DMFCC’s fuel cell cartridges are manufactured by experienced manufacturing partners that have a track record of supplying critical products to OEMs of consumer electronics. For example, one of DMFCC’s manufacturing partners Sato Group (“SATO”) which provides printer and toner cartridges to Japanese OEMs, has manufactured DMFCC cartridges for Samsung. DMFCC will rely on its manufacturing partners’ extensive backgrounds and experience in manufacturing products similar to its fuel cell related products.
VIASPACE Energy Products
VIASPACE has expanded into safe lithium batteries with representation of two Asian manufacturers with focus in electric bikes, larger electric vehicles (“EVs”) as well as portable electronics. The Company is putting a minimal of resources on this product line.
VIASPACE Subsidiary - Ionfinity LLC (“Ionfinity”)
Ionfinity is working on a next-generation mass spectrometry (“MS”) technology, which could improve the application of MS for industrial process control and environmental monitoring and could also lead to a new class of detection systems for homeland security.
Ionfinity entered into a new Phase II Army contract with its partners, including JPL, on August 4, 2008 to design a compact, field portable, stand-off high-efficiency, rugged, integrated detection and identification, system for chemical and biowarfare agents. This contract was completed on July 31, 2010. During 2010, Ionfinity recorded $219,000 in revenues on this Army contract.
Ionfinity entered into a new Phase II Navy contract with its partners, including JPL, on October 23, 2008, to develop an innovative smaller, lighter, and more sensitive electronic sniffer sensor that detects chemical, biological, radiological, explosive and illegal drug residue. The Phase II Navy contract had a base value of $492,000 and had an original period of performance through April 23, 2010. On March 16, 2010, the Navy exercised an option for Ionfinity on this contract which increased the total value from $492,000 to $1,278,000, an increase of $786,000. The contract is a cost plus fixed fee type of contract. Approximately $169,000 in revenues was recognized in 2010 by Ionfinity on this Navy contract.
Other VIASPACE Projects
The Company retains a worldwide nonexclusive license to certain patents and patent applications in the areas of interactive radio technology.
Research and Development
The Company did not record any research and development (“R&D”) activities in 2010. In 2009, R&D of $30,000 was charged to Operations expenses. The Company is putting its focus on GKG and no longer has current plans to spend money on research and development expenses.
Competition
Framed Art Business
There are many framed art companies that compete with IPA. For example, ICA Home Decor, Crown Arts, Wendover Art, Midwest Art and many more 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 art work by the container load with a typical order of 1,400 copies of a single design. These customers generally have many retail stores in their chains. IPA only manufactures art after an order is placed and has virtually no inventory of framed art. 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 sources high quality frame moldings, mattes and glass in China, and assembles the framed art in its factory in China. IPA is able to control its expenses through its relationships with suppliers and control quality by assembly at its factory in China. We believe that these processes allow IPA's products to be sold at a favorable price in a competitive environment.
Grass Business Division
Many companies, universities and research laboratories worldwide are investigating grass as a feedstock for cellulosic ethanol and other applications. Monsanto is an example of a large company focusing on grass. Ceres is an example of a startup company focusing on biomass and grass in particular. Much of the competition is looking at miscanthus or switchgrass. These grasses are suitable for temperate areas. Much of the competition also is focused on selling seeds. The VIASPACE Green Energy GKG is a natural hybrid that is not genetically modified nor 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 the company’s efforts. GKG is propagated by seedlings not by seeds. VIASPACE Green Energy 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.
Direct Methanol Fuel Cell Corporation
DMFCC faces competitors in the cartridge business. BIC Corporation in France and the US, and Tokai Corporation and Toyo Seikan in Japan have demonstrated cartridges for direct methanol fuel cells, and may become direct competitors. Other companies may enter the cartridge business.
Ionfinity
The Ionfinity technology is patented. Competing technologies to soft ionization membranes are standard ionization techniques such as electron filament ionization, electrospray, and others. Other mass spectrometers may become available and become competitors.
Overall, the markets for our products are highly competitive and many of our competitors have greater resources and better name recognition than we do. It is our intention to compete primarily by leveraging our intellectual property rights and our unique products.
Regulatory Issues
Companies operating in the portable/micro fuel cell industry, including DMFCC, are subject to current and future state, federal and international regulation, including safety codes and transportation regulations related to methanol fuel cells and cartridges. The US Department of Transportation gave final approval in 2008 to carry methanol fuel cells and to spare cartridges in the passenger cabin of commercial airplanes. This action now harmonizes US policy with that of the International Civil Aviation Organization (“ICAO”). The same approvals have been given by Canada, United Kingdom Japan and China. Approval to carry direct methanol fuel cells and cartridges on airplanes is a critical milestone which allows commercialization to move forward.
The International Electrotechnical Commission (“IEC”), the electrical counterpart of the International Standards Organization (“ISO”) and international committee of which DMFCC is a member, developed safety standards for fuel cells and fuel cartridges. The IEC document PAS 62282 – 6 – 1 Micro Fuel Cells – Safety was published in February 2006. This document covers small low power “micro” fuel cell systems and fuel cartridges that can easily be carried by hand. Broadly speaking, the IEC safety standards require the following potential dangers to be mitigated: fire, explosion, leakage, harmful emissions, ignition sources and corrosion. Extensive and detailed safety tests are required for these fuel cells are fuel cartridges. The IEC safety standards were critical to obtaining approval to carry fuel cells on airplanes.
The ICAO DGP specified that micro fuel cell cartridges and systems will be added to the exceptions allowed to be carried on aircraft by passengers and crew subject to the following conditions:
|
|
●
|
Fuel cell cartridges may only contain liquids (including methanol, formic acid and butane)
|
|
|
●
|
Fuel cell cartridges must comply with IEC PAS 62282 – 6 – 1 Micro Fuel Cells – Safety (as defined above)
|
|
|
●
|
Fuel cell cartridges must not be refillable by the user. Refueling of fuel cell systems is not permitted except that the installation of a spare cartridge is allowed. Fuel cartridges which are used to refill fuel cell systems but which are not designed or intended to remain installed (fuel cell refills) are not permitted to be carried.
|
|
|
●
|
The maximum quantity of fuel in any fuel cell cartridge may not exceed: for liquids 200 mL; for liquefied gases 120 mL for nonmetallic fuel cell cartridges and 200 mL for metal fuel cell cartridges
|
|
|
●
|
No more than two spare fuel cell cartridges may be carried by a passenger
|
|
|
●
|
Fuel cell systems containing fuel and fuel cartridges including spare cartridges are permitted in carry-on baggage only
|
● Fuel cell systems whose sole function is to charge a battery in the device are not permitted
|
|
●
|
Fuel cell systems must be of a type that will not charge batteries when the portable electronic device is not in use and must be durably marked “Approved for Carriage in Aircraft Cabin Only”
|
Dependence on a Few Major Customers
For 2010 and 2009, the Company had one customer in our framed artwork business, Hobby Lobby Stores, which made up 73% and 65%, 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
IPA China received its sublicense authority to obtain and grow GKG from China Gate Technology Co. Ltd., a Brunei Darussalam company ("Licensor"), in an agreement dated November 11, 2008. The agreement does not provide any limitation on IPA China’s ability to grow, harvest and market the grass anywhere in the world. No term length was specified in the agreement. To our knowledge, China Gate has not entered into such license agreements with any other party. The agreement between China Gate and IPA China enables us to plant our seedlings in other geographic regions outside Guangdong province and North America.
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. These are companies we have longstanding relationships with, and we believe the chances that such artwork copyrights have not been obtained is minimal.
DMFCC
DMFCC has licensed certain patents to fuel cell technology from Caltech and USC. DMFCC also has filed for patents related to its cartridge technology.
Ionfinity
Ionfinity has five issued patents and two patent applications in the fields of soft ionization device and applications related to its development of improved mass spectrometer technology. The patents have expiration dates between 2022 and 2024. Ionfinity has also licensed one patent from Caltech relating to a soft ionization membrane being used as an ion source for a rotating field mass spectrometer. Ionfinity also has a cross license agreement with patent rights in the soft ionization device field, with a commercial company.
Trademarks
The Company has received issued trademarks for “VIASPACE” and “VIASPACE Technologies. The Company has made trademark applications for “GIANT KING” grass and products made from GKG, and “GREEN LOG” fireplace and campfire logs. In addition, we have trademark applications for “VIASPACE Energy” and “Ionfinity”.
Employees
As of December 31, 2010 we have 58 full time employees, 53 of whom are based in China and 5 in the US. We also have 28 part time employees, 25 of whom are based in China and 3 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.
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
We have incurred losses and anticipate continued losses for the foreseeable future.
Our net loss for 2010 was $2,833,000. We have not yet achieved profitability and expect to continue to incur net losses until we recognize sufficient revenues from licensing activities, customer contracts, product sales or other sources. Because we do not have an operating history upon which an evaluation of our prospects can be based, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies seeking to develop new and rapidly evolving technologies. To address these risks, we must, among other things, respond to competitive factors, continue to attract, retain and motivate qualified personnel and commercialize and continue to develop our technologies. We may not be successful in addressing these risks. We can give no assurance that we will achieve or sustain profitability.
Our ability to continue as a going concern is dependent on achieving profitability or future financing.
Goldman Kurland Mohidin, LLP, our independent registered public accounting firm, included an explanatory paragraph in its report on our financial statements for 2010, which expresses substantial doubt about our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in Goldman Kurland Mohidin, LLP’s report on our financial statements could have a detrimental effect on our stock price and our ability to raise additional capital if needed.
Our financial statements were prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to the financial statements as a result of the outcome of the uncertainty described above. Accordingly, the value of the Company in liquidation may be different from the amounts set forth in our financial statements.
Our continued success will depend on our ability to achieve profitability or to raise capital in order to fund the development and commercialization of our products. Failure to be profitable or to raise additional capital may result in substantial adverse circumstances, including our inability to continue the development of our products and our liquidation.
If we fail to make the cash payment due to Chang on May 14, 2011, or some other alternate arrangement is not reached, then Chang, we would be required to forfeit our interests in VGE.
On May 14, 2010, VIASPACE entered into a secured Note with Sung Hsien Chang and must pay Chang $5,331,025 over a five-year period. Interest accrues at 6%. The principal must be repaid in five equal installments of $1,066,205 on the first through fifth anniversary of the issuance date. The first payment is due May 14, 2011. Chang may elect to receive payments in cash or VIASPACE equity securities. The Note is secured by certain assets of VIASPACE, including all securities of VGE held by VIASPACE. The Note is also secured by the assets of VGE, IPA BVI and IPA China. The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including VIASPACE maintaining a net worth of $5 million on a consolidated basis. If VIASPACE is ultimately unable to make this cash payment, or some other alternate arrangement is not reached, VIASPACE would be required to transfer all of the shares of VGE it holds to Chang.
An impairment in the carrying value of goodwill could 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. Goodwill valuations have been 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 of December 31, 2010, we had $12.3 million of goodwill, which represented 70.8% of total assets.
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 and acquisition of other agribusiness companies with procedures not identical to our own 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 operate in a changing and unpredictable regulatory environment.
Companies operating in the portable/micro fuel cell industry, including DMFCC, are subject to current and future state, federal and international regulation, including safety codes and transportation regulations related to methanol fuel cells and cartridges.
In 2008, the US Department of Transportation issued final approval of a regulation allowing methanol fuel cells and fuel cartridges to be carried on board aircraft. This approval is critical for commercialization of fuel cell powered devices.
Our success depends upon market acceptance of our technologies and product development.
The markets for our technologies are either new or non-existent at the present time including direct methanol fuel cell cartridges and grass of cellulosic ethanol. Our success will depend upon the market acceptance of our various products and services. This acceptance may require in certain instances a modification to the culture and behavior of customers to be more accepting of fuel cell technology and other forms of technology and automation. Potential customers may be reluctant or slow to adopt changes or new ways of performing processes. There is no assurance that our current or future products or services will gain widespread acceptance or that we will generate sufficient revenues to allow us to ever achieve profitability.
In addition, our products require continuing improvement and development. Our products may not succeed or may not succeed as intended. As a result, we may need to change our product offerings, discontinue certain products and services or pursue alternative product strategies. There is no assurance that we will be able to successfully improve our current products or that we will continue to develop or market some of our products and services.
We operate in competitive markets against companies that have significantly greater resources than we have.
DMFCC faces competitors in the cartridge business. BIC Corporation in France and the US, and Tokai Corporation and Toyo Seikan in Japan have demonstrated cartridges for direct methanol fuel cells, and are direct competitors. Other companies may enter the cartridge business.
The Ionfinity technology is patented and to our knowledge is unique. Competing technologies to the soft ionization membrane approach are standard ionization techniques such as electron filament ionization, electrospray, and others.
Overall, the markets for our products are highly competitive and many of our competitors have greater resources and better name recognition than we do. We intend to compete primarily by leveraging our intellectual property rights and our unique product value added features.
Due to uncertainties in our business, the capital on hand may not be sufficient to fund our operations until we achieve positive cash flow.
We have expended and will continue to expend substantial amounts of money for research and development, capital expenditures, working capital needs and manufacturing and marketing of our products and services. Although we have reduced expenses significantly, our business requires funds for operations.
The exact timing and amount of spending required cannot be accurately determined and will depend on several factors, including:
|
●
|
progress of our research and development efforts;
|
|
●
|
competing technological and market developments;
|
|
●
|
commercialization of products currently under development by us and our competitors; and
|
|
●
|
market acceptance and demand for our products and services.
|
The cost of developing our technologies may require financial resources greater than we currently have available. Therefore, in order to successfully complete development of our technologies, we may be required to obtain additional financing. We cannot assure you additional financing will be available if needed or on terms acceptable to us. If adequate and acceptable financing is not available, we may have to delay development or commercialization of certain of our products and services or eliminate some or all of our development activities. We may also reduce our marketing or other resources devoted to our products and services. Any of these options could reduce our sales growth and result in continued net losses.
If we lose key personnel or are unable to hire additional qualified personnel, it could impact our ability to grow our business.
We believe our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial, sales and marketing, finance and operations personnel. We face intense competition for all such personnel, and we may not be able to attract and retain these individuals. Our failure to do so could delay product development, affect the quality of our products and services, and/or prevent us from sustaining or growing our business. In addition, employees may leave our company and subsequently compete against us. Key personnel include Dr. Carl Kukkonen, our CEO and Sung Hsien Chang, President of VGE and CEO of IPA BVI and IPA China.
We have taken steps to retain our key employees and we have entered into employment agreements with some of our key employees. The loss of key personnel, especially if without advanced notice, could harm our ability to maintain and build our business operations. Furthermore, we have no key man life insurance for any of our key employees.
Our revenues to date have been to a few customers, the loss of which could result in a material decline in revenues.
For 2010 and 2009, the Company had one customer which made up 73% and 65%, 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.
Our products and services could infringe on the intellectual property rights of others, which may lead to costly litigation, lead to payment of substantial damages or royalties and/or prevent us from manufacturing and selling our current and future products and services.
If third parties assert our products and services or technologies infringe their intellectual property rights, our reputation and ability to license or sell our products and services could be harmed. Whether or not a claim has merit, it could be time consuming and expensive for us and divert the attention of our technical and management personnel from other work. In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights.
A determination we are infringing the proprietary rights of others could have a material adverse effect on our products and services, revenues and income. In the event of any infringement by us, we cannot assure you we will be able to successfully redesign our products and services or processes to avoid infringement. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products and services and could require us to pay substantial damages and royalties.
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.
Risks Related To the Industry
If we fail to successfully introduce new products and services, our future growth may suffer. Our areas of anticipated future growth are certain products and services at an early stage of development.
As part of our strategy, we intend to develop and introduce a number of new products and services. Such products and services are currently in research and development. We have generated no revenues from such potential products and services and may never generate revenues. A substantial portion of our resources have been and for the foreseeable future will continue to be dedicated to our research programs and the development of products and services. If we do not introduce these new products and services on a timely basis, or if they are not well accepted by the market, our business and the future growth of our business may suffer. There is no assurance we will be able to develop a commercial product from these projects. Our competitors may succeed in developing technologies or products and services that are more effective than ours.
If we do not update and enhance our technologies, they will become obsolete or noncompetitive. Our competitors may succeed in developing products and services faster than we do.
We operate in highly competitive industries and competition is likely to intensify. Emerging technologies, extensive research and new product introductions characterize the market for our products and services. We believe our future success will depend in large part upon our ability to conduct successful research in our fields of expertise, to discover new technologies as a result of that research, to develop products and services based on our technologies, and to commercialize those products and services. If we fail to stay at the forefront of technological development, we will be unable to compete effectively.
Certain of our existing and potential competitors possess substantial financial and technical resources and production and marketing capabilities greater than ours. We cannot assure you we will be able to compete effectively with existing or potential competitors or that these competitors will not succeed in developing technologies and products and services that would render our technology and products and services obsolete and noncompetitive. Our position in the market could be eroded rapidly by our competitors’ product advances.
Our success depends, in part, on attracting customers who will embrace the new technologies offered by our products and services.
It is vital to our long-term growth that we establish customer awareness and persuade the market to embrace new technologies offered by our products and services. This may require in certain instances a modification to the culture and behavior of customers to be more accepting of technology and automation. Organizations may be reluctant or slow to adopt changes or new ways of performing processes and instead may prefer to resort to habitual behavior within the organization. Our marketing plan must overcome this obstacle, invalidate deeply entrenched assumptions and reluctance to behavioral change and induce customers to utilize our products and services rather than the familiar options and processes they currently use. If we fail to attract additional customers at this early stage, our business and the future growth of our business may suffer.
If we fail to comply with our obligations in our intellectual property licenses with Caltech and USC, we could lose license rights that are important to our business.
We are a party to a number of license agreements that are material to our business. We may enter into additional technology licenses in the future. Our existing licenses impose and future licenses may impose various minimum royalty commitments, other royalties and other obligations on us. If we fail to comply with these obligations, the licensors may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensors. We cannot assure you we will be able to obtain new licenses, or renew existing licenses, on commercially reasonable terms, if at all. Termination of the licenses could have a material adverse affect on our business, operating results and financial condition.
Our success depends, in part, on our ability to protect our intellectual property rights.
Our success is heavily dependent upon the development and protection of proprietary technology. We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and protect our products and services. These legal means, however, afford only limited protection and may not adequately protect our rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and management attention.
We cannot assure you our competitors or other parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products and services or processes used or proposed to be used by us. In that case, our competitive position could be harmed and we may be required to obtain licenses to patents or proprietary rights of others.
In addition, the laws of some of the countries in which our products and services are or may be sold may not protect our products and services and intellectual property to the same extent as US laws, if at all. We may be unable to protect our rights in proprietary technology in these countries.
Risks Related to our Grass Business
We currently have no meaningful customers for our grass business although we are starting to make progress. If we are unable to attract any customers, our grass business will suffer.
We commenced our grass business in October 2008 and have not recorded substantial revenues yet. 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.
We could be subject to intellectual property rights claims regarding the seedlings.
We are subject to the risk that the seedlings we license 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 which 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 have a sublicense relationship with respect to the GKG license. If the license from our sublicensor is cancelled, terminated or otherwise is adversely affected, our sublicense may be materially affected.
We sublicense our intellectual property to the GKG from China Gate which licenses the intellectual property from the original licensor. The term of this license is not specified. China Gate has informed us that they have an exclusive license to the GKG in Guangdong province and North America and have granted us an exclusive sublicense to the same region. However, because we do not have a direct relationship with the holder of the intellectual property, any material adverse effect to the GKG license held by our sublicensor would affect our rights as the sublicensee. The original licensor is aware of our sublicense and has consented to it. For instance, if our sublicensor fails to perform its obligations under its license with the original licensor, we would have no recourse against the original licensor and our rights with respect to the sublicense may be materially affected.
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 develop 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.
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: feedstock for low-carbon liquid biofuels for transportation; fuel to burn in electricity generating power plants; and animal feed. We are also reviewing opportunities to grow grass in other areas of China, India, Indonesia, other areas of Southeast Asia and South America. These represent great opportunities for the company, but also represent a potential risk in losing focus and diluting 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 biofuel, 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. 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 us 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 2010 and 2009, sales to one customer comprised 73% and 65%, 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.
We may not be able to compete with existing or potential competitors in our framed art business
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 Licensor 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:
| |
●
|
the higher level of government involvement;
|
| |
●
|
the early stage of development of the market-oriented sector of the economy;
|
| |
●
|
the higher level of control over foreign exchange; and
|
| |
●
|
the allocation of resources.
|
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.
Risks Related To An Investment In Our Stock
Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital.
Any sale of a substantial number of shares of our common stock (or the prospect of sales) may depress the price of our common stock. In particular, we anticipate that the issuance of newly-issued shares to Chang in connection with an alternate arrangement to enable us to hold interests in VGE, and in turn, IPA BVI and IPA China may be very dilutive. In addition, these sales could lower our value and make it more difficult for us to raise capital. Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.
The Company has 1,500,000,000 authorized shares of common stock, of which 1,228,651,926 were issued and outstanding as of December 31, 2010. Of these issued and outstanding shares, 483,592,150 shares (39.4% of the total issued and outstanding shares) are currently held by our executive officers, directors and principal shareholders (including Dr. Carl Kukkonen, CEO and Director; Mr. Stephen J. Muzi, CFO; Mr. Sung Hsien Chang, Director and President of VGE; Mr. Rick Calacci, Director; General Bernard Randolph, Director; Ms. Angelina Galiteva, Director; and SNK Capital Trust). On April 10, 2006, SNK Capital Trust agreed to a lock-up of its 61,204,286 shares until April 9, 2011. No other shares are currently subject to any lock-up arrangement. Of the shares issued and outstanding at December 31, 2010, 576,239,586 are accounted by our transfer agent as restricted under Rule 144. These shares could be released in the future if requested by the holder of the shares, subject to volume and manner of sale restrictions under Rule 144. 652,412,340 shares of the Company’s common stock are accounted for by our transfer agent as free trading at December 31, 2010.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares currently held by management and principal shareholders), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
If we default on our secured debt to Chang, we may lose our interests in VGE which would impact our stock price.
If VIASPACE defaults in its obligation to Chang, Chang may foreclose on all assets of our Company and/or our subsidiaries. He may also seize the equity interests of VGE. Any of these actions would cause us to relinquish all ownership of our assets and our company would then lose most of its value. Under such circumstances, your securities may lose most of its value.
Our stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other factors that could cause such volatility may include:
|
●
|
actual or anticipated fluctuations in our operating results;
|
|
●
|
announcements concerning our business or those of our competitors or customers;
|
|
●
|
changes in financial estimates by securities analysts or our failure to perform as anticipated by the analysts;
|
|
●
|
announcements of technological innovations;
|
|
●
|
conditions or trends in the industry;
|
|
●
|
introduction or withdrawal of products and services;
|
|
●
|
variation in quarterly results due to the fact our revenues are generated by sales to a limited number of customers which may vary from period to period;
|
|
●
|
patents or proprietary rights;
|
|
●
|
departure of key personnel;
|
|
●
|
failure to hire key personnel; and
|
|
●
|
general market conditions.
|
Our executive officers, directors and principal shareholders own 39.4% of our voting stock, which may allow them to control substantially all matters requiring shareholder approval, and their interests may not align with the interests of our other stockholders.
Our executive officers, directors and principal shareholders hold 39.4% of our outstanding shares as of December 31, 2010. In addition, 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 BOD 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 as discussed in footnotes. This empowers Chang with supermajority voting rights even after he holds less than a majority of outstanding voting securities.
Because our common stock is considered a “penny stock” any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is currently traded on the OTCBB and is considered a “penny stock.” The OTCBB is generally regarded as a less efficient trading market than the NASDAQ Small Cap Market.
The SEC adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.
We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize issuance of 1,500,000,000 shares of common and 10,000,000 shares of preferred stock. The common and preferred stock can be issued by, and the terms of the preferred stock, including dividend rights, voting rights, liquidation preference and conversion rights can generally be determined by, our Board of Directors (“BOD”) without stockholder approval. Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common and preferred stock, in the event buyers can be found therefore. Any future issuances of common or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders. Furthermore, the issuance of preferred stock could be used to discourage or prevent efforts to acquire control of our Company through acquisition of shares of common stock. In addition, 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 BOD 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 as discussed in footnotes. This empowers Chang with supermajority voting rights even after he holds less than a majority of outstanding voting securities.
Warrants issued by the Company may have an adverse impact on the market value of our common stock.
The sale of stock issuable upon exercise of the warrants issued or issuable, or even the possibility of their sale, may adversely affect the trading market for our common stock and adversely affect the prevailing market price of our common stock. The existence of rights under such warrants to acquire our common stock at fixed prices may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and may dilute the value of their ownership.
The warrants may adversely affect our operational flexibility.
The terms of outstanding warrants impose restrictions on us that may affect our ability to successfully operate our business. The transaction documents contain a number of covenants that may restrict our ability to operate, including, among other things, covenants that restrict our ability:
|
●
|
to incur additional indebtedness;
|
|
●
|
to pay dividends on our capital stock (except for our preferred stock);
|
|
●
|
to redeem or repurchase our common stock;
|
|
●
|
to issue shares of common stock, or securities convertible into common stock, in certain circumstances;
|
|
●
|
to use our assets as security in other transactions;
|
|
●
|
to create liens on our assets; and
|
|
●
|
to enter into certain transactions with affiliates.
|
Certain events could result in adjustments in the exercise price of our warrants.
The exercise price of our warrants is subject to adjustment under certain circumstances. If we sell shares of common stock for a price less than the exercise price of the warrants in effect prior to such sale, in certain circumstances, the exercise price of the warrants could be reduced. In addition, the exercise price of the warrants could be reduced if we issue options or convertible securities, or in the case of a stock split, stock dividend, recapitalization, combination or otherwise. Existing stockholders will experience significant dilution from our sale of shares and warrants.
Any subsequent sale of shares and warrants will have a dilutive impact on our stockholders. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline significantly.
Other Matters
We were contacted informally by the Pacific Regional Office of the SEC in March 2006 requesting the voluntary provision of documents concerning the reverse merger of Global-Wide Publication, Ltd. and Viaspace Technologies LLC in June 2005 and related matters. The SEC or its staff has made no indication that any violations of the law have occurred. We cooperated fully with this inquiry in 2006 and responded to the inquiry in writing in 2006. There was no further inquiry in 2007, 2008, 2009 or 2010.
ITEM 2. PROPERTIES
The Company moved into new office space on April 1, 2009 located on 2102 Business Center Drive, Irvine, CA 92612. IPA owns its manufacturing facility in Guangzhou, China. Total rent expense for all locations for 2010 was approximately $44,000. VGE also leases approximately 280 acres of land in Guangdong province of the PRC. The Company recorded amortization of $41,000 on these land leases in 2010.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters were submitted to a vote of the majority of common security holders during the fourth quarter of 2010.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Prices
The shares of our common stock have been listed and principally quoted on the OTCBB under the trading symbol “VSPC.OB” since June 22, 2005. Prior to June 22, 2005, the Company’s common stock was traded on the OTCBB under the symbol “GWPL.OB”. The first day of trading for the Company’s common stock was June 4, 2004.
The following table sets forth, for the fiscal quarters indicated, the high and low sale price for our common stock, as reported on the OTCBB. The price information in the table below reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
|
Quarterly period
|
|
High
|
|
|
Low
|
|
Fiscal year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
As of March 28, 2011, there were approximately 51 shareholders of record of the Company’s Common Stock.
Dividends
We have not paid any cash dividends on our common stock since our inception and do not anticipate paying any cash dividends on our common stock in the foreseeable future. There are no restrictions in our articles or incorporation or bylaws that prevent us from declaring dividends in the future. Our future dividend policy will be examined periodically by our BOD based upon conditions then existing, including our earnings and financial condition, capital requirements and other relevant factors.
Equity Compensation Plan
Our discussion regarding the Company’s, DMFCC’s and VGE’s equity compensation plans under which the Company’s and DMFCC’s and VGE’s equity securities are authorized for issuance are discussed under the section titled “Equity Compensation Plan Information” under “Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stock Matters” below.
Recent Sales of Unregistered Securities
On November 16, 2010, the Company issued vendors a total of 175,000 unregistered shares of the Company’s common stock for investor relations services valued at $2,188 on the date of issuance. On October 28, 2010 and November 29, 2010, the Company issued Mr. Stephen Muzi, CFO of the Company, 5,042,373 unregistered shares of the Company’s common stock for salary valued at $60,000 on the date of issuance. These sales were exempt from registration under Section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
VIASPACE Overview
VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable and alternative energy company with a global reach. We operate four separate businesses. We have a majority ownership in VIASPACE Green Energy Inc. “VGE”, a British Virgin Islands (“BVI”) company, which is the parent company of Inter Pacific Arts Corporation, a British Virgin Islands international business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a Peoples 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, framed artwork sold in US retail chain stores. IPA China also has a sublicense to a fast-growing, high yield, low carbon, nonfood energy crop called Giant KingTM Grass (“GKG”) 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. Cellulosic ethanol and other liquid biofuels, collectively called Grassoline, 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 that the 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 has some carbon dioxide emissions, but much lower than burning coal or other fossil fuels directly. GKG has been independently tested by customers and been shown to have excellent energy content and very high bio methane production. We do not build the power plant or biofuel plant; rather we grow GKG that is needed as the fuel or feedstock.
We are growing GKG on approximately 280 acres of leased land in China to serve as a nursery for expansion, a demonstration plot for potential partners and customers, to provide samples for potential customers, and as a grass source for our own products. VGE is headquartered in California with business activities in China.
We grow a fast-growing, high yield, low carbon, nonfood energy crop called GKG 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. Cellulosic ethanol and other liquid biofuels, collectively called Grassoline, 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 that the 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 is low carbon, but much lower than burning coal or other fossil fuels directly. GKG has been independently tested by customers and been shown to have excellent energy content and very high bio methane production. We do not build the power plant or biofuel plant; rather we grow GKG that is needed as the fuel or feedstock. We are growing GKG on 280 acres of leased land in China to serve as a nursery for expansion, a demonstration plot for potential partners and customers, to provide samples for potential customers, and as a grass source for our own products.
We also manufacture framed copyrighted artwork in China and market and sell the artwork in the US. We also produce disposable fuel cartridges that provide the energy source for portable electronics powered by fuel cells. We do not make fuel cells, but instead we make disposable fuel cartridges for fuel cell and electronics manufacturers such as Samsung. We are also working on a next-generation mass spectrometry technology for industrial process control and environmental monitoring.
VIASPACE is based in California with business activities in China, Korea and Japan.
The Company’s web site is www.VIASPACE.com.
Critical accounting policies and estimates
Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”) issued by the SEC, suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements.
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies discussed below require significant management judgments and estimates.
VIASPACE has generated revenues on product revenue shipments. In accordance with “Revenue Recognition”, codified in FASB ASC Topic 605, VIASPACE recognizes product revenue provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are freight on board shipping point. If the Company ships product whereby a customer has a right of return or review period, the Company does not recognize revenue until the right of return or review period has lapsed. Prior to the period lapsing, any cash received would be recorded as deferred revenue on the Company’s Balance Sheet.
Ionfinity has generated revenues on fixed-price contracts for government contracts. These contracts have clear milestones and deliverables with distinct values assigned to each milestone. The government is not obligated to pay Ionfinity the complete value of the contract and can cancel the contract if the Company fails to meet a milestone. Although the government can cancel the contract if a milestone is not met, the Company is not required to refund any payments for prior milestones that have been approved and paid by the government. The milestones do not require the delivery of multiple elements as noted in “Revenue Arrangements with Multiple Deliverables”, codified in FASB ASC Topic 605. In accordance with this topic, the Company treats each milestone as an individual revenue agreement and only recognizes revenue for each milestone when all required revenue recognition conditions are met.
In accordance with FASB ASC Topic 605, IPA BVI and IPA China recognize product revenue provided: (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are free on board shipping point. Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. Revenue is recorded net of VAT taxes.
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 in exchange 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.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There is no assurance that actual results will not differ from these estimates.
See footnotes in the accompanying financial statements regarding recent financial accounting developments.
Results of Operations
Year Ended December 31, 2010 Compared to December 31, 2009
Revenues
Revenues were $3,643,000 and $4,376,000 for 2010 and 2009, respectively, a decrease of $733,000 or 17%. IPA BVI and IPA China recorded revenues of $3,240,000 in 2010 from the sales of framed-artwork primarily to retail US customers, a decrease of $392,000 from the comparable period in 2009. During the fourth quarter of 2010, VGE recorded $7,000 in grass revenues related to the sale of its Green Log fireplace logs made from GKG. There were no VGE grass revenues in 2009. Ionfinity incurred revenues of $388,000 in 2010, a decrease of $313,000 from 2009. Ionfinity recorded revenues in both years from a Phase II US Army contract and a Phase II US Navy contract. The Phase II US Army contract ended July 31, 2010 which is the primary cause of the decrease in Ionfinity revenues. DMFCC recorded revenues in 2010 of $8,000 from a fuel cell contract it had with Samsung and $55,000 from a Samsung contract in 2009, a decrease of $47,000. VIASPACE recorded revenues of $2,000 from a battery sale commercial contract in 2009 and no corresponding revenues in 2010.
Cost of Revenues
Costs of revenues were $2,634,000 and $2,686,000 for 2010 and 2009, respectively, a decrease of $52,000 or 2%. IPA BVI and IPA China recorded cost of revenues of $2,265,000 from the sales of framed-artwork, an increase of 246,000 from the comparable period in 2009 due to higher manufacturing costs in 2010. VGE had $6,000 in grass cost of revenues related to the sale of its Green Log fireplace logs in 2010 and none in 2009. Ionfinity recorded decreased cost of revenues of $261,000 during 2010 as compared with 2009 due to the ending of its Phase II US Army contract in July 2010. DMFCC recorded decreased cost of revenues of $42,000 in 2010 compared with 2009 due to lower revenues recorded in 2010 on a fuel cell contract with Samsung. VIASPACE recorded lower cost of revenues of $1,000 in 2010 compared with 2009.
Gross Profit
The resulting effect on these changes in revenues and cost of revenues from 2009 to 2010 was a decrease in gross profits from $1,690,000 in 2009 to $1,009,000 in 2010, a decrease of $681,000 or 40%.
Operations Expenses
Operations expenses were $178,000 and $30,000 for 2010 and 2009, respectively, an increase of $148,000. The increase is primarily due to operations expenses incurred by VGE in the production of its GKG in China. This includes salaries, equipment, maintenance, utilities and fuel. The Company expects operations expenses for VGE to increase in the future as more expenditures are incurred to grow, harvest and produce GKG.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3,650,000 and $4,387,000 for 2010 and 2009, respectively, a decrease of $737,000 or 17%. Commissions incurred in the framed-artwork business decreased $315,000 from 2009 to 2010 as less commissions were paid on lower sales recognized. Payroll and payroll benefits decreased $129,000 due to lower payroll levels and headcount in 2010. Stock option expenses increased $481,000 primarily due to compensation recorded for VGE stock options issued in 2010. Stock compensation expenses decreased $512,000 from 2009 to 2010 primarily due to lower amounts of Company’s common stock issued to employees, consultants and vendors for services. Accounting fees decreased $64,000 due to lower audit fees from 2009 to 2010. Legal fees decreased $328,000 primarily due to lower patent related costs received by DMFCC in 2010 compared with 2009. Consulting costs increased $375,000 primarily due to costs associated with business development of GKG in China in 2010 as compared with 2009. Public relations expenses decreased $132,000 during 2010 as compared to 2009. Other selling, general and administrative expenses, net, decreased by $113,000 during 2010 from the same period in 2009.
Loss from Operations
The resulting effect on these changes in gross profits, operations expenses and selling, general and administrative expenses from 2009 to 2010 was an increase in the loss from operations from $2,727,000 in 2009 to $2,819,000 in 2010, an increase of $92,000 or 3%.
Other Income (Expense), Net
Interest Expense
Interest expense decreased by $119,000 from 2009 to 2010, due to lower interest expense on the related party loan payable to Sung Hsien Chang related to the acquisition of IPA by the Company on October 21, 2008.
Other Income
Other income increased $112,000 from 2009 to 2010 primarily due to interest income being recorded on the amounts owed to IPA BVI by Sung Hsien Chang and JJ International.
Gain on Sale of Humidity Sensor Business Line
On April 20, 2009, the Company into an Asset Purchase and Support Services Agreement with Landtec North America. The Purchased Assets primarily included assets related to the Seller's tunable diode laser-based humidity sensor business. Landtec agreed to pay $210,000 for the purchased assets and support services. The Company recorded a gain on sale of assets related to this agreement of $176,000 in the second quarter of 2009.
Liquidity and Capital Resources
The Company’s net loss was $2,833,000. Non-cash expenses of $2,500,000 for 2010 composed primarily of stock compensation and stock options issued to employees, directors and consultants. General working capital used $262,000 in 2010. The Company recorded a gain on the disposal of a vehicle of $15,000. Net cash used in operating activities was $610,000 for 2010.
Net cash used in investing activities was $153,000 for 2010, arising from primarily to capital expenditures incurred by VGE in building a new manufacturing and storage facility and purchasing equipment for its GKG business. The Company also received proceeds of $17,000 from the disposal of a vehicle. In addition, VGE incurred $13,000 in costs associated with entering into a new land lease in the PRC to grow GKG.
Net cash used in financing activities was $32,000 in 2010 arising from principal payments on Company loans to the Community Development Commission.
At December 31, 2010, the Company has working capital of $235,000 and an accumulated deficit of $35,568,000. Our financial statements were prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to the financial statements as a result of the outcome of the uncertainty described above. Accordingly, the value of the Company in liquidation may be different from the amounts set forth in our financial statements. The Company has addressed this concern by laying off certain of its staff and reducing operating expenses. In addition, the Company has sold non-core and as yet non-profitable business units. The Company is now focused primarily on three main business units including the GKG business, framed artwork business and the fuel cell business.
Contractual Obligations
The following table summarizes our long-term contractual obligations at December 21, 2010:
| |
|
Total
|
|
|
Less than 1 Year
|
|
Long-term debt obligations (a)
|
|
|
|
|
|
|
|
|
(a) The annual installment of principal and interest on the notes payable owed to the Community Development Commission as discussed in the accompanying footnotes to the consolidated financial statements are noted.
The are no other major outstanding contractual obligations other than employment agreements and the note to Sung Chang as detailed below.
Employment Agreements
On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi. Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum. For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE. The remainder of the employment term they would be paid by VGE. Each of them would be entitled to a bonus as determined by the VGE BOD, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.
Due to Sung Hsien Chang
As discussed in Note 8, VIASPACE was obligated to pay Sung Hsien Chang $4,800,000 at the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company including interest. The Second Closing did not occur on the February 15, 2010 deadline. On May 14, 2010, the Company entered into a secured Note with Chang designed to pay this amount. Under the Note, the Company must pay Chang $5,331,025 over a five-year period. Interest accrues at 6%. The principal must be repaid in five equal installments of $1,066,205 on the first through fifth anniversary of the issuance date. Chang may elect to receive payments in cash or equity securities. The Note is secured by certain assets of the Company, including all securities of VGE held by the Company. The Note is also secured by the assets of VGE, IPA BVI and IPA China. The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including maintaining a net worth of $5 million on a consolidated basis. At December 31, 2010, there is accrued interest of $202,000 arising from the Note included in accrued expenses.
Inflation and Seasonality
We have not experienced material inflation during the past five years. Seasonality has historically not had a material effect on our operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as of December 31, 2010.
ITEM 7. FINANCIAL STATEMENTS
See the Company’s audited financial statements on pages F-1 through F-25.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Disclosure controls and procedures. Disclosure controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
At the end of the period covered by this report and at the end of each fiscal quarter therein, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our BOD, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| |
•
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
|
| |
•
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
|
| |
•
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on such assessment, we believe our internal controls over financial reporting were effective as of December 31, 2010
This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the temporary rules of the SEC that permit the Company to provide only management’s report in this annual report on Form 10-K.
Changes in internal controls over financial reporting. Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The Company is a non-accelerated filer with the SEC.
ITEM 8B. OTHER INFORMATION
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth our executive officers, their ages and the positions held by them. The Company’s named executive officers as of December 31, 2010 include the Chief Executive Officer and the Chief Financial Officer. In addition, one additional officer of the Company’s subsidiary VGE is included in accordance with disclosure requirements.
|
Name
|
|
Age
|
|
Position Held
|
|
|
|
|
|
Chief Executive Officer and Director
|
|
|
|
|
|
VGE President and Director
|
|
|
|
|
|
|
Carl Kukkonen. Dr. Kukkonen has been our Chief Executive Officer and Director since October 2008. He is also the Chief Executive Officer and Director of VIASPACE, Inc., our parent corporation since 2005. He is also the Chief Executive Officer, President, and Director, Direct Methanol Fuel Cell Corporation, a subsidiary of VIASPACE since 2001, and the Chief Executive Officer and Director of VIASPACE Security Inc., a subsidiary of VSI since 2002. He was the Co-founder and Chief Executive Officer of ViaSpace Technologies LLC (predecessor of VIASPACE) from 1998 to 2005. Previously, Dr. Kukkonen served as the Director of the Center for Space Microelectronics Technology and Manager of Supercomputing at the Caltech NASA Jet Propulsion Laboratory from 1984 to 1998. From 1977 to 1984, he was the Principal Research Engineer at Ford Motor Company. Dr. Kukkonen has a B.S. in physics from the University of California at Davis and an M.S. and Ph.D. in physics from Cornell University. He was also a Post-doctoral fellow at Purdue University.
Sung Hsien Chang. Mr. Chang is the President and Director of VIASPACE Green Energy since October 2008. He is also the Chief Executive Officer and founder of Inter-Pacific Arts, Inc., our subsidiary since 2002. He worked at Jun Jung Metal prior to 2002. He attended Taiwan Junior College.
Stephen Muzi. Mr. Muzi is our Chief Financial Officer, Treasurer and Secretary since October 2008. Since June 2005, he has also been the Chief Financial Officer, Treasurer and Secretary of VIASPACE Inc., our parent corporation. He was the controller for SpectraSensors, Inc., a spun-off former subsidiary of VIASPACE from 2003 to 2005. He was also a controller for ViaLogy Corp., a spun-off former subsidiary of the Company from 2003 to 2005. From 2004 to 2005, he also served as a consultant to Direct Methanol Fuel Cell Corporation, VIASPACE Security Inc. and Ionfinity LLC, subsidiaries of VIASPACE from 2004 to 2005. Mr. Muzi joined ViaSpace Technologies LLC (predecessor of VIASPACE) in May 2000. Mr. Muzi obtained his B.S. degree from Rochester Institute of Technology and an M.B.A. from the State University of New York at Buffalo. He is a Certified Public Accountant.
(b) Directors
The Company’s directors are as follows:
|
Name
|
|
Age
|
|
Position Held
|
|
|
|
|
|
Chief Executive Officer and Director
|
|
|
|
|
|
VGE President and Director
|
|
|
|
|
|
|
General Bernard P. Randolph
|
|
|
|
|
|
|
|
|
|
|
Carl Kukkonen – See background in Item 9 (a) under Executive Officers
Sung Hsien Chang – See background in Item 9 (a) under Executive Officers
Angelina Galiteva. Director Since: April 28, 2006. Committee Memberships of Company: Member of the Compensation Committee, Member of the Corporate Governance and Nominating Committee. Independent Director: Yes. Principal Occupation: Chairperson of the World Council for Renewable Energy (WCRE) specializing in strategic issues related to renewable energy, environmental, energy efficiency and overall sustainable policy programs for public and private entities, Founder and Principal of New Energy Options, Inc. Other Directorships: Member of Board of Directors of American Distributed Generation, Inc. and TECOGEN. Prior Business Experience: Prior to July 2003, Executive Director-Strategic Planning, for the City of Los Angeles Department of Water and Power (LADWP) responsible for managing the Departments’ Corporate Environmental Services Business Unit as well as all LADWP’s Green LA Programs and New Technology Initiatives, Prior to 1997, worked for the California Independent System Operator and Power Exchange Trusts and Corporations and for the New York Power Authority on conservation, renewable energy and air quality initiatives. Education: Attorney with a JD and Masters’ of Law Degrees in Environmental and Energy Law from Pace University School of Law, New York.
General Bernard P. Randolph. Director Since: April 19, 2006. Committee Memberships of Company: Chairman of the Compensation Committee, Member of the Audit Committee, Member of the Corporate Governance and Nominating Committee. Independent Director: Yes. Principal Occupation: Senior Consultant to Science Applications International Corporation (SAIC) Space Air and Information Group (SAIG). Other Directorships: Board of Defense Acquisition University in Fort Belvoir, Virginia. Prior Business Experience: Senior Consultant in the Space Air and Information Group, Space Systems Engineering Division, Senior Consultant to the Aerospace Corporation, 35 years of service in the United States Air Force retiring with Rank of General, Final Air Force assignment was as Commander of the Air Force Systems Command charged with the development and procurement of all major defense systems for the Air Force, Key technology management positions in Air Force including: Vice Commander of the Warner Robins Air Logistics Center; Vice Commander and Deputy Commander of Space Systems acquisition at the Air Force's Space Division; Director of Space Systems and Command, Control and Communications in the Office of the Deputy Chief of Staff; Research, Development and Acquisition at Air Force Headquarters; and program director for such major space systems as the Air Force Satellite Communications Program and Space Defense Program, TRW Space and Electronics Group in Redondo Beach, California dual line and staff roles including as Vice President and General Manager of the Defense Communications Division and Vice President and Special Assistant to the Group General Manager, Member of the Defense Science Board in DoD pursuing adoption of cost saving commercial procurement practices, Member of the Defense Intelligence Agency Scientific advisory Board, Consultant for the Institute for Defense Analyses, Member of the Advisory Board for Lincoln Laboratory at Massachusetts Institute of Technology. Education: Degree in chemistry from Xavier University (New Orleans, Louisiana), Bachelor's and master's degrees in electrical engineering from the University of North Dakota, Master's degree in business administration from Auburn University, Honorary doctorate of engineering from the University of North Dakota.
Rick Calacci. Director Since: February 1, 2007. Committee Memberships of Company: None. Independent Director: Yes. Principal Occupation: President of Access Sales Group, a provider of national coverage for “Best in Class”, “Variable Cost” and “Outsourcing Solution” sales, marketing and management services to meet the dynamic ever changing needs of the retail channel for vendor partners. Other Directorships: None. Prior Business Experience: General Manager / Sr. Vice President of Sales and Market for Hannspree California, Inc., a developer, manufacturer and distributor of LCD display technologies – 2005 to 2006, President of Moxell Technology, Inc., a Motorola consumer electronics licensee for displays, recording media, connectivity, IT and related accessory products in the Americas and Europe - 2003 to 2005, Senior Executive Vice President / Group General Manager – Consumer Electronics of Sharp Electronics Corporation, a leading global consumer electronics and home appliances company - 2001 to 2003, Vice President Sales of Toshiba America Consumer Products, a leading global consumer electronics and computer company from 1995 to 2001. Served in other roles as Regional General Manager, Central Zone Vice President and Western Sales Group Vice President - 1984 to 1995, Sales Manager positions with Pioneer Video, Inc. and Sony Corporation of America - 1977 to 1983. Education: Business program, Northern Illinois University and Rock Valley Junior College.
Family Relationships
There are no family relationships between or among any of the current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers.
Involvement in Certain Legal Proceedings
None of our directors or executive officers has, during the past five years:
| |
·
|
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
|
| |
·
|
had any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time;
|
| |
·
|
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; or
|
| |
·
|
been found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
|
| |
·
|
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:.
|
| |
(i)
|
any federal or state securities or commodities law or regulation;
|
| |
|
|
| |
(ii)
|
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
|
| |
(iii)
|
any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
|
| |
·
|
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. (covering stock, commodities or derivatives exchanges, or other SROs).
|
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Code of Ethics
The Company adopted a code of ethics that applies to its principal: executive officers, financial officer, accounting officer or controller, or persons performing similar functions. The text of the Company’s code of ethics is available on the Company’s website, www.viaspace.com. A copy of the Company’s code of ethics may be obtained free of charge by contacting the Company at the address or telephone number listed on the cover page hereof.
Committees of the Board of Directors
Audit Committee. On October 20, 2005, our BOD established an Audit Committee. Our Audit Committee has the authority to retain and terminate the services of our independent accountants, reviews annual financial statements, considers matters relating to accounting policy and internal controls and reviews the scope of annual audits. The Company does not currently have an independent member of the BOD serving as the audit committee’s financial expert that meets the definition under Item 401(e) of Regulation S-B. The Company intends to identify and recruit a suitable candidate to serve as the audit committee financial expert during 2010.
Compensation Committee. On October 20, 2005, our BOD established a Compensation Committee. Our Compensation Committee reviews, approves and makes recommendations regarding our compensation policies, practices and procedures to ensure that legal and fiduciary responsibilities of the BOD are carried out and that such policies, practices and procedures contribute to our success. The Compensation Committee is responsible for the determination of the compensation of our chief executive officer, and shall conduct its decision making process with respect to that issue without the chief executive officer present.
Governance and Nominating Committee. On October 20, 2005, our BOD established a Governance and Nominating Committee. This committee’s role is to make recommendations to the full BOD as to the size and composition of the BOD and its committees, and to evaluate and make recommendations as to potential candidates. The Governance and Nominating Committee may consider candidates recommended by stockholders as well as from other sources such as other directors or officers, third party search firms or other appropriate sources. For all potential candidates, the Governance and Nominating Committee may consider all factors it deems relevant, such as a candidate’s personal integrity and sound judgment, business and professional skills and experience, independence, knowledge of the industry in which we operate, possible conflicts of interest, diversity, the extent to which the candidate would fill a present need on the BOD, and concern for the long-term interests of the stockholders. In general, persons recommended by stockholders will be considered on the same basis as candidates from other sources.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the annual compensation paid by us to Dr. Carl Kukkonen, our principal executive officer, for the year ended December 31, 2010 and our executive officers who were paid more than $100,000 per annum. Other than the officers listed, no other officer had total compensation during either of the previous two years of more than $100,000. The Named Executive Officers are the Company’s Chief Executive Officer, VGE President and Chief Financial Officer.
SUMMARY COMPENSATION TABLE
|
(a)
|
|
(b)
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock Awards
($) (3)
|
|
|
Option Awards
($)(1)
|
|
|
All Other Compensation
($)(2)
|
|
|
Total
($)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
- |
|
|
|
- |
|
|
|
604,568 |
|
|
|
386,253 |
|
|
|
- |
|
|
|
990,821 |
|
|
Chief Executive Officer of Company
|
|
2009 |
|
|
40,000 |
|
|
|
- |
|
|
|
676,412 |
|
|
|
35,000 |
|
|
|
- |
|
|
|
751,412 |
|
| |
|
2008 |
|
|
214,352 |
|
|
|
- |
|
|
|
178,731 |
|
|
|
131,218 |
|
|
|
13,717 |
|
|
|
538,018 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
25,167 |
|
|
|
- |
|
|
|
360,000 |
|
|
|
249,441 |
|
|
|
14,703 |
|
|
|
649,311 |
|
|
Chief Financial Officer, Treasurer and
|
|
2009 |
|
|
51,040 |
|
|
|
- |
|
|
|
368,244 |
|
|
|
65,417 |
|
|
|
15,210 |
|
|
|
499,911 |
|
| Secretary of Company |
|
2008 |
|
|
143,047 |
|
|
|
- |
|
|
|
118,407 |
|
|
|
501,772 |
|
|
|
- |
|
|
|
763,226 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sung Hsien Chang, |
|
2010 |
|
|
240,000 |
|
|
|
- |
|
|
|
- |
|
|
|
206,253 |
|
|
|
- |
|
|
|
446,253 |
|
| President VIASPACE Green Energy, Inc. |
|
2009 |
|
|
240,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
240,000 |
|
| |
|
2008 |
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40,000 |
|
|
(1)
|
Column (f) represents the dollar amount recognized as compensation expense for financial statement reporting purposes for 2010 under FASB ASC Topic 718, Share-Based Payment, and not an amount paid to or realized by the Named Executive Officer. The amount shown includes awards granted in and prior to 2007. Assumptions used in the calculation of this amount are included in the footnotes to the Company’s consolidated audited financial statements for 2010. There can be no assurance that the amounts determined by FASB ASC Topic 718 will ever by realized.
|
|
(2)
|
Dr. Kukkonen received $13,717 in additional stock awards in 2009 and 2010 for health insurance coverage (equivalent to the cost to the Company if he was covered under the Company’s plan). Amounts shown for Mr. Muzi represent health insurance coverage paid by the Company on his behalf.
|
|
(3)
|
Dr. Kukkonen deferred a portion of his 2009 and 2010 stock awards and is entitled to the following unregistered shares of Company common stock at December 31, 2010: 11,195,707 shares for deferred 2009 compensation and 8,467,939 shares for deferred 2010 compensation.
|
Narrative Disclosure to Summary Compensation Table
Employment Agreements and Arrangements
On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi. Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum. For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE. The remainder of the employment term they would be paid by VGE. Each of them would be entitled to a bonus as determined by the VGE BOD, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.
Stock Option Grants
The following table provides information on stock options granted in 2010 to each of the Company’s Named Executive Officers. There can be no assurance that the Grant Date Fair Value of Stock and Option Awards will ever be realized.
VIASPACE INC.
GRANTS OF PLAN-BASED AWARDS
| |
|
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
|
Estimated Future Payouts Under Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
Name
|
Grant Date
|
Threshold ($)
|
Target ($)
|
Maximum
($)
|
Threshold ($)
|
Target
($)
|
Maximum
($)
|
All Other Stock Awards: Number of Shares of Stocks or Units
(#)
|
|
All Other Option Awards: Number of Securities Underlying Options
(#) (1)
|
|
Exercise or Base Price of Option Awards
($/Sh)
|
|
Grant Date Fair Value of Stock and Option Awards
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000,000 |
|
$ |
0.012 |
|
$ |
220,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000 |
|
$ |
0.012 |
|
$ |
110,000 |
|
|
(1)
|
Options allow the grantee to purchase a share of VIASPACE common stock for the fair market value of a share of VIASPACE Common Stock on the grant date. Options vest monthly over 24 months. If a grantee’s employment is terminated, options that are then vested expire within three months of termination and unvested options expire immediately.
|
|
(2)
|
Column (g) represents the aggregate FASB ASC Topic 718 values of options granted during the year. There can be no assurance that the options will ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will equal the FASB ASC Topic 718 value.
|
Outstanding Equity Awards at Fiscal Year End
The following table shows the number of equity awards held by the Company’s Named Executive Officers on December 31, 2010.
VIASPACE INC.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
DECEMBER 31, 2010
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
|
Name
(a)
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)
|
|
Equity
Incentive
Plan
Awards:
Number of Securities Underlying Unexercised Unearned
Options
(#)
(d)
|
|
Option
Exercise
Price
($)
(e)
|
|
Option
Expiration
Date
(f)
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
(g)
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
(h)
|
|
Equity
Incentive
Plan Awards: Number of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(i)
|
|
Equity
Incentive
Plan Awards: Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(j)
|
|
|
|
|
|
7,500,000
|
|
|
|
12,500,000
|
|
|
|
$ |
0.012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,750,000
|
|
|
|
6,250,000
|
|
|
|
$ |
0.0225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
- |
|
|
|
$ |
0.0225 |
|
|
|
|
|
|
|
|
|
|
|
|
Stephen Muzi
|
|
|
|
|
|
|
- |
|
|
|
$ |
0.0225 |
|
8/19/19
|
|
|
|
|
|
|
|
|
|
|
Stephen Muzi
|
|
|
2,125,000
|
|
|
|
875,000
|
|
|
|
$ |
0.039 |
|
2/14/18
|
|
|
|
|
|
|
|
|
|
|
Stephen Muzi
|
|
|
187,500
|
|
|
|
62,500
|
|
|
|
$ |
0.08 |
|
12/10/17
|
|
|
|
|
|
|
|
|
|
There were no shares of the Company’s common stock acquired during 2010 upon the exercise of the options.
VIASPACE Green Energy Inc. Stock Incentive Plan
On June 2, 2009, the BOD of VGE adopted the 2009 Stock Incentive Plan (the “VGE Plan”). The VGE Plan was also approved by the holders of a majority of VGE’s common stock. The VGE Plan provided for the reservation for issuance under the Plan of 1,400,000 shares of VGE common stock (16.28% of outstanding shares at December 31, 2010). The number of shares in the stock option plan will adjust annually and remain at 16.28% of outstanding shares.
Stock Option Grants
The following table provides information on stock options granted in 2010 to each of the Company’s Named Executive Officers. There can be no assurance that the Grant Date Fair Value of Stock and Option Awards will ever be realized.
VIASPACE GREEN ENERGY INC.
GRANTS OF PLAN-BASED AWARDS
| |
|
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
|
Estimated Future Payouts Under Equity Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
Name
|
Grant Date
|
Threshold ($)
|
Target ($)
|
Maximum
($)
|
Threshold ($)
|
Target
($)
|
Maximum
($)
|
All Other Stock Awards: Number of Shares of Stocks or Units
(#)
|
|
All Other Option Awards: Number of Securities Underlying Options
(#) (1)
|
|
Exercise or Base Price of Option Awards
($/Sh)
|
|
Grant Date Fair Value of Stock and Option Awards
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
$ |
0.80
|
|
$ |
362,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
$ |
0.80
|
|
$ |
362,828
|
|
|
Stephen Muzi
|
3/25/10
|
|
|
|
|
|
|
|
|
|
250,000
|
|
$ |
0.80
|
|
$ |
164,922 |
|
|
(1)
|
Options allow the grantee to purchase a share of VGE common stock for the fair market value of a share of VGE Common Stock on the grant date. Options vest monthly over 24 months. If a grantee’s employment is terminated, options that are then vested expire five years from termination date and unvested options expire immediately.
|
|
(2)
|
Represents the aggregate FASB ASC Topic 718 values of options granted during the year. There can be no assurance that the options will ever be exercised (in which case no value will be realized by the executive) or that the value on exercise will equal the FASB ASC Topic 718 value.
|
Outstanding Equity Awards at Fiscal Year End
The following table shows the number of equity awards held by the Company’s Named Executive Officers on December 31, 2010.
VIASPACE GREEN ENERGY INC.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
DECEMBER 31, 2010
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
|
Name
(a)
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b)
|
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)
|
|
Equity
Incentive
Plan
Awards:
Number of Securities Underlying Unexercised Unearned
Options
(#)
(d)
|
|
Option
Exercise
Price
($)
(e)
|
|
Option
Expiration
Date
(f)
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
(g)
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
(h)
|
|
Equity
Incentive
Plan Awards: Number of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(i)
|
|
Equity
Incentive
Plan Awards: Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
(j)
|
|
|
|
|
|
206,253 |
|
|
|
343,747 |
|
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,253 |
|
|
|
343,747 |
|
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,753 |
|
|
|
156,247 |
|
|
|
$ |
0.80 |
|
|
|
|
|
|
|
|
|
|
|
There were no shares of the Company’s common stock acquired during 2010 upon the exercise of the options.
Direct Methanol Fuel Cell Corporation Option Plan
As explained in the footnotes to the Company’s consolidated financial statements, the Company’s subsidiary, DMFCC also has in place an equity-based stock option plan that allows for the grant of stock options to employees, directors and consultants. There were no grants of securities underlying options granted in 2010 by DMFCC to the Company’s Named Executive Officers. There were no shares of DMFCC common stock acquired during 2010 upon the exercise of options by the Company’s Named Executive Officers.
The following table shows the number of shares covered by exercisable and unexercisable options held by the Company’s Named Executive Officers in DMFCC on December 31, 2010.
DIRECT METHANOL FUEL CELL CORPORATION
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
DECEMBER 31, 2010
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
(e)
|
|
Name
|
|
Number of
Securities Underlying Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities Underlying Unexercised
Options (#)
Unexercisable
|
|
|
Option Exercise
Price
($)
|
|
Option Expiration
Date
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
― |
|
|
$ |
0.005 |
|
|
|
|
|
|
30,000 |
|
|
|
― |
|
|
$ |
0.05 |
|
|
|
|
|
|
50,000 |
|
|
|
― |
|
|
$ |
0.05 |
|
|
Director Compensation
The following chart summarizes the annual compensation for the Company’s non-employee directors during 2010.
Director Compensation
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
Name
|
|
Fees Earned
($)
|
|
|
Stock
Awards
($)
|
|
|
Option Awards
($) (1)
|
|
|
All Other
Compensation ($)
|
|
|
Total
($)
|
|
General Bernard P. Randolph
|
|
|
― |
|
|
|
― |
|
|
$ |
40,813 |
|
|
|
― |
|
|
$ |
40,813 |
|
|
|
|
|
― |
|
|
|
― |
|
|
$ |
40,813 |
|
|
|
― |
|
|
$ |
40,813 |
|
|
|
|
|
― |
|
|
|
― |
|
|
$ |
21,438 |
|
|
|
― |
|
|
$ |
21,438 |
|
|
(1)
|
Column (d) represents the dollar amount recognized as compensation expense for financial statement reporting purposes for 2010 under FASB ASC Topic 718, and not an amount paid to or realized by the Director. The amount shown includes all awards granted. Assumptions used in the calculation of this amount are included in the Company’s financial statement footnotes. There can be no assurance that the amounts determined by FASB ASC Topic 718 will ever be realized.
|
Narrative Disclosure to Director Compensation Table
Compensation of Non-employee Directors
August 19, 2009, the Directors of the Company voted unanimously that compensation for 2010 will be 1 million stock options each vesting over a one-year period. General Randolph and Ms. Galiteva received an additional grant of 500,000 options each for their service on committees of the Company. No cash compensation was paid in 2010 to Directors. There are currently no cash retainer or meeting fees scheduled to be paid to Directors of the Company. On the date of appointment to the BOD, new non-employee outside Directors are entitled to a one-time grant of 125,000 non-qualified stock options (or such other number of shares determined by the BOD in its discretion as Administrator). The price of the option is the closing market price on the date of grant, generally vesting over four years for which the BOD member holds office (or such other vesting period as determined by the BOD in its discretion as Administrator). Further, the BOD in its discretion as Administrator of the Plan may make additional grants of non-qualified stock options to non-employee directors at any time.
Non-employee Directors may also be granted other awards, as referred to in the 2005 Stock Incentive Plan, by the BOD in its discretion as Administrator of the Plan such as Stock Appreciation Rights, Dividend Equivalent Rights, Restricted Stock, Performance Unit or Performance Shares. No awards of this kind were granted to any non-employee Director in 2010.
Directors of the Company, who are employees of the Company or of a Company subsidiary, do not receive additional compensation for their services as Directors.
Retirement Plans
The Company does not have any retirement plans at December 31, 2010.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 28, 2011 by (i) each person who beneficially owns more than 5% of all outstanding shares of our common stock, (ii) each director and the executive officer identified below, and (iii) all directors and executive officers as a group.
|
Name
|
|
Number of
Shares Beneficially
Owned
|
|
|
Exercisable
Options
Beneficially
Owned (a)
|
|
|
Total Number of
Shares and
Exercisable
Options
Beneficially
Owned
|
|
|
Percent of
Class of
Common Stock
(b)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Bernard P. Randolph
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Named Executive Officers and Directors as a group (6 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes options that become exercisable on or before May 28, 2011.
|
|
(b)
|
The percent of Common Stock owned is calculated using the sum of the number of shares of Common Stock owned as of March 28, 2011 and the number of options of the beneficial owner that are exercisable on or before May 28, 2011.
|
|
(c)
|
17,162,462 shares were gifted to family members in 2010.
|
|
(d)
|
Mr. Chang is President of VGE and CEO of IPA BVI and IPA China. Shares shown include those owned by Mr. Chang directly and shares held by Changs LLC and Chang Family Foundation.
|
Equity Compensation Plans
The following table summarizes information about the options and warrants under the Company’s equity plans as of the close of business on December 31, 2010.
Equity Compensation Plan Information
| |
|
Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants and
rights
(a)
|
|
|
Weighted-
average
exercise price
of
outstanding
options,
warrants
and rights
(b)
|
|
|
Number of
securities
remaining
available
for future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column
(a))
(c)
|
|
Equity compensation plans approved by security holders for VIASPACE
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders for DMFCC
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders for VGE
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our current stock option plans (the “Plans”) are explained in detail in the footnotes to the accompanying consolidated financial statements and provide for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and other awards to the Company’s employees, officers, directors or consultants. VIASPACE, DMFCC and VGE each have separate stock option plans.
Our BOD, with assistance from the executive officers of the Company, administers the Plans, 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 each of the Plans generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant for incentive stock options (110% of the fair market value on the date of the grant for employees that own 10% or more of Company stock). In the case of non-qualified stock options, the exercise price shall not be less than 85% of fair market value on the date of the grant. The term of the options granted under the Plans cannot be greater than 10 years. Options vest at varying rates for employees, directors and consultants.
Changes in Control Arrangements
No change in control arrangements existed at December 31, 2010.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Other than as listed below, we have not been a party to any significant transactions, proposed transactions, or series of transactions, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.
Related Party Receivables
Included in the Company’s consolidated balance sheets at December 31, 2010 and 2009 are Related Party Receivables and Payables. The Related Party Receivables and Payables are detailed below. Sung Hsien Chang is a Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI. JJ International (“JJ”) is a company owned by Sung Hsien Chang that operates separately. JJ also acts as a distributor of product for VGE. IPA China recorded revenues of $362,000 from JJ for the year ended December 31, 2010. IPA BVI is charging JJ interest income on the outstanding receivable balance at an interest rate of 6%. For the year ended December 31, 2010, $97,000 was recorded as interest income to JJ. This amount is included in Other Income in the Company’s Consolidated Statements of Operations.
The following table represents a summary of Related Party Receivables at December 31, 2010 and 2009:
| |
|
2010
|
|
|
2009
|
|
Due from Sung Hsien Chang
|
|
|
|
|
|
|
|
|
Due from JJ International
|
|
|
|
|
|
|
|
|
Due from employee of IPA China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 14, 2010, Sung Hsien Chang owed IPA BVI $807,833 including interest for loans and advances. Mr. Chang repaid IPA BVI on that date by transferring 56,889,650 shares of the common stock of VIASPACE to IPA BVI. The amount was repaid at fair market value and represented a closing price of VIASPACE common stock of $0.0142 per share. This amount is shown as an asset on the balance sheet of IPA BVI, but eliminated as a consolidation entry between IPA BVI and VIASPACE at December 31, 2010. The effect on VIASPACE is a decrease in accumulated paid in capital at December 31, 2010.
Related Party Payables
At December 31, 2010 and 2009, the Company included as a related party payable $89,000 and $110,000, respectively, for accrued salary and partner draw due Dr. Kukkonen, CEO of ViaSpace LLC prior to its merger with the Company on June 22, 2005. In addition, at December 31, 2010 and 2009, the Company owes $80,000 to Dr. Kukkonen for a portion of 2008 and 2009 salary that was earned but not paid. In addition, at December 31, 2010 and 2009, the Company owed Dr. Kukkonen $302,000 and $201,000 for deferred salary that will be paid in shares of VIASPACE stock in lieu of cash. Total shares of common stock to be issued to Dr. Kukkonen for this amount is 19,663,646.
On October 31, 2006, the Company entered into a Consulting Agreement (the "Consulting Agreement") with Denda Associates Co. Ltd. ("Denda Associates"). Pursuant to the Consulting Agreement, Denda Associates provided the Company with consulting and business development expertise to assist the Company with expanding into the Japanese market. Denda Associates was founded by Mr. Nobuyuki Denda, who serves as its CEO and who also served on the BOD until July 1, 2008 when Mr. Denda resigned from the BOD for personal health reasons. As of December 31, 2010, $11,000 is owed to Mr. Denda.
The following table is a summary of Related Party Payables at December 31, 2010 and 2009:
| |
|
2010
|
|
|
2009
|
|
Due to employee of IPA China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Directors of Ionfinity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Sung Hsien Chang
As discussed in Note 8, VIASPACE was obligated to pay Sung Hsien Chang $4,800,000 at the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company including interest. The Second Closing did not occur on the February 15, 2010 deadline. On May 14, 2010, the Company entered into a secured Note with Chang. Under the Note, the Company must pay Chang $5,331,025 over a five-year period. Interest accrues at 6%. The principal must be repaid in five equal installments of $1,066,205 on the first through fifth anniversary of the issuance date. Chang may elect to receive payments in cash or equity securities. The Note is secured by certain assets of the Company, including all securities of VGE held by the Company. The Note is also secured by the assets of VGE, IPA BVI and IPA China. The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including maintaining a net worth of $5 million on a consolidated basis. At December 31, 2010, there is accrued interest of $202,000 arising from the Note included in accrued expenses.
Employment Agreements
On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi. Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum. For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE. The remainder of the employment term they would be paid by VGE. Each of them would be entitled to a bonus as determined by the VGE BOD, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.
Director Independence
Our BOD has determined that it currently has three members who qualify as "independent" as the term is used in Item 407 of Regulation S-K as promulgated by the SEC and in the listing standards of The Nasdaq Stock Market, Inc. - Marketplace Rule 4200. The independent directors are: General Bernard P. Randolph, Ms. Angelina Galiteva and Mr. Rick Calacci.
ITEM 13. EXHIBITS
|
Exhibit
Number
|
|
Description of Exhibit
|
|
|
|
|
Share Purchase Agreement dated August 29, 2003 between Marco Polo World News Inc., Rino Vultaggio and Global-Wide Publication Ltd. (incorporated herein by reference to Exhibit 4.1 of the Company’s SB-2 Registration Statement filed on November 21, 2003).
|
|
|
|
|
Agreement and Plan of Merger Among ViaSpace Technologies LLC, Robert Hoegler and Global-Wide Publication Ltd. dated June 15, 2005 (incorporated by reference to Exhibit 1.1 of the Company’s Form 8-K filed on June 20, 2005).
|
|
|
|
|
Stock Option Agreement between Global-Wide Publication Ltd., ViaSpace Technologies LLC, and SNK Capital Trust dated June 15, 2005 (incorporated by reference to Exhibit 1.2 of the Company’s Form 8-K filed on June 20, 2005).
|
|
|
|
|
Acquisition Agreement between Global-Wide Publication Ltd. and Rino Vultaggio dated May 19, 2005 (incorporated by reference to Exhibit 2.2 of the Company’s Form 8-K filed on June 23, 2005).
|
|
|
|
|
Share Purchase Agreement between Global-Wide Publication Ltd. and Robert Hoegler dated May 19, 2005 (incorporated by reference to Exhibit 2.3 of the Company’s Form 8-K filed on June 23, 2005).
|
|
|
|
|
Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 1.1 of the Company’s SB-2 Registration Statement filed on November 21, 2003).
|
|
|
|
|
Amendment to Articles of Incorporation dated August 3, 2005 (incorporated by reference to Item 5.03 of the Company’s Form 8-K filed on August 9, 2005).
|
|
|
|
|
Amendment to Articles of Incorporation dated May 9, 2005 (incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2005).
|
|
|
|
|
Amendment to Articles of Incorporation dated June 1, 2005 (incorporated herein by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2005).
|
|
|
|
|
Articles of Merger between Global-Wide Publication Ltd. and ViaSpace Technologies LLC dated June 17, 2005 (incorporated by reference to Exhibit 3.3 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2005).
|
|
|
|
|
Amendment to Articles of Incorporation dated October 12, 2006 (incorporated herein by reference to Item 5.03 of the Company’s Form 8-K filed October 17, 2006).
|
|
|
|
|
Amendment to Articles of Incorporation dated December 7, 2007 (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K filed December 13, 2007).
|
|
|
|
|
Amendment to Articles of Incorporation dated February 14, 2008 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed February 21, 2008).
|
|
|
|
|
Bylaws of the Company (incorporated herein by reference to Exhibit 2.1 of the Company’s SB-2 Registration Statement filed on November 21, 2003).
|
|
|
|
|
Amendment to Bylaws of the Company December 7, 2007 (incorporated herein by reference to Exhibit 10.4 of the Company’s Form 8-K filed December 13, 2007).
|
|
|
|
|
Certificate of Designation dated May 14, 2010 (incorporated herein by reference to Exhibit 3.1 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Employment Agreement dated October 14, 2004 between Direct Methanol Fuel Cell Corporation and Dr. Carl Kukkonen (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005).
|
|
|
|
|
Consulting Agreement between VIASPACE Inc. and Synthetic/A/(America) Ltd., dated August 16, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on August 22, 2005).
|
|
|
|
|
Warrant No. 1 between VIASPACE Inc. and Synthetic/A/(America) Ltd., dated August 16, 2005 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on August 22, 2005).
|
|
|
|
|
Warrant No. 2 between VIASPACE Inc. and Synthetic/A/(America) Ltd., dated August 16, 2005 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on August 22, 2005).
|
|
|
|
|
Warrant No. 3 between VIASPACE Inc. and Synthetic/A/(America) Ltd., dated August 16, 2005 (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on August 22, 2005)
|
|
|
|
|
Direct Methanol Fuel Cell Corporation 2002 Stock Option/Stock Issuance Plan (incorporated herein by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2005).
|
|
|
|
|
VIASPACE Inc. 2005 Stock Incentive Plan dated October 20, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on October 26, 2005).
|
|
|
|
|
Amendment to 2005 Stock Incentive Plan dated May 18, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 23, 2006).
|
|
|
|
|
Amendment to 2005 Stock Incentive Plan dated December 7, 2007 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on December 13, 2007).
|
|
|
|
|
Amendment to 2005 Stock Incentive Plan dated February 14, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February 21, 2008).
|
|
|
|
|
Amendment to 2005 Stock Incentive Plan dated February 14, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K/A filed on April 4, 2008).
|
|
|
|
|
VIASPACE Inc. 2005 Non-Employee Director Option Plan dated October 20, 2005 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on October 26, 2005).
|
|
|
|
|
VIASPACE Inc. 2006 Non-Employee Director Option Plan dated February 13, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on February 16, 2006).
|
|
|
|
|
Compensation Package for Outside Members of the Board Directors of VIASPACE Inc. dated October 20, 2005 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on October 26, 2005).
|
|
|
|
|
2006 Compensation Package for Outside Members of the Board of Directors of VIASPACE Inc. dated February 13, 2006 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on February 16, 2006).
|
|
|
|
|
Stock Purchase Agreement between VIASPACE Inc. and California Institute of Technology dated October 20, 2005 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on October 26, 2005).
|
|
|
|
|
** Confidential License Agreement By and Among University of Southern California, California Institute of Technology and Direct Methanol Fuel Cell Corporation dated January 19, 2006 (incorporated by reference to Exhibit 10.13 of the Company’s Form 10-K filed on March 31, 2006).
|
|
|
|
|
** Confidential Non-Exclusive License Agreement By and Among University of Southern California, California Institute of Technology and Direct Methanol Fuel Cell Corporation dated January 19, 2006 (incorporated by reference to Exhibit 10.14 of the Company’s Form 10-K filed on March 31, 2006).
|
|
|
|
|
VIASPACE Inc. Amended Option Agreement with SNK Capital Trust dated March 21, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 22, 2006).
|
|
|
|
|
VIASPACE Inc. Stock Purchase Agreement with SNK Capital Trust dated March 21, 2006 (incorporated by reference Exhibit 10.2 of the Company’s Form 8-K filed on March 22, 2006).
|
|
|
|
|
VIASPACE Inc. Stock Settlement Agreement dated March 21, 2006 with members of ViaSpace Technologies LLC dated March 21, 2006 (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed on March 22, 2006).
|
|
|
|
|
Nonexclusive Software License Agreement between Arroyo Sciences, Inc. and California Institute of Technology dated June 19, 2003. (incorporated by reference to Exhibit 10.18 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Nonexclusive Software License Agreement between Arroyo Sciences, Inc. and California Institute of Technology dated September 28, 2004. (incorporated by reference to Exhibit 10.19 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Software License Agreement between VIASPACE Inc. and California Institute of Technology dated March 15, 2006. (incorporated by reference to Exhibit 10.20 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Stock Purchase Agreement with SNK Capital Trust dated March 30, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 3, 2006).
|
|
|
|
|
Share Lock-Up Agreement with SNK Capital Trust dated April 10, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 13, 2006).
|
|
|
|
|
License Agreement between Direct Methanol Fuel Cell Corporation and California Institute of Technology dated May 9, 2006 (incorporated by reference to Exhibit 10.23 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Purchase order from L3 Communications to Arroyo Sciences, Inc. dated June 8, 2006 (incorporated by reference to Exhibit 10.24 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Lease with Pasadena Business Park, LLC dated January 10, 2006, effective beginning May 1, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-QSB filed on August 14, 2006).
|
|
|
|
|
Ionfinity contract with US Navy dated August 1, 2006 (incorporated by reference to Exhibit 10.26 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Ionfinity contract with US Army dated August 14, 2006 (incorporated by reference to Exhibit 10.27 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Ionfinity contract with US Air Force dated September 30, 2006 (incorporated by reference to Exhibit 10.28 of the Company’s Form 10-K filed on March 30, 2007).
|
|
|
|
|
Consulting Agreement between VIASPACE Inc. and Denda Associates Co., Ltd. dated October 31, 2006 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 6, 2006).
|
|
|
|
|
Securities Purchase Agreement dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Investor Registration Rights Agreement (relating to the securities issued pursuant to the Securities Purchase Agreement) dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Security Agreement dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Form of Secured Convertible Debenture relating to the Securities Purchase Agreement dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Form of Common Stock Purchase Warrant relating to the Securities Purchase Agreement dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Standby Equity Distribution Agreement dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Registration Rights Agreement (relating to securities to be issued pursuant to the Standby Equity Distribution Agreement) dated November 2, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.7 of the Company’s Form 8-K filed November 8, 2006).
|
|
|
|
|
Secured Convertible Debenture relating to the Securities Purchase Agreement dated November 29, 2006 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed December 4, 2006).
|
|
|
|
|
Securities Purchase Agreement dated March 8, 2007 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 13, 2007).
|
|
|
|
|
Registration Rights Agreement dated March 8, 2007 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed March 13, 2007).
|
|
|
|
|
Termination Agreement dated March 8, 2007 between the Company and Cornell Capital Partners, LP (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed March 13, 2007).
|
|
|
|
|
Promissory Note dated September 10, 2007 between the Company and Rhino Steel Manufacturing Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 11, 2007).
|
|
|
|
|
Promissory Noted dated October 18, 2007 between the Company and La Jolla Cove Investors, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 23, 2007).
|
|
|
|
|
Form of Stock Purchase Agreement between the Company and La Jolla Cove Investors, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 2, 2007).
|
|
|
|
|
Service and Support Agreement dated February 28, 2008 between the Company and E2 Corp. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed March 5, 2008).
|
|
|
|
|
Service and Support Agreement dated February 28, 2008 between the Company and Arroyo Support Group, Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed March 5, 2008).
|
|
|
|
|
Addendum to Promissory Note between the Company and Rhino Steel Manufacturing, Ltd. dated February 11, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed May 15, 2008).
|
|
|
|
|
Settlement Agreement and General Release between the Company and La Jolla Cove Investors, Inc. dated March 25, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed May 15, 2008).
|
|
|
|
|
Amendment to Settlement Agreement and General Release between the Company and La Jolla Cove Investors, Inc. dated June 25, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed July 1, 2008).
|
|
|
|
|
Continuing Personal Guaranty between La Jolla Cove Investors, Inc. and Carl Kukkonen dated June 25, 2008 (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed July 1, 2008).
|
|
|
|
|
STTR Phase II Contract between Ionfinity and the US Army for Advanced Robotic Detection of Chemical Agents, Toxic Industrial Gases, and IEDs for Force Health Protection effective August 4, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed August 14, 2008).
|
|
|
|
|
Settlement Agreement between the Company and YA Global Investments, L.P. (formerly known as Cornell Capital Partners, L.P.) dated September 8, 2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed September 12, 2008).
|
|
|
|
|
Securities Purchase Agreement dated October 21, 2008 by and among the Registrant, VIASPACE Green Energy Inc., Sung Hsien Chang and China Gate Technology Co. Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Shareholders Agreement dated October 21, 2008 by and among the Registrant, VIASPACE Green Energy Inc., and Sung Hsien Chang (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Employment Agreement dated October 21, 2008 by and among VIASPACE Green Energy Inc. and Sung Hsien Chang (incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Employment Agreement dated October 21, 2008 by and among VIASPACE Green Energy Inc. and Carl Kukkonen (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Employment Agreement dated October 21, 2008 by and among VIASPACE Green Energy Inc. and Stephen Muzi (incorporated by reference to Exhibit 10.5 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Employment Agreement dated October 21, 2008 by and among VIASPACE Green Energy Inc. and Maclean Wang (incorporated by reference to Exhibit 10.6 of the Company’s Form 8-K filed October 27, 2008).
|
|
|
|
|
Asset Purchase Agreement dated December 22, 2008 by and between the Company and Knovitech, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed December 29, 2008).
|
|
|
|
|
STTR Phase II Contract between Ionfinity and the US Navy for Miniature Electronic Sniffer for Navy Vertical Take off Unmanned Aerial Vehicles (VTUAVs) effective October 23, 2008. (incorporated by reference to Exhibit 10.57 of the Company’s Form 10-K filed March 31, 2009).
|
|
|
|
|
Asset Purchase and Support Services Agreement dated April 20, 2009 by and between the Registrant and Landtec North America (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 23, 2009).
|
|
|
|
|
Amendment to Securities Purchase Agreement dated June 22, 2009 by and among the Registrant, VIASPACE Green Energy Inc., Sung Hsien Chang and China Gate Technology Co., Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 26, 2009).
|
|
|
|
|
Amendment No. 2 to Securities Purchase Agreement dated August 21, 2009 by and among the Registrant, VIASPACE Green Energy Inc., Sung Hsien Chang and China Gate Technology Co., Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed August 25, 2009).
|
|
|
|
|
Amendment No. 3 to Securities Purchase Agreement dated August 21, 2009 by and among the Registrant, VIASPACE Green Energy Inc., Sung Hsien Chang and China Gate Technology Co., Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q filed November 16, 2009).
|
|
|
|
|
Amendment No. 4 to Securities Purchase Agreement dated November 21, 2009 by and among the Registrant, VIASPACE Green Energy Inc. and Sung Hsien Chang (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 23, 2009).
|
|
|
|
|
Amendment No. 5 to Securities Purchase Agreement dated November 25, 2009 by and among the Registrant, VIASPACE Green Energy Inc. and Sung Hsien Chang (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed November 30, 2009).
|
|
|
|
|
Amendment No. 6 to Securities Purchase Agreement dated December 18, 2009 by and among the Registrant, VIASPACE Green Energy Inc. and Sung Hsien Chang (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed December 21, 2009).
|
|
|
|
|
Share Purchase Agreement dated April 16, 2010 by and among the Registrant and Sung Hsien Chang (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed April 20, 2010).
|
|
|
|
|
Amendment to Share Purchase Agreement dated May 14, 2010 by and among Registrant, Sung Chang, certain other VGE shareholders and the other parties set forth therein (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Security Agreement dated May 14, 2010 by and between the Registrant and Sung Chang (incorporated herein by reference to Exhibit 10.2 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Stock Pledge Agreement dated May 14, 2010 by and between the Registrant and Sung Chang (incorporated herein by reference to Exhibit 10.3 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Employment Agreement dated May 14, 2010 by and among Registrant, VIASPACE Green Energy Inc. and Carl Kukkonen (incorporated herein by reference to Exhibit 10.4 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Employment Agreement dated May 14, 2010 by and among Registrant, VIASPACE Green Energy Inc. and Stephen Muzi (incorporated herein by reference to Exhibit 10.5 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Registration Rights Agreement dated May 14, 2010 by and between the Registrant and Chang (incorporated herein by reference to Exhibit 10.6 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
Secured Promissory Note dated May 14, 2010 by and between Registrant and Chang (incorporated herein by reference to Exhibit 10.7 of the Company’s Form 8-K filed May 18, 2010).
|
|
|
|
|
VIASPACE Inc. Code of Ethics for Senior Executive Officers and Senior Financial Officers dated October 20, 2005 (incorporated by reference to Exhibit 14.1 of the Company’s Form 8-K filed on October 26, 2005).
|
|
|
|
|
* List of subsidiaries of Company.
|
|
|
|
|
* Consent of Goldman Kurland Mohidin LLP dated March 30, 2011.
|
|
|
|
|
* Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
* Certification of President and Chief Financial Officer pursuant to Exchange Act Rule 13a-14 and 15d-14 as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
* Certification of the Company’s Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
**
|
Confidential treatment approved by the Securities and Exchange Commission on March 2, 2007. Exhibit 10.13 received approval for confidential treatment through October 26, 2019. Exhibit 10.14 received approval for confidential treatment through November 10, 2019.
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent Auditors
Consistent with SEC policies regarding auditor independence, our Audit Committee has the responsibility for appointing, setting compensation and overseeing the work of the independent auditor. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent auditor.
Prior to engagement of the independent auditor for the next year’s audit, management will submit an aggregate of services expected to be rendered during that year for each of four categories of services to the Audit Committee for approval.
|
|
1.
|
Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent auditor can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.
|
|
|
2.
|
Audit-Related services are for assurance and related services that are traditionally performed by the independent auditor, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.
|
|
|
3.
|
Tax services include all services performed by the independent auditor's tax personnel except those services specifically related to the audit of the financial statements, and includes fees in the areas of tax compliance, tax planning, and tax advice.
|
|
|
4.
|
Other Fees are those associated with services not captured in the other categories.
|
Prior to the engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent auditor and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent auditor.
The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2011.
| |
VIASPACE INC.
|
| |
(Registrant)
|
| |
|
|
By:
|
/s/ CARL KUKKONEN
|
| |
Name: Carl Kukkonen
|
| |
Title: Chief Executive Officer
|
| |
(Principal Executive Officer and Director)
|
| |
|
|
By:
|
/s/ STEPHEN J. MUZI
|
| |
Name: Stephen J. Muzi
|
| |
Title: Chief Financial Officer
|
| |
(Principal Financial and Accounting Officer)
|
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
| |
|
|
|
|
|
/s/ CARL KUKKONEN
|
|
Chief Executive Officer
|
|
March 30, 2011
|
|
Carl Kukkonen
|
|
(Principal Executive Officer and Director)
|
|
|
| |
|
|
|
|
|
/s/ STEPHEN J. MUZI
|
|
Chief Financial Officer
|
|
|
|
Stephen J. Muzi
|
|
(Principal Financial and Accounting Officer)
|
|
|
| |
|
|
|
|
|
/s/ SUNG HSIEN CHANG
|
|
Director
|
|
|
|
Sung Hsien Chang
|
|
|
|
|
| |
|
|
|
|
|
/s/ GENERAL BERNARD P. RANDOLPH
|
|
Director
|
|
|
|
General Bernard P. Randolph
|
|
|
|
|
| |
|
|
|
|
|
/s/ ANGELINA GALITEVA
|
|
Director
|
|
|
|
Angelina Galiteva
|
|
|
|
|
| |
|
|
|
|
|
/s/ RICK CALACCI
|
|
Director
|
|
|
|
Rick Calacci
|
|
|
|
|
ITEM 7. FINANCIAL STATEMENTS
VIASPACE INC.
TABLE OF CONTENTS
| |
PAGE
|
| |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTING FIRM
|
|
| |
|
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
| |
|
Consolidated Balance Sheets
|
|
Consolidated Statements of Operations and Other Comprehensive Loss
|
|
Consolidated Statements of Stockholders’ Equity (Deficit)
|
|
Consolidated Statements of Cash Flows
|
|
Notes to Consolidated Financial Statements
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
VIASPACE Inc.
We have audited the accompanying consolidated balance sheets of VIASPACE Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations and other comprehensive loss, stockholders' equity (deficit), and cash flows for the years ended December 31, 2010 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VIASPACE Inc. and Subsidiaries as of December 31, 2010 and 2009 and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2010 and 2009, in conformity with US generally accepted accounting principles.
The accompanying financial statements were prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations. In addition, at December 31, 2010, the Company has working capital of $235,000 and an accumulated deficit of $35,568,000. These facts raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Goldman Kurland and Mohidin LLP
Goldman Kurland and Mohidin LLP
Encino, California
March 30, 2011
VIASPACE INC.
CONSOLIDATED BALANCE SHEETS
| |
|
December 31,
2010
|
|
|
December 31,
2009
|
|
|
ASSETS
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 10,000,000 shares authorized, one share of Series A preferred stock issued and outstanding in 2010, no shares issued and outstanding in 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 1,500,000,000 shares authorized, 1,228,651,926 and 903,505,407 issued and outstanding in 2010 and 2009, respectively
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
|
|
|
|
|
|
|
Accumulated comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
VIASPACE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE LOSS
| |
|
Years Ended December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of humidity sensor product line
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LOSS INCLUDING NONCONTROLLING INTERESTS AND BEFORE DISCONTINUED OPERATIONS AND INCOME TAXES
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS ATTRIBUTED TO VIASPACE
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LOSS PER SHARE OF COMMON STOCK INCLUDING NONCONTROLLING INTERESTS AND BEFORE DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE OF COMMON STOCK ATTRIBUTED TO VIASPACE SHAREHOLDERS — Basic and diluted
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted
|
|
|
|
|
|
|
|
|
* Less than $0.01 per common share.
The accompanying notes are an integral part of the consolidated financial statements.
VIASPACE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2010 AND 2009
| |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares
|
|
Amount
|
|
Additional
Paid in
Capital
|
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Deficit
|
|
Total Stockholder’s Equity
|
|
|
Noncontrolling Interest |
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
) |
Cash distribution from Ionfinity, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share exchange between VIASPACE and VGE shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distribution from Ionfinity, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to Sung Hsien Chang and related parties related to Share Purchase Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of Sung Hsien Chang receivable with shares of stock issued to IPA BVI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
VIASPACE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
Years Ended December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
Stock compensation related to stock issued
|
|
|
|
|
|
|
|
|
Operating expenses paid in stock
|
|
|
|
|
|
|
|
|
Gain on disposal of vehicle
|
|
|
|
|
|
|
|
|
Gain on sale of assets to Landtec
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of vehicle
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets to Landtec
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payments on short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND EQUIVALENTS
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS, Beginning of year
|
|
|
|
|
|
|
|
|
CASH AND EQUIVALENTS, End of year
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Financing for 2010:
|
·
|
The Company issued 18,000,000 shares of common stock for future services valued at $257,000. This amount was recorded at issuance as prepaid expenses.
|
Supplemental Disclosure of Non-Cash Activities for 2009:
|
·
|
The Company issued 23,377,927 shares of common stock for future services valued at $638,000. This amount was recorded at issuance as prepaid expenses.
|
The accompanying notes are an integral part of the consolidated financial statements.
VIASPACE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable and alternative energy company with a global reach. We operate four separate businesses. We have a majority ownership in VIASPACE Green Energy Inc., a British Virgin Islands (“BVI”) international business company (“VGE”) who is the parent company of Inter Pacific Arts Corporation, a BVI international business company (“IPA BVI”) and Guangzhou Inter Pacific Arts, a Peoples 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, framed artwork sold in US retail chain stores. IPA China also has a sublicense to a fast-growing, high yield, low carbon, nonfood energy crop called Giant KingTM Grass (“GKG”) 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. Cellulosic ethanol, bio butanol and other liquid biofuels, collectively called Grassoline, 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 that the 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 has some carbon dioxide emissions, but much lower than burning coal or other fossil fuels directly. GKG has been independently tested by customers and been shown to have excellent energy content, very high bio methane production, and high potential for biofuels and biochemicals.
We are growing GKG on approximately 280 acres of leased land in China to serve 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 Green LogTM product.
We also produce disposable fuel cartridges that provide the energy source for portable electronics powered by fuel cells. We do not make fuel cells, but instead we make disposable fuel cartridges for fuel cell and electronics manufacturers such as Samsung. We are also working on a next-generation mass spectrometry technology for industrial process control and environmental monitoring.
VIASPACE is based in California with business activities in China, Korea and Japan.
Company Background - ViaSpace Technologies LLC (“ViaSpace LLC”) was founded in July 1998 as a private company to commercialize proven space and defense technologies from NASA and the Department of Defense. ViaSpace LLC had licensed patents, and software technology from California Institute of Technology (“Caltech”), which manages the Jet Propulsion Laboratory (“JPL”) for NASA. On June 22, 2005, ViaSpace LLC acquired the non-operating shell company Global-Wide Publication Ltd. (“GW”). GW was incorporated in the State of Nevada on July 14, 2003. At merger, GW was renamed VIASPACE Inc. The transaction was accounted for as a reverse merger and a recapitalization of the Company. VIASPACE became a public company on June 22, 2005.
Going Concern - At December 31, 2010, the Company has working capital of $235,000 and an accumulated deficit of $35,568,000. Our financial statements were prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have not made any adjustments to the financial statements as a result of the outcome of the uncertainty described above. Accordingly, the value of the Company in liquidation may differ from the amounts in our financial statements.
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, 2009 consolidated financial statements to conform to the December 31, 2010 consolidated financial statement presentation.
Noncontrolling Interest - Certain amounts presented for prior periods previously designated minority interest were reclassified to conform to the current year presentation. The Company follows “Noncontrolling Interests in Consolidated Financial Statements, codified in FASB Accounting Standards Codification (“ASC”) Topic 810 which established new 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. This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all NCIs prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon adoption, the Company retroactively reclassified the “Minority interest” previously included in the “Other liabilities” section of the consolidated balance sheet to a new component of equity with respect to NCIs in consolidated subsidiaries. The adoption also impacted certain captions previously used on the consolidated statement of income and other comprehensive income, largely identifying net income including NCI and net income attributable to the Company.
Noncontrolling interest in consolidated subsidiaries is the minority stockholders’ proportionate share of equity of Direct Methanol Fuel Corporation (“DMFCC”), Ionfinity LLC (“Ionfinity”) and VGE. The Company’s controlling interest requires the results of these companies’ operations be included in the consolidated financial statements. The percentage of DMFCC, Ionfinity and VGE not owned by the Company is shown as NCI in the Consolidated Statement of Operations and Consolidated Balance Sheet. At December 31, 2010 and 2009, the Company recorded $500,000 as NCI for an investment in DMFCC by a minority shareholder. At December 31, 2010 and 2009, the Company recorded $2,104,000 and $6,467,000, respectively, representing Common Shareholder NCIs in Ionfinity and VGE. On May 14, 2010, the Company completed a share exchange agreement with certain minority shareholders of VGE exchanging shares of VIASPACE for shares of VGE that such shareholders held. This resulted in a decrease in NCI of VGE of $4,229,000. At December 31, 2010 and 2009, the Company recorded $2,104,000 and $6,467,000, respectively, representing Common Shareholder NCIs in Ionfinity and VGE.
Principles of Consolidation - The Company is generally a founding shareholder of its affiliated companies which are consolidated. Affiliated companies include VGE, DMFCC and Ionfinity 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.
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 Equivalents - The Company considers all highly liquid debt instruments, purchased with an original maturity of three months or less, to be cash equivalents.
Concentration of Credit Risk - The Company’s financial instruments that are exposed to credit risk consist primarily of cash equivalents. The Company maintains all of its cash accounts with high credit quality institutions. Such balances with any one institution may exceed FDIC insured limits.
Accounts Receivable Allowance for Doubtful Accounts - The allowance for doubtful accounts relates to specifically identified receivables that are evaluated individually for collectability. We determine a receivable is uncollectible when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms of the receivable agreement, without regard to any subsequent restructurings. Factors considered in assessing collectability include, but are not limited to, a customer’s extended delinquency, requests for restructuring and filings for bankruptcy.
Marketable Securities - The Company accounts for marketable securities in accordance with the provisions of “Accounting for Certain Investments in Debt and Equity Securities”, codified in FASB ASC Topic 320. This Topic provides accounting and disclosure guidance for investments in equity securities that have readily determinable fair values and all debt securities. It applies to marketable equity securities and all debt securities, carried at fair value with unrealized gains and losses, net of related deferred tax effect, and requires that they be reported as an item of other comprehensive income. At December 31, 2010 and 2009, the Company did not have any marketable securities.
Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the average cost method. Market is determined using net realizable value. The Company writes down its inventory for estimated obsolescence, excess quantities and other factors in evaluating net realizable value.
The following is a summary of inventory at December 31, 2010:
| |
|
Raw
Materials
|
|
|
Finished
Goods
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of inventory at December 31, 2009:
Property and Equipment - Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets and estimated lives as follows:
Land Use Right – All land in the PRC is government owned and cannot be sold to any individual or company. IPA China acquired land use rights for the land occupied by its manufacturing facility in 2005. VGE acquired land use rights in 2010 on approximately 13 hectares, or 33 acres in Guangdong province of the PRC to grow GKG. As of December 31, 2010, VGE has land use rights of approximately 113 hectares, or 280 acres in Guangdong province of the PRC.
License – IPA China has a worldwide license for a fast-growing, high yield, low carbon, nonfood energy crop called GKG 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. IPA China sublicensed this right from China Gate Technology Co., Ltd. which obtained the original license from the inventor. IPA China did not directly pay for the license. VIASPACE issued shares of its common stock to Licensor upon the acquisition of IPA China by VIASPACE and VGE on October 21, 2008 to pay for the license.
Intangible Assets - The Company’s intangible assets consist of licenses to patents that are amortized through the expiration date of the patents (up to twenty years). All intangible assets are subject to impairment tests on an annual or periodic basis. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. Amortizing intangibles are currently evaluated for impairment using the methodology set forth in “Accounting for the Impairment or Disposal of Long-Lived Assets”, codified in FASB ASC Topic 360.
Impairment of Long-lived Assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For purposes of estimating future cash flows from impaired assets, the Company groups assets at the lowest level from which there is identifiable cash flows that are largely independent of the cash flow of other groups of assets. There have been no impairment charges recorded by the Company.
Fair Value of Financial Instruments - “Disclosures about Fair Value of Financial Instruments,” codified in FASB ASC Topic 85, requires the Company disclose estimated fair values of financial instruments at least annually. The recorded value of accounts receivables, related party receivables, related party payables, accounts payable and accrued expenses approximate their fair values based on their short-term nature. The recorded values of long-term debt and liabilities approximate fair value.
Income Taxes– The Company utilizes “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. For IPA China, the statutory corporate income tax rate for foreign enterprises in the PRC is 25% for 2010. IPA BVI and VGE are British Virgin Islands international companies and not subject to any United States income taxes. The Company does not have any deferred tax assets or liabilities recorded for the periods covered by the accompanying financial statements.
Revenue Recognition – Product Revenue. VIASPACE has generated revenues on product revenue shipments. In accordance with “Revenue Recognition”, codified in FASB ASC Topic 605, VIASPACE recognizes product revenue provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are freight on board shipping point. If the Company ships product whereby a customer has a right of return or review period, the Company does not recognize revenue until the right of return or review period has lapsed. Prior to the period lapsing, any cash received would be recorded as deferred revenue on the Company’s Balance Sheet.
Product Development Revenue on Fixed-Price Contracts With Milestone Values Defined. Ionfinity has generated revenues on fixed-price contracts for government contracts. These contracts have clear milestones and deliverables with distinct values assigned to each milestone. The government is not obligated to pay Ionfinity the complete value of the contract and can cancel the contract if the Company fails to meet a milestone. Although the government can cancel the contract if a milestone is not met, the Company is not required to refund any payments for prior milestones that have been approved and paid by the government. The milestones do not require the delivery of multiple elements as noted in “Revenue Arrangements with Multiple Deliverables”, codified in FASB ASC Topic 605. In accordance with this topic, the Company treats each milestone as an individual revenue agreement and only recognizes revenue for each milestone when all required revenue recognition conditions are met.
Framed art sales. In accordance with FASB ASC Topic 605, IPA BVI and IPA China recognize product revenue provided: (1) persuasive evidence of an arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. The price is considered fixed or determinable when it is not subject to refund or adjustments. Our standard shipping terms are free on board shipping point. Some of the Company’s products are sold in the PRC and are subject to Chinese value-added tax. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. Revenue is recorded net of VAT taxes.
Cost of Revenues – Cost of revenues consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Any write-down of inventory to lower of cost or market is also recorded in cost of goods sold.
Foreign Currency Translation and Comprehensive Income (Loss) – IPA China’s functional currency is the Renminbi (“RMB”). For financial reporting purposes, RMB were translated into United States dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income". Gains and losses resulting from foreign currency transactions are included in income. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date. IPA BVI’s sales are denominated in USD.
Segment Reporting and Geographic Information – "Disclosures about Segments of an Enterprise and Related Information", codified in FASB ASC Topic 280, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
Stock Based Compensation - VIASPACE and DMFCC have stock-based compensation plans. Effective with VIASPACE and DMFCC’s fiscal year that began January 1, 2006, the Company 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.
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 stockholders for the period by the weighted average number of shares of common stock outstanding during the period.
Research and Development - The Company charges research and development expenses to operations as incurred.
NOTE 2 — ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following at December 31, 2010 and December 31, 2009:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts receivable
|
|
|
|
|
|
|
|
|
Less: Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 — PREPAID EXPENSES
During 2009 and 2010, the Company 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. As of December 31, 2010 and 2009, the remaining value of these agreements was $264,000 and $601,000, respectively, which is included in prepaid expenses in the accompanying consolidated balance sheets.
Other prepaid expenses were $36,000 and $50,000 at December 31, 2010 and 2009, respectively.
NOTE 4 — FIXED ASSETS
Fixed assets are comprised of the following at December 31, 2010 and December 31, 2009:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation was $82,000 for 2010 and $124,000 for 2009.
NOTE 5 — LAND USE RIGHT
Land use right is composed of the following at December 31, 2010 and December 31, 2009:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization was $41,000 for 2010 and $30,000 for 2009. The amortization for the next five years from December 31, 2010 will be: 2011 - $41,000; 2012 - $34,000; 2013 - $30,000; 2014 - $30,000; and 2015 - $30,000.
NOTE 6 — INTANGIBLE ASSETS
Intellectual Property
Intangible asset balances for intellectual property are comprised of the following at December 31, 2010 and December 31, 2009, respectively:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
Intellectual property, net
|
|
|
|
|
|
|
|
|
Amortization was $16,000 for 2010 and 2009. The amortization for the next five years from December 31, 2010 will be $16,000 in each year.
License to Grass
As more fully explained in Note 8, VIASPACE through its majority owned subsidiary VGE, acquired IPA China and IPA BVI on October 21, 2008. IPA China has a worldwide license for a fast-growing, high yield, low carbon, nonfood energy crop called GKG 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. VIASPACE issued 30,576,007 shares to the Licensor of the GKG valued at $507,000 on the date of acquisition. The grass license is amortized over an estimated useful life of 20 years.
Amortization was $25,000 for 2010 and 2009. The amortization for the next five years from December 31, 2010 will be $25,000 in each year.
License to Grass is composed of the following at December 31, 2010 and December 31, 2009:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
As more fully explained in Note 8, the Company and Parent Company acquired IPA China and IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the acquisition.
NOTE 7 — OWNERSHIP INTEREST IN AFFILIATED COMPANIES
DMFCC. As of December 31, 2010 and December 31, 2009, the Company owned 71.4% of the outstanding shares of DMFCC.
VGE. As of December 31, 2010 and December 31, 2009, the Company owned 75.7% and 59.3%, respectively, of the outstanding shares of VGE. On May 14, 2010, as discussed in Note 8, the Company completed a share exchange agreement with certain minority shareholders of VGE exchanging newly-issued shares of VIASPACE for existing shares of VGE. This resulted in a decrease in non-controlling interest of VGE of $4,229,000 and the Company increasing its ownership in VGE from 59.3% to 75.7%. VGE owns 100% of the outstanding shares of IPA BVI. IPA BVI owns 100% of the outstanding shares of IPA China. During the fourth quarter of 2010, VGE established VIASPACE Green Energy Pte. Ltd. (“VIASPACE Pte.”), a company incorporated in the Republic of Singapore. At December 31, 2010, VIASPACE Pte. has no active operations or assets. VGE has established VIASPACE Pte. to explore business opportunities for its GKG in Singapore.
Ionfinity. As of December 31, 2010 and December 31, 2009, the Company owned 46.3% of the outstanding membership interests of Ionfinity. The Company has two seats on Ionfinity’s board of managers out of four seats. The Company provides management and accounting services for Ionfinity. The Company also acts as tax partner for Ionfinity for income tax purposes. Due to these factors, Ionfinity is considered economically and organizationally dependent on the Company and as such is included in the Consolidated Financial Statements of the Company. The noncontrolling interest held by other members is disclosed separately in the Company’s Consolidated Financial Statements.
NOTE 8 — ACQUISITION OF IPA
On October 21, 2008, VIASPACE and VGE entered into a Securities Purchase Agreement (the "Purchase Agreement") with Sung Hsien Chang ("Chang"), and China Gate Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under the Purchase Agreement, we agreed to acquire 100% of Inter-Pacific Arts Corp., a BVI international business company ("IPA BVI"), and the entire equity interest of Guangzhou Inter-Pacific Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong province ("IPA China") from Chang, the sole shareholder of IPA BVI and IPA China. In exchange, VIASPACE agreed to pay $16 million in a combination of cash, and newly-issued shares of VIASPACE and our ordinary shares. In addition, VIASPACE issued shares of its common stock to Licensor and in exchange Licensor sub licensed certain grass technology to IPA China.
Initially, the transactions under the Purchase Agreement ("Acquisition") were to involve two phases. At the first closing (“First Closing”) on October 21, 2008, we issued 3,500,000 newly-issued shares to Chang and his designees. VIASPACE issued 215,384,615 shares of its common stock to Chang and 30,576,007 shares of common stock to Licensor. Chang delivered 70% of the outstanding common stock of IPA BVI to us. At that point, we controlled 70% of IPA BVI. Accordingly, we consolidated its results, assets and liabilities in our financial statements. IPA China became a wholly-owned subsidiary of IPA BVI subsequent to the First Closing on June 9, 2009.
The conditions to VIASPACE’s and VGE’s obligations to consummate the second closing (“Second Closing”) included: (1) representations and warranties of Chang and Licensor remained true at closing; (2) Chang complied with the material covenants under the agreement; (3) the issuance of the securities to Chang and Licensor were exempt from registration, including under Regulation D for which the issuance of the First Closing shares relied upon; (4) Chang executed certain compliance certificates; (5) customary permits, consents and waivers were obtained; (6) books and records were delivered to VIASPACE; (7) an officer’s certificate regarding each target’s charter documents were delivered; (8) due diligence had been satisfactorily completed; and (9) Chang shall have transferred his entire equity interest in IPA China to IPA BVI.
The conditions to Chang’s and Licensor’s obligation to consummate the second closing included: (1) representations and warranties of VIASPACE and us remained true at closing; (2) VIASPACE and we complied with the material covenants under the agreement; (3) books and records of VIASPACE were delivered or made available to Chang and his counsel; (4) any necessary third party consents shall have been obtained; and (5) VIASPACE shall deliver $4.8 million plus interest in cash to Chang. To our knowledge, all of these criteria, other than the cash payment were met. Even if the Second Closing did not occur, the remaining 30% of IPA BVI was to be transferred by Chang to VGE prior to the Second Closing deadline.
In addition, the Licensor and Chang, the seller of IPA China and IPA BVI, each represented that at least 100 hectares of arable land in Guangdong province in China will be available for grass farming by IPA China within 12 months after the First Closing Date. IPA China secured 45 hectares of arable land in the first quarter of 2009 and leased an additional 55 hectares in the third quarter of 2009. The requirement was met.
On August 21, 2009, the parties entered into a second Amendment to the Purchase Agreement whereby VIASPACE irrevocably assigned to Chang and Licensor the VIASPACE shares issued to Chang and Licensor in the First Closing of the Purchase Agreement. Licensor agreed to limit sales of VIASPACE common shares issued at the First Closing to 8,800,000 shares in any 90-day period.
As required by the Purchase Agreement, VGE filed a Registration Statement on Form S-1 with the SEC on June 3, 2009 covering the resale of a portion of VGE common stock issued pursuant to the Purchase Agreement as permitted by SEC regulations. The SEC declared the VGE Registration Statement on Form S-1 effective 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 listing on the OTC Bulletin Board under the ticker symbol VGREF.OB. This satisfied the requirement in the Purchase Agreement that VGE stock be listed on a Trading Market.
Following various additional amendments to the Purchase Agreement, the deadline for the Second Closing in which the remaining minority interest of 30% of IPA BVI equity holdings would be transferred to us was February 15, 2010. At the Second Closing deadline, VIASPACE was to pay $4.8 million ("Cash Consideration") plus Interest (as determined below) since the First Closing, in cash to Chang. Interest on the Cash Consideration was to accrue at 6% for the first nine months after the First Closing, and then 18% until June 10, 2009, and then at 6% thereafter. We had control of the assets of IPA BVI through our majority ownership position in VGE and there was no restriction on the Company’s ability to transfer or capitalize on such assets at any time, including prior to the cash payment due Chang from VIASPACE.
The Second Closing did not occur on the February 15, 2010 deadline. As a result, VIASPACE had a contractual obligation to deliver all of the VGE shares it holds to Chang and Chang has an obligation to deliver the remaining 30% of IPA BVI equity to us. However, Chang, VIASPACE and VGE continued negotiating an alternative closing and purchase of IPA.
On April 16, 2010, VIASPACE and Chang entered into a Share Purchase Agreement ("Share Purchase Agreement") pursuant to which Chang would transfer controlling interest of VGE to VIASPACE, or 6,506,000 shares of VGE capital stock, and VIASPACE would grant Chang (i) 241,667,000 newly-issued shares of its common stock, (ii) one share of its Series A Preferred Stock which controls 50.1% of the voting power of VIASPACE equity securities, and (iii) a secured promissory note in the principal amount of $5,331,025 (the "Note").
On May 14, 2010, VIASPACE, Chang and other VGE shareholders closed the transactions contemplated by the Share Purchase Agreement (the "Closing") and in connection with the Closing, VIASPACE, VGE, IPA BVI and IPA China entered into certain agreements with Chang. In particular, each executed (i) a Guarantee with Chang pursuant to which each company guaranteed VIASPACE’s repayment of the Note and (ii) a Security Agreement with Chang in which such company granted a security interest in a significant amount of assets of each company. In addition, VIASPACE also executed stock pledge agreement pledging all of the securities it owns in VGE as collateral for repayment of the Note. VIASPACE also executed a registration rights agreement in which it granted Chang rights to register his newly issued shares of VIASPACE common stock. VGE also executed employment agreements for Carl Kukkonen, CEO; Sung Hsien Chang, President; and Stephen Muzi, Chief Financial Officer.
The amount paid by VIASPACE and VGE for the acquisition on October 21, 2008 was $15,832,000 composed of: fair market value of VIASPACE stock issued - $4,589,000; VIASPACE loan to Chang - $4,800,000; and VIASPACE minority interest in VGE - $6,443,000. The net assets acquired totaled $3,003,000. The excess of value paid for the acquisition in excess of net assets acquired was assigned to: grass license - $507,000 and goodwill - $12,322,000 which are recorded on the balance sheet of VIASPACE.
NOTE 9 — DISCONTINUED OPERATIONS
Sale of Humidity Sensor Business Unit
On April 20, 2009, the Company entered into an Asset Purchase and Support Services Agreement (the “Landtec Purchase Agreement”) with Landtec North America, a California corporation ("Buyer"). Pursuant to the Landtec Purchase Agreement, the Company transferred certain assets related to the Company's tunable diode laser-based humidity sensor business to the Buyer. On April 20, 2009, pursuant to the terms of the Landtec Purchase Agreement, the Company closed the transaction to sell assets related to its humidity sensor business for $210,000. Seller received $170,000 on April 20, 2009 from Buyer and received $40,000 on June 22, 2009.
The Company recorded a gain on sale of assets related to this Landtec Purchase Agreement of $176,000 in the second quarter of 2009. Discontinued operations of $12,000 for the nine months ended September 30, 2009, for the operations sold are shown in the accompanying consolidated statements of operations for this business.
Return of Battery License to Caltech
On August 11, 2009, the Company and California Institute of Technology (“Caltech”) entered into an agreement whereby the Company returned to Caltech the license it received from Caltech on August 15, 2007 related to certain electrochemical thermodynamic measurement system technology. In exchange for the return of this license and $25,000, Caltech cancelled $134,000 payable by the Company for electrochemical thermodynamic measurement system technology and patent costs related to DMFCC fuel cell technology licensed from Caltech. The Company also agreed to return its fuel cell patents to Caltech if it ever fails to maintain the patents or if it fails by August 11, 2013 to commercialize or license one or more of the fuel cell patents received from Caltech. The Company is free to not maintain one or more individual patents if they do not meet business objectives in which case such individual patent shall revert back to Caltech. If the portfolio is returned to Caltech, DMFCC will be granted a royalty-free nonexclusive license without the right to sublicense to the patents covering the ability to make, use, sell, offer to sell and import the items covered by the patents.
NOTE 10 — STOCK OPTIONS AND WARRANTS
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 six 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. 68,300,141 shares were available for future grant at December 31, 2010. During the first quarter of 2010, the Company granted 30,000,000 stock options to employees to purchase common shares with an exercise price of $0.012 per share. During this same period, no stock options were cancelled due to employees, directors or consultants terminating employment or service with the Company.
For 2010, the Company issued 15,116,551 shares of common stock under the Plan to employees and consultants for services provided to the Company. The stock compensation expense recorded relating to these share issuances was based on fair market value on the date of grant.
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, including those issued to employees, directors, consultants and advisory board members for 2010 and 2009, the fair value was estimated at the date of grant using the following range of assumptions:
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
3.11% |
|
|
|
2.53% - 3.31% |
|
|
|
|
|
0% |
|
|
|
0% |
|
|
|
|
|
130.43% |
|
|
|
126.13% - 134.16% |
|
|
|
|
|
|
|
|
|
|
|
|
|
16.1% |
|
|
|
28.6% - 49.9% |
|
Employee and Director Option Grants
The following table summarizes activity for employees and directors in the Company’s Plan at December 31, 2010:
| |
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted to employees and directors during 2010 was $0.012 per share. The Plan recorded $445,000 of compensation expense for employee and director stock options for 2010. At December 31, 2010, there was $215,000 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 two years. At December 31, 2010, the fair value of options vested for employees and directors was $334,000. There were no options exercised during 2010.
Consultant Option Grants
The following table summarizes activity for consultants in the Company’s Plan for 2010:
| |
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no stock options granted to consultants during 2010. The Company recorded no compensation expense for consultant stock options during 2010. At December 31, 2010, there was no unrecognized compensation costs related to non-vested share-based compensation arrangements. At December 31, 2010, the fair value of options vested for consultants was $14,000. There were no options exercised during 2010.
Direct Methanol Fuel Cell Corporation 2002 Stock Option / Stock Issuance Plan
DMFCC formed a stock-based compensation plan in 2002 entitled the 2002 Stock Option / Stock Issuance Plan (the “DMFCC Option Plan”) that reserved 2,000,000 shares of DMFCC common stock for issuance to employees, non-employee members of the BOD of DMFCC, BOD members of its parent company, consultants, and other independent advisors. As of December 31, 2010, options to purchase 1,396,000 shares of DMFCC common stock were outstanding and 604,000 shares remained available for grant under the DMFCC Option Plan. Of these outstanding options, 1,030,000 are incentive stock options issued to employees and 366,000 are non-statutory stock options issued to consultants. During the year ended December 31, 2010, DMFCC issued no stock options.
DMFCC uses the Black-Scholes option pricing model to calculate the fair market value of each option granted. The Black-Scholes option pricing model includes assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. For stock options that are issued, the fair value of each option grant is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
The following table summarizes activity in the DMFCC Option Plan for 2010:
| |
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMFCC recorded zero stock option compensation expense during 2010. There were no options exercised during 2010.
VIASPACE Green Energy Inc. 2009 Stock Incentive Plan
On June 2, 2009, the BOD of VGE adopted the 2009 Stock Incentive Plan (the “VGE Plan”). The VGE Plan was also approved by the holders of a majority of the Company’s common stock. The VGE Plan provided for the reservation for issuance under the Plan of 1,400,000 shares of VGE common stock.
The VGE Plan is designed to provide additional incentive to employees, directors and consultants of the Company through the awarding of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and other awards. The VGE BOD administers the VGE 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 VGE Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant. The term of the options granted under the Plan cannot be greater than 10 years. Options to employees and directors generally vest over a period determined by the VGE BOD. 50,000 shares were available for future grant at December 31, 2010. On March 25, 2010, VGE granted stock options to the following: Carl Kukkonen, VGE CEO 550,000 stock options; Sung Hsien Chang, VGE President 550,000 stock options; and Stephen Muzi, VGE CFO 250,000 stock options. There were no stock options cancelled during 2010.
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 dividend history. The stock volatility factor is based on the historical volatility of VGE’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 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 in 2010, the fair value was estimated at the date of grant using the following range of assumptions:
|
|
|
|
|
|
Volatility factor (estimated)
|
|
|
|
|
Annual forfeiture rate (estimated)
|
|
The following table summarizes activity for employees and directors in VGE’s Plan for 2010:
| |
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted to employees and directors during 2010 was $0.80 per share. The Company recorded $334,000 of compensation expense under the VGE Plan for employee and director stock options for 2010. At December 31, 2010, there was $557,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the VGE Plan that is expected to be recognized over a weighted average period of approximately one year and three months. At December 31, 2010, the fair value of options vested for employees and directors was $405,000. There were no options exercised during 2010.
Warrants
The Company has issued warrants to purchase 624,000 common shares of the Company to non-affiliate parties at exercise prices ranging from $0.30 to $0.60 per share. These warrants expire between November 2, 2011 and March 8, 2012.
NOTE 11 — LONG-TERM DEBT
Loans with Community Development Commission
Concentric Water LLC (“Concentric”), a wholly owned subsidiary of the Company that was closed in 2009, entered into a long-term debt agreement with the Community Development Commission (“CDC”) in 2004 for $100,000, with interest of 5%, monthly payments of $1,610, with the final payment originally due in September 2009. The loan was secured by the assets of Concentric. On January 27, 2010, the Company and the CDC restructured the agreement whereby Concentric agreed to pay $1,986 in monthly principal payments beginning February 1, 2010 for 18 months. The interest rate on the loan remained at 5%.
VIASPACE Security Inc., a wholly owned subsidiary of the Company that was closed in 2009, entered into a long-term debt agreement with the CDC in 2004 for $50,000, with interest of 5%, monthly payments of $1,151, with the final payment due in September 2009. The Company received an extension of time to repay this loan and paid this loan off in full on January 20, 2010.
Loans with the CDC are comprised of the following at December 31, 2010 and December 31, 2009, respectively:
| |
|
2010
|
|
|
2009
|
|
CDC of the County of Los Angeles, secured, with interest at 5% due July 1, 2011
|
|
|
|
|
|
|
|
|
CDC of the County of Los Angeles, secured, with interest at 5% due January 20, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Current Portion of Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Sung Hsien Chang
As discussed in Note 8, VIASPACE was obligated to pay Sung Hsien Chang $4,800,000 at the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company including interest. The Second Closing did not occur on the February 15, 2010 deadline. On May 14, 2010, the Company entered into a secured Note with Chang designed to pay this amount. Under the Note, the Company must pay Chang $5,331,025 over a five-year period. Interest accrues at 6%. The principal must be repaid in five equal installments of $1,066,205 on the first through fifth anniversary of the issuance date. Chang may elect to receive payments in cash or equity securities. The Note is secured by certain assets of the Company, including all securities of VGE held by the Company. The Note is also secured by the assets of VGE, IPA BVI and IPA China. The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including maintaining a net worth of $5 million on a consolidated basis. At December 31, 2010, there is accrued interest of $202,000 arising from the Note included in accrued expenses.
NOTE 12 — STOCKHOLDERS’ EQUITY
Preferred Stock
At December 31, 2010 and 2009, 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.
There were no shares outstanding of preferred stock as of December 31, 2009. 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 BOD 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 as discussed in Note 8, effectively giving him a controlling interest in VIASPACE.
Common Stock
As of December 31, 2010 and 2009, the number of authorized shares of the Company’s common stock was 1,500,000,000. The par value of the common stock is $0.001. Common stockholders are entitled to one vote for each share held on all matters voted on by stockholders.
As of December 31, 2009, there were 903,505,407 shares of common stock outstanding. During 2010, the Company issued 15,116,551 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 310,029,968 unregistered shares of common stock to employees, consultants and vendors for services provided or to be provided to the Company. Included in newly issued unregistered shares were 241,667,000 shares of common stock issued to Mr. Chang as discussed in Note 8. All of the share issuances in 2010 were recorded at fair market value on the date of grant. As of December 31, 2010, there were 1,228,651,926 shares of common stock outstanding.
NOTE 13 — INCOME TAX
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company has accrued no interest or penalties at December 31, 2010. As of the date of these financial statements, the 2009, 2008, and 2007 income tax years are open to examination by federal and state taxing authorities.
The Company did not record a provision for income taxes for 2010 or 2009 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. 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 $15,000,000 available at December 31, 2010, which expire through 2030.
The following table reconciles the US statutory rates to the Company’s effective tax rate for 2010 and 2009.
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of Federal benefit
|
|
|
|
|
|
|
|
|
Income from non-taxable jurisdiction
|
|
|
|
|
|
|
|
|
Valuation allowance for US net operating losses
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
|
|
|
|
|
|
Note 14 — RETIREMENT PLAN
The Company has no retirement plans in effect at December 31, 2010.
Note 15 — OPERATING SEGMENTS
The Company evaluates its reportable segments in accordance with FASB ASC Topic 280 “Disclosures about Segments of an Enterprise and Related Information”. For the year ended December 31, 2010, the Company’s Chief Executive Officer, Dr. Carl Kukkonen, was the Company’s Chief Operating Decision Maker (“CODM”) pursuant to SFAS No. 131. The CODM allocates resources to the segments based on their business prospects, product development and engineering, and marketing and strategy.
The Company operates in four reportable segments. The operations of DMFCC and VIASPACE Corporate’s energy related business are included in the Energy segment. The operations of Ionfinity are included in the Security segment. The operations of IPA China and IPA BVI are included in the Framed Artwork segment. The operations of VGE are included in the Grass segment.
Energy Segment:
|
|
(i)
|
DMFCC: DMFCC is a provider of disposable fuel cartridges and intellectual property protection for manufacturers of direct methanol and other liquid hydrocarbon fuel cells. Direct methanol fuel cells are expected to be replacements for traditional batteries and are expected to gain a substantial market share in the future because they offer longer operating time as compared to current lithium ion batteries and may be instantaneously recharged by simply replacing the disposable fuel cartridge.
|
|
|
(ii)
|
VIASPACE Corporate: VIASPACE Corporate is identifying and pursuing additional business opportunities in areas including batteries, alternative fuels, and new products to conserve energy and reduce emissions.
|
Security Segment:
|
|
(i)
|
Ionfinity: Ionfinity is working on a next-generation mass spectrometry technology, which could significantly improve the application of mass spectrometry for industrial process control and environmental monitoring and could also spawn a new class of detection systems for homeland security.
|
Framed-Artwork Segment:
|
|
(i)
|
IPA China and IPA BVI: Specialize in manufacturing high-quality, copyrighted, framed artwork in the PRC which is sold to retail stores in the US
|
Grass Segment:
|
|
(i)
|
VGE: VGE grows a fast-growing, high yield, low carbon, nonfood energy crop called GKG in the PRC. 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. GKG can also be used as animal feed.
|
The accounting policies of the reportable segments are described in the summary of significant accounting policies (see Note 1 to these financial statements). The Company evaluates segment performance based on income (loss) from operations excluding infrequent and unusual items.
The amounts shown as “Corporate Administrative Costs” consist of unallocated corporate-level operating expenses. In addition, the Company does not allocate other income/expense, net to reportable segments.
Information on reportable segments for the years ended December 31, 2010 and 2009 is shown below:
| |
|
|
|
| |
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Income (Loss) From Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations by Reportable Segments
|
|
|
|
|
|
|
|
|
Corporate Administrative Costs
|
|
|
|
|
|
|
|
|
Corporate Stock Compensation and Warrant Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2010 and 2009, the Company had one customer which made up 73% and 65%, respectively, of our total consolidated revenues.
NOTE 16 — 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, 2010 and 2009 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:
The following table sets forth the computation of basic and diluted net loss per share for 2010 and 2009, respectively:
| |
|
2010
|
|
|
2009
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Net loss per share of common stock, basic and diluted
|
|
|
|
|
|
|
|
|
NOTE 17 — RELATED PARTY TRANSACTIONS
Other than as listed below, we have not been a party to any significant transactions, proposed transactions, or series of transactions, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holders, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest.
Related Party Receivables
Included in the Company’s consolidated balance sheets at December 31, 2010 and 2009 are Related Party Receivables and Payables. The Related Party Receivables and Payables are detailed below. Sung Hsien Chang is a Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI. JJ International (“JJ”) is a company owned by Sung Hsien Chang that operates separately. JJ also acts as a distributor of product for VGE. IPA China recorded revenues of $362,000 from JJ for the year ended December 31, 2010. IPA BVI is charging JJ interest income on the outstanding receivable balance at an interest rate of 6%. For the year ended December 31, 2010, $97,000 was recorded as interest income to JJ. This amount is included in Other Income in the Company’s Consolidated Statements of Operations.
The following table represents a summary of Related Party Receivables at December 31, 2010 and 2009:
| |
|
2010
|
|
|
2009
|
|
Due from Sung Hsien Chang
|
|
|
|
|
|
|
|
|
Due from JJ International
|
|
|
|
|
|
|
|
|
Due from employee of IPA China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 14, 2010, Sung Hsien Chang owed IPA BVI $807,833 including interest for loans and advances. Mr. Chang repaid IPA BVI on that date by transferring 56,889,650 shares of the common stock of VIASPACE to IPA BVI. The amount was repaid at fair market value and represented a closing price of VIASPACE common stock of $0.0142 per share. This amount is shown as an asset on the balance sheet of IPA BVI, but eliminated as a consolidation entry between IPA BVI and VIASPACE at December 31, 2010. The effect on VIASPACE is a decrease in accumulated paid in capital at December 31, 2010.
Related Party Payables
At December 31, 2010 and 2009, the Company included as a related party payable $89,000 and $110,000, respectively, for accrued salary and partner draw due Dr. Kukkonen, CEO of ViaSpace LLC prior to its merger with the Company on June 22, 2005. In addition, at December 31, 2010 and 2009, the Company owes $80,000 to Dr. Kukkonen for a portion of 2008 and 2009 salary that was earned but not paid. In addition, at December 31, 2010 and 2009, the Company owed Dr. Kukkonen $302,000 and $201,000 for deferred salary that will be paid in shares of VIASPACE stock in lieu of cash. Total shares of common stock to be issued to Dr. Kukkonen for this amount is 19,663,646.
On October 31, 2006, the Company entered into a Consulting Agreement (the "Consulting Agreement") with Denda Associates Co. Ltd. ("Denda Associates"). Pursuant to the Consulting Agreement, Denda Associates provided the Company with consulting and business development expertise to assist the Company with expanding into the Japanese market. Denda Associates was founded by Mr. Nobuyuki Denda, who serves as its CEO and who also served on the BOD until July 1, 2008 when Mr. Denda resigned from the BOD for personal health reasons. As of December 31, 2010, $11,000 is owed to Mr. Denda.
The following table is a summary of Related Party Payables at December 31, 2010 and 2009:
| |
|
2010
|
|
|
2009
|
|
Due to employee of IPA China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Directors of Ionfinity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to Sung Hsien Chang
As discussed in Note 8, VIASPACE was obligated to pay Sung Hsien Chang $4,800,000 at the Second Closing of the acquisition of IPA China and IPA BVI by VGE and the Company including interest. The Second Closing did not occur on the February 15, 2010 deadline. On May 14, 2010, the Company entered into a secured Note with Chang. Under the Note, the Company must pay Chang $5,331,025 over a five-year period. Interest accrues at 6%. The principal must be repaid in five equal installments of $1,066,205 on the first through fifth anniversary of the issuance date. Chang may elect to receive payments in cash or equity securities. The Note is secured by certain assets of the Company, including all securities of VGE held by the Company. The Note is also secured by the assets of VGE, IPA BVI and IPA China. The Note may be accelerated upon an event of default under the note which includes failure to repay any amount owed, or breach of certain representations, warranties and covenants. The Note also includes various affirmative covenants, including legal compliance and insurance maintenance; and negative covenants, including maintaining a net worth of $5 million on a consolidated basis. At December 31, 2010, there is accrued interest of $202,000 arising from the Note included in accrued expenses.
Employment Agreements
On May 14, 2010, VGE entered into two-year employment agreements with each of Carl Kukkonen, Sung Hsien Chang and Stephen Muzi. Dr. Kukkonen would serve as Chief Executive Officer of VGE, Mr. Chang as President of VGE, and Mr. Muzi as Chief Financial Officer, Treasurer and Secretary of VGE. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum. For the first 12 months, Messrs. Kukkonen and Muzi would be paid by VIASPACE. The remainder of the employment term they would be paid by VGE. Each of them would be entitled to a bonus as determined by the VGE BOD, customary insurance and health benefits, 20 business days paid leave per year, and reimbursement for out-of-pocket expenses in the course of his employment.
Note 18— OTHER COMMITMENTS AND CONTINGENCIES
Leases
The Company currently has no long term office lease. Lease on land in the PRC is discussed in Note 1 and Note 5. Rent expense charged to operations for 2010 and 2009 was $44,000 and $65,000, respectively.
Operations in the PRC
IPA China’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The Company’s sales, purchases and expenses transactions are denominated in RMB and all of the Company’s assets and liabilities are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.
Litigation
The Company is not party to any material legal proceedings at the present time.
NOTE 19 — FINANCIAL ACCOUNTING DEVELOPMENTS
On February 25, 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-09 Subsequent Events Topic 855 “Amendments to Certain Recognition and Disclosure Requirements,” effective immediately. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of US GAAP. The FASB believes these amendments remove potential conflicts with the SEC’s literature. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB codified the consensus reached in Emerging Issues Task Force Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU No. 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. FASB ASU No. 2010-17 is effective for fiscal years beginning on or after June 15, 2010, and is effective on a prospective basis for milestones achieved after the adoption date. The Company does not expect this ASU will have a material impact on its financial position or results of operations when it adopts this update on January 1, 2011.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This update amends codification Topic 310 on receivables to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, which was issued in January 2011.
F-25