SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

x	Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
	For the quarterly period ended June 30, 2012

 

or

 

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from  __________ to ___________

 

Commission File Number 333-110680

 

VIASPACE INC.

(Exact name of small business issuer as specified in its charter)

   

Nevada	76-0742386
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

131 Bells Ferry Lane, Marietta, Georgia 30066

(Address of principal executive offices)

 

(626) 768-3360

(Issuer’s telephone number)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES o    NO x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  1,383,147,082 shares of $0.001 par value common stock issued and outstanding as of August 13, 2012.

 

 

VIASPACE INC.

 

INDEX

FISCAL QUARTER ENDED JUNE 30, 2012

 

		Page
Part I.	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011	3
	Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)	4
	Consolidated Statements of Comprehensive Loss For the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)	5
	Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2012 and 2011 (Unaudited)	6
	Notes to Consolidated Financial Statements June 30, 2012 (Unaudited) and December 31, 2011	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
Part II.	Other Information
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures		35

   

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

  

VIASPACE INC.

CONSOLIDATED BALANCE SHEETS

 

		(Unaudited) June 30, 2012				December 31, 2011
ASSETS
CURRENT ASSETS:
Cash and equivalents		$	522,000			$	1,141,000
Accounts receivable			276,000				178,000
Inventory			286,000				268,000
Prepaid expenses			206,000				292,000
Related party receivables			1,238,000				1,245,000
Other current assets			25,000				25,000
TOTAL CURRENT ASSETS			2,553,000				3,149,000
FIXED ASSETS:
Fixed assets, net			1,133,000				1,097,000
OTHER ASSETS:
Land use right, net			499,000				517,000
Grass license, net			415,000				427,000
Goodwill			5,015,000				5,015,000
Other assets			5,000				6,000
TOTAL OTHER ASSETS			5,934,000				5,965,000
TOTAL ASSETS		$	9,620,000			$	10,211,000
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	745,000			$	741,000
Accrued expenses			198,000				218,000
Due to Changs LLC			5,131,000				866,000
Related party payables			1,152,000				1,267,000
TOTAL CURRENT LIABILITIES			7,226,000				3,092,000
LONG-TERM LIABILITIES:
Due to Changs LLC			–				4,265,000
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, one share of Series A preferred stock issued and outstanding in 2012 and 2011			–				–
Common stock, $0.001 par value, 1,500,000,000 shares authorized, 1,383,147,082 and 1,333,796,601 shares issued and outstanding in 2012 and 2011, respectively			1,383,000				1,334,000
Additional paid in capital			44,132,000				43,653,000
Accumulated deficit			(43,923,000	)			(43,050,000	)
Total stockholders’ equity			1,592,000				1,937,000
Noncontrolling interest			802,000				917,000
Total equity			2,394,000				2,854,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	9,620,000			$	10,211,000

 

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

 

VIASPACE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
REVENUES
Framed-artwork		$	1,022,000			$	2,775,000			$	1,599,000			$	3,309,000
Security			―				45,000				―				93,000
Energy			―				―				―				―
Grass			27,000				3,000				38,000				3,000
Total revenues			1,049,000				2,823,000				1,637,000				3,405,000
COST OF  REVENUES			719,000				1,924,000				1,152,000				2,385,000
GROSS PROFIT			330,000				899,000				485,000				1,020,000
OPERATING EXPENSES
Operations			53,000				60,000				98,000				96,000
Selling, general and administrative			494,000				833,000				1,334,000				1,706,000
Total operating expenses			547,000				893,000				1,432,000				1,802,000
INCOME (LOSS) FROM OPERATIONS			(217,000	)			6,000				(947,000	)			(782,000	)
OTHER INCOME (EXPENSE)
Interest expense			(76,000	)			(80,000	)			(153,000	)			(159,000	)
Other income			20,000				62,000				159,000				82,000
Other expense			―				―				―				(1,000	)
Gain on sale of marketable securities			―				―				―				6,000
Total other expense			(56,000	)			(18,000	)			6,000				(72,000	)
LOSS BEFORE INCOME TAXES			(273,000	)			(12,000	)			(941,000	)			(854,000	)
INCOME TAXES			―				―				―				―
NET LOSS			(273,000	)			(12,000	)			(941,000	)			(854,000	)
Net loss attributed to noncontrolling interests			―				(128,000	)			67,000				(48,000	)
NET LOSS ATTRIBUTED TO VIASPACE		$	(273,000	)		$	(140,000	)		$	(874,000	)		$	(902,000	)
LOSS PER SHARE OF COMMON STOCK INCLUDING NONCONTROLLING INTERESTS —Basic and diluted		$	*			$	*			$	*			$	*
Noncontrolling interests			*				*				*				*
NET LOSS PER SHARE OF COMMON STOCK ATTRIBUTED TO VIASPACE SHAREHOLDERS—Basic and diluted		$	*			$	*			$	*			$	*
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted			1,380,114,086				1,289,112,524				1,367,205,406				1,272,516,179
*   Less than $0.01 per common share.

 

 

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

 

 

 

VIASPACE INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
NET LOSS ATTRIBUTED TO VIASPACE		$	(273,000	)		$	(140,000	)		$	(874,000	)		$	(902,000	)
Other Comprehensive Income:
Foreign currency translation			―				7,000				―				12,000
Subtotal			―				7,000				―				12,000
COMPREHENSIVE LOSS		$	(273,000	)		$	(133,000	)		$	(874,000	)		$	(890,000	)

 

 

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

 

 

VIASPACE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended  June 30,
		2012				2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(941,000	)		$	(854,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation			52,000				46,000
Amortization of intangible assets			30,000				41,000
Stock option compensation expense			410,000				340,000
Stock compensation expense related to stock issued			147,000				497,000
Operating expenses paid in stock issued			80,000				132,000
(Increase) decrease in:
Accounts receivable			(98,000	)			(205,000	)
Inventory			(18,000	)			(33,000	)
Prepaid expenses and other current assets			6,000				7,000
Increase (decrease) in:
Accounts payable			4,000				422,000
Accrued expenses and other			(19,000	)			(113,000	)
Related party, net			(108,000	)			241,000
Net cash provided by (used in) operating activities			(455,000	)			521,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets			(89,000	)			(24,000	)
Net cash used in investing activities			(89,000	)			(24,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to noncontrolling interests			(75,000	)			―
Payments on short-term debt			―				(10,000	)
Net cash used in financing activities			(75,000	)			(10,000	)
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS			―				12,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(619,000	)			499,000
CASH AND CASH EQUIVALENTS, Beginning of period			1,141,000				307,000
CASH AND CASH EQUIVALENTS, End of period		$	522,000			$	806,000
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	―			$	―
Income taxes		$	―			$	―

 

Supplemental Disclosure of Non-Cash Activities for 2011:

●

The Company issued 28,680,672 shares of the Company’s common stock for future services valued at $296,000.  This amount was recorded at issuance as prepaid expenses.

 

 

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

  

 

VIASPACE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012 (Unaudited) and December 31, 2011 (Audited)

 

Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business - VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable energy company with a global reach. Our renewable energy is based on biomass-- in particular our dedicated energy crop with the trademarked name “Giant KingTM Grass”.  VIASPACE has 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 People’s 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 Giant KingTM Grass (“GKG”), a proprietary dedicated energy crop, which can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use corn or other food sources as feedstock. GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and that this process is carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy. GKG has been independently tested by customers and been shown to have excellent energy content, high bio methane production, and the cellulosic sugar content needed for biofuels and biochemicals.

 

We are growing GKG on approximately 226 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 and pellet products.

 

We have two inactive subsidiaries, Direct Methanol Fuel Cell Corporation (“DMFCC”), that produced disposable fuel cartridges that provide the energy source for portable electronics powered by fuel cells, and Ionfinity LLC (“Ionfinity”) which had US government contracts for a next-generation mass spectrometry technology for industrial process control and environmental monitoring.  

 

The Company maintained a corporate office in Irvine, California through March 31, 2012.  Effective April 1, 2012, our corporate office was relocated to Marietta, Georgia.  The Company also has business activities in China.

 

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. Upon completion of the 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 July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal, non-binding term sheets outlining the steps to cause the net effect of the orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition, non-binding term sheets have also been executed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan. Under the term sheets, the VIASPACE secured debt to Chang will not have to be paid. After the transfer of the Company’s equity interest in VGE to Mr. Chang, the Company will no longer be able to consolidate the operations of VGE into the operations of the Company. Therefore, revenues from the framed art business will no longer be recognized in the Company’s operations. The Company’s future revenues are expected to be generated from commercial contracts to develop Giant King Grass in the rest of the world outside China and Taiwan. The Company does not have any commercial contracts currently. See Subsequent Events footnote for more information.

 

Going Concern - The Company has incurred significant losses from operations, resulting in an accumulated deficit of $43,923,000. The Company expects such losses to continue. In addition, the Company has limited working capital and based on current cash flows did not have sufficient funds to pay the May 14, 2012 installment due on the note to Changs LLC. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  On July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal, non-binding term sheets outlining the steps to cause the net effect of an orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition, term sheets have also been executed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan. Under the term sheets, the VIASPACE secured debt to Chang will not have to be paid. After the transfer of the Company’s equity interest in VGE to Mr. Chang, the Company will no longer be able to consolidate the operations of VGE into the operations of the Company. Therefore, revenues from the framed art business will no longer be recognized in the Company’s operations. The Company’s future revenues are expected to be generated from commercial contracts to develop Giant King Grass in the rest of the world outside China and Taiwan. The Company does not have any commercial contracts currently. See Subsequent Events footnote for more information.

 

Basis of Presentation - The accompanying unaudited 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-Q.  Accordingly, the unaudited financial statements do not include all of the information and footnotes required by US GAAP.  Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2011 filed with the SEC on April 2, 2012.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these interim financial statements. All significant intercompany accounts and transactions have been eliminated on consolidation.  Certain reclassifications were made to the June 30, 2011 consolidated financial statements, to conform to the June 30, 2012 consolidated financial statement presentation.

 

Noncontrolling Interest - 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.  

 

Noncontrolling interest in consolidated subsidiaries is the minority stockholders’ proportionate share of equity of DMFCC, 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 June 30, 2012 and December 31, 2011, the Company recorded $500,000 as NCI for an investment in DMFCC by a minority shareholder.  At June 30, 2012 and December 31, 2011, the Company recorded $302,000 and $417,000, respectively, representing Common Shareholder NCIs in Ionfinity and VGE.

 

Principles of Consolidation - The Company is generally a major shareholder of its affiliated companies which are consolidated. Affiliated companies, including VGE, DMFCC and Ionfinity, 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. At June 30, 2012 and December 31, 2011, there was no allowance for doubtful accounts recorded. For the three and six months ended June 30, 2012 and 2011, there was no bad debt expense recorded.

 

 

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 June 30, 2012:

 

		Raw Materials				Finished Goods				Total
Framed-Artwork		$	286,000			$	―			$	286,000
Total		$	286,000			$	―			$	286,000

   

The following is a summary of inventory at December 31, 2011:

 

		Raw Materials				Finished Goods				Total
Framed-Artwork		$	268,000			$	―			$	268,000
Total		$	268,000			$	―			$	268,000

 

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:

 

Building	20 to 30 years
Machinery and equipment	10 years
Office equipment	5 years
Vehicles	5 years
Computers	3 years

 

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.  As of June 30, 2012, VGE has land use rights of approximately 91 hectares, or 226 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, to our knowledge, 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 amortizes intangible assets with definite lives using the straight-line method over their established lives, generally 1-30 years. Additionally, the Company tests these assets with established lives for impairment if conditions exist that indicate that carrying values may not be recoverable. Possible conditions leading to the unrecoverability of these assets include changes in market conditions, changes in future economic conditions or changes in technological feasibility that impact the Company’s assessments of future operations. If the Company determines that an impairment charge is needed, the charge will be recorded in selling, general and administrative expenses in the consolidated statements of operations.

 

Goodwill - Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is measured at cost less accumulated impairment losses. Goodwill is not amortized but tested for impairment annually and whenever impairment indicators require. Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment by management using a discounted cash flow methodology. This requires us to use significant judgment including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital and relevant market data. VIASPACE and VGE acquired IPA China and IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the acquisition. As part of the Company’s annual impairment review as of December 31, 2011, a $7,307,000 goodwill impairment charge was recorded within the Company’s framed-artwork reportable segment due to lower than expected revenue and operating income growth. Goodwill was $5,015,000 at June 30, 2012 and December 31, 2011.

 

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.

Fair Value of Financial Instruments - “Disclosures about Fair Value of Financial Instruments,” codified in FASB ASC Topic 850, 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 the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were 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 was 25% for 2011 and 2012. VGE and IPA BVI are British Virgin Islands international companies and not subject to 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 due to no significant book to tax basis differences existing.

 

Revenue Recognition - 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 revenues.

 

Foreign Currency Translation and Comprehensive Income (Loss) - IPA China’s local currency is the Renminbi (“RMB”) and its functional currency is US dollars (“USD”). For financial reporting purposes, RMB has been translated into United States dollars ("USD") as the functional 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 recorded in the Company’s statements of operations. There has been no significant fluctuation in exchange rate for the conversion of RMB to USD after the balance sheet date.  The sales of IPA BVI are 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. Segment detail is shown in the footnotes below.

 

Stock Based Compensation - VIASPACE, DMFCC and VGE have stock-based compensation plans. The Company has adopted the accounting and disclosure provisions of “Share-Based Payments”, codified in FASB ASC Topic 718, using the modified prospective application transition method.  The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of FASB ASC Topic 505-50, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services” and “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees”.  The measurement date for the fair value of the equity instruments issued is determined at the earlier of: (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete.  In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with FASB ASC Topic 505-50, an asset acquired for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes.  Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expenses in its consolidated balance sheet.

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. Common stock equivalents including stock options are included in the case where the Company has net income per share since their effect is dilutive, but these common stock equivalents are excluded from net loss per share calculations since their effect is anti-dilutive.

 

Research and Development - The Company charges research and development expenses to operations as incurred.

 

Reclassifications – Certain prior year amounts were reclassified to conform to the manner of presentation in the current period.

 

 

NOTE 2 — ACCOUNTS RECEIVABLE

 

Accounts receivable are comprised of the following at June 30, 2012 and December 31, 2011:

  

		2012				2011
Framed artwork customers		$	253,000			$	178,000
Grass customers			23,000				―
Total accounts receivable		$	276,000			$	178,000

 

NOTE 3 — PREPAID EXPENSES

 

Prior to January 1, 2012, 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. At June 30, 2012 and December 31, 2011, the remaining value of these agreements was $166,000 and $246,000, respectively, which is included in prepaid expenses in the accompanying consolidated balance sheets.

 

Other prepaid expenses were $40,000 and $46,000 at June 30, 2012 and December 31, 2011, respectively.

 

NOTE 4 — FIXED ASSETS

 

Fixed assets are comprised of the following at June 30, 2012 and December 31, 2011:

 

 

		2012				2011
Building		$	800,000			$	795,000
Machinery and equipment			550,000				466,000
Office equipment			81,000				82,000
Vehicles			225,000				225,000
Total property and equipment			1,656,000				1,568,000
Less: Accumulated depreciation			523,000				471,000
Fixed assets, net		$	1,133,000			$	1,097,000

  

Depreciation was $28,000 and $22,000 for the three months ended June 30, 2012 and 2011, respectively. Depreciation was $52,000 and $46,000 for the six months ended June 30, 2012 and 2011, respectively. 

 

 

NOTE 5 — LAND USE RIGHT

 

Land use right is composed of the following at June 30, 2012 and December 31, 2011:

   

		2012				2011
Land use right		$	720,000			$	720,000
Less: Accumulated amortization			221,000				203,000
Land use right, net		$	499,000			$	517,000

 

Amortization was $8,000 and $10,000 for the three months ended June 30, 2012 and 2011, respectively. Amortization was $18,000 and $21,000 for the six months ended June 30, 2012 and 2011, respectively. The amortization for the next five years from June 30, 2012 will be: 2013 - $32,000; 2014 - $30,000; 2015 - $30,000; 2016 - $30,000; and 2017 - $30,000.

 

NOTE 6 — INTANGIBLE ASSETS

 

License to Grass

 

VIASPACE, through its majority owned subsidiary, VGE acquired IPA China and IPA BVI on October 21, 2008. IPA China has a worldwide license to cultivate and sell a fast-growing high yield hybrid grass called GKG that has the potential to be used in the production of nonfood biofuels and, in the more immediate term, animal feedstock for dairy cows, pigs, sheep, goats, fish and other animals. VGE’s parent company, 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 $6,000 for the three months ended June 30, 2012 and 2011. Amortization was $12,000 for the six months ended June 30, 2012 and 2011.  The amortization expense for the next five years will be $25,000 in each year.

 

License to Grass is composed of the following at June 30, 2012 and December 31, 2011:

 

		2012				2011
License to Grass		$	507,000			$	507,000
Less: Accumulated amortization			92,000				80,000
License to Grass, net		$	415,000			$	427,000

 

Goodwill

 

VIASPACE, through its majority owned subsidiary VGE, acquired IPA China and IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the acquisition. As part of the Company’s annual impairment review as of December 31, 2011, a $7,307,000 goodwill impairment charge was recorded within the Company’s framed-artwork reportable segment due to lower than expected revenue and operating income growth. Goodwill was $5,015,000 at June 30, 2012 and December 31, 2011, respectively.

 

Intellectual Property

 

The Company performed an impairment analysis for intellectual property for DMFCC at December 31, 2011 and wrote-off $130,000 of additional amortization expense related to the license to patents for DMFCC. The intellectual property, net, on the consolidated balance sheets at June 30, 2012 and December 31, 2011 is zero. Amortization was zero and $4,000 for the three months ended June 30, 2012 and 2011, respectively. The amortization was $8,000 for the six months ended June 30, 2012 and 2011.

 

NOTE 7 — OWNERSHIP INTEREST IN AFFILIATED COMPANIES

 

DMFCC. As of June 30, 2012 and December 31, 2011, the Company owned 71.4% of the outstanding shares of DMFCC. At June 30, 2012, DMFCC is inactive.

 

VGE. As of June 30, 2012 and December 31, 2011, the Company owned 75.6% of the outstanding shares of VGE.  VGE owns 100% of the outstanding shares of IPA BVI. IPA BVI owns 100% of the outstanding shares of IPA China. During 2010, VGE established VIASPACE Green Energy Pte. Ltd. (“VIASPACE Pte.”), a company incorporated in the Republic of Singapore. At June 30, 2012, VIASPACE Pte. is inactive.

 

Ionfinity. As of June 30, 2012 and December 31, 2011, 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. At June 30, 2012, Ionfinity is inactive.

  

NOTE 8 — STOCK OPTIONS, WARRANTS AND ISSUED STOCKS

 

VIASPACE Inc. 2005 Stock Incentive Plan

 

On October 20, 2005, the BOD of the Company adopted the 2005 Stock Incentive Plan (the “Plan”) including the 2005 Non-Employee Director Option Program (the “2005 Director Plan”).  The Plan was also approved by the holders of a majority of the Company’s common stock.  The Plan originally provided for issuance of up to 28,000,000 shares of the Company’s common stock.  On July 12, 2006, the Company filed a Form S-8 Registration Statement with the SEC registering 28,000,000 shares of the Company’s common stock.  On February 14, 2008, the BOD and the holders of a majority of the Company’s common stock approved an amendment to the Plan which increased the maximum aggregate number of shares which may be issued in the Plan to 99,000,000 shares.  On April 30, 2008, the Company filed a Registration Statement on Form S-8 registering 71,000,000 shares of the Company’s common stock.  In addition, effective January 1, 2009 and each January 1 thereafter during the term of the Plan, the maximum number of shares under the Plan are to be increased so that the maximum number of shares is equivalent to 30% of the total number of shares of common stock issued and outstanding as of the close of business on the immediately preceding December 31.  On February 4, 2009, the Company filed a Registration Statement on Form S-8 registering 146,500,000 shares of the Company’s common stock based on the number of shares of common stock outstanding on December 31, 2008.

The Plan is designed to provide additional incentive to employees, directors and consultants of the Company through awarding incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and other awards.  On February 13, 2006, the BOD approved the 2006 Non-Employee Director Option Program (the “2006 Director Plan”) replacing the 2005 Director Plan and the 2006 Director Plan was approved by the holders of a majority of the Company’s common stock. The 2006 Director Plan awards a one-time grant of 125,000 options, or such other number of options as determined by the BOD as plan administrator of the 2006 Director Plan, to newly appointed outside members of the Company’s BOD and annual grants of 50,000 options, or such other number of options as determined by the BOD, to outside members of the BOD that have served at least 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.  At June 30, 2012, there were 55,764,231 shares available for future grant.  

 

During 2012, the Company granted 4,000,000 stock options to employees to purchase common shares.  During 2012, 24,030,000 stock options were cancelled due to employees, directors or consultants terminating employment or service with the Company.  During 2012, the Company issued 1,000,438 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 to employees, directors, consultants and advisory board members for 2012 and 2011, the fair value was estimated at the date of grant using the following range of assumptions: 

 

	2012		2011
Risk free interest rate	1.40%		1.60%
Dividends	0%		0%
Volatility factor	124.48%		124.49%
Expected life	6.67 years		6.67 years
Annual forfeiture rate	34.4%		13.4%

 

Employee and Director Option Grants

 

The following table summarizes activity for employees and directors in the Company’s Plan at June 30, 2012:

 

		Number of Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term In Years				Aggregate Intrinsic Value
Outstanding at December 31, 2011			70,130,000			$	0.017
Granted			4,000,000				0.008
Exercised			—				—
Forfeited			(24,030,000	)			0.015
Outstanding at June 30, 2012			50,100,000			$	0.017				6.3			$	—
Exercisable at June 30, 2012			47,850,000			$	0.017				6.3			$	—

  

The weighted-average grant date fair value of stock options granted to employees during 2012 was $0.008 per share.  The Plan recorded $36,000 of compensation expense for employee and director stock options in 2012.  At June 30, 2012, there was $11,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan that is expected to be recognized over a weighted average period of approximately one year and 7 months.  At June 30, 2012, the fair value of options vested for employees and directors was $96,000.  There were no options exercised during 2012.

 

Consultant Option Grants

 

The following table summarizes activity for consultants in the Company’s Plan at June 30, 2012:

 

		Number of Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term In Years				Aggregate Intrinsic Value
Outstanding at December 31, 2011			1,538,462			$	0.02
Granted			—				—
Exercised			—				—
Forfeited			—				—
Outstanding at June 30, 2012			1,538,462			$	0.02				0.1			$	—
Exercisable at June 30, 2012			1,538,462			$	0.02				0.1			$	—

 

There were no stock options granted to consultants during 2012.  The Company recorded no compensation expense for consultant stock options during 2012.  At June 30, 2012, there was no unrecognized compensation costs related to non-vested share-based compensation arrangements.  At June 30, 2012, the fair value of options vested for consultants was $3,000.  There were no options exercised during 2012.

 

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 June 30, 2012, 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 2012, 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 at June 30, 2012:

   

 

		Number of Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term In Years				Aggregate Intrinsic Value
Outstanding at December 31, 2011			1,396,000			$	.02
Granted			—				—
Exercised			—				—
Forfeited			(1,000,000	)			.005
Outstanding at June 30, 2012			396,000			$	.05				2.2			$	―
Exercisable at June 30, 2012			396,000			$	.05				2.2			$	―

  

DMFCC did not record any stock option compensation expense during 2012.  There were no options exercised during 2012.

 

VIASPACE Green Energy Inc. 2009 Stock Incentive Plan

 

On June 2, 2009, the Board 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 Board 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 Board of Directors. 50,000 shares were available for future grant at June 30, 2012. There were no stock options issued during the three or six months ended June 30, 2012. There were no stock options cancelled during 2012.

 

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.

  

The following table summarizes activity for employees and directors in VGE’s Plan at June 30, 2012:

  

		Number of Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term In Years				Aggregate Intrinsic Value
Outstanding at December 31, 2011			1,350,000			$	0.80
Granted			—				—
Exercised			—				—
Forfeited			—				—
Outstanding at June 30, 2012			1,350,000			$	0.80				7.8			$	1,620,000
Exercisable at June 30, 2012			1,350,000			$	0.80				7.8			$	1,620,000

     

There were no stock options issued in the VGE Plan in 2012. The Company recorded $111,000 of compensation expense under the VGE Plan for employee and director stock options for the three months ended March 31, 2012. There was no stock option compensation expense recorded for the three months ended June 30, 2012. At June 30, 2012, there were no unrecognized compensation costs related to non-vested share-based compensation arrangements under the VGE Plan. At June 30, 2012, the fair value of options vested for employees and directors was $1,080,000. There were no options exercised during 2012.

 

NOTE 9 — SHORT-TERM AND LONG-TERM DEBT

 

Due to Changs LLC

 

VIASPACE was obligated to pay Sung Hsien Chang (“Chang”) $4,800,000 for the acquisition of IPA China and IPA BVI by VGE and the Company on October 21, 2008.  Chang is a Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI.  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 of VIASPACE or VGE.  All payments of VIASPACE or VGE common stock shall be valued at the 10-day average closing price of its respective common shares preceding the applicable payment date or by other reasonable methods determined by the board of directors of VIASPACE or VGE, as the case may be if the shares are not trading at the time of payment.  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.  If VIASPACE defaults in its obligation to Chang, Chang may foreclose on all assets of our Company and/or our subsidiaries with the exception of any assets of DMFCC and Ionfinity.   He may also seize the equity interests of our interest in VGE.   Any of these actions would cause us to relinquish all ownership of our assets.  Under such circumstances, the common stock of the Company may lose all of its value 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, 2011, the Company was in violation of the net worth covenant.  The Company received a waiver on this violation from Chang.

 

On May 16, 2011, VIASPACE and Chang entered into an Amendment to Secured Promissory Note (the "Note Amendment"). The parties desired to extend the installment payment due dates by one year as part of the Note Amendment.  The Note Amendment requires VIASPACE to make five equal annual installment payments of One Million Sixty Six Thousand and Two Hundred and Five Dollars ($1,066,205) each, together with interest per annum of six percent (6%), in arrears on the second, third, fourth, fifth and sixth anniversary dates of the Issue Date rather than the first, second, third, fourth and fifth anniversary dates of the Issue Date.  In addition, as part of the Note Amendment, the Holder of the Note has been changed from Sung Hsien Chang to Changs LLC, a limited liability company owned by Mr. Chang and his wife.  On September 23, 2011, the Company made an advance payment of $200,000 on the installment payment due to Changs LLC on May 14, 2012.   The current amount of the installment payment due to Changs LLC on May 14, 2012 is $866,205.

 

The Company did not have the cash available to pay Changs LLC on May 14, 2012. On July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal term sheets outlining the steps to cause the net effect of the orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition term sheets have also been executed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan. Under the term sheets, the VIASPACE secured debt to Chang will not have to be paid. The term sheets are non-binding other than provisions relating to intercompany transfers, confidentiality and transaction-related expenses. The parties intend to draft, negotiate and finalize definitive documents based on the term sheets. See Subsequent Event footnote for additional information.

 

At June 30, 2012 and December 31, 2011, there is accrued interest of $432,000 and $519,000, respectively, arising from the Note included in related party payable in the Company’s Consolidated Balance Sheet. During the second quarter of 2012, $240,000 was paid to Changs LLC as partial payment on the accrued interest balance.

 

 

NOTE 10 — STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

At June 30, 2012 and December 31, 2011, the number of authorized shares of the Company’s preferred stock was 10,000,000. The par value of the preferred stock is $0.001. On May 14, 2010, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Series A Preferred Stock. The Certificate was approved by the Board and did not require shareholder vote.  The Certificate created a new class of preferred stock known as Series A Preferred Stock. There is one share designated as Series A Preferred Stock. One share of Series A Preferred Stock is entitled to 50.1% of the outstanding votes on all shareholder voting matters. Series A Preferred Stock has no dividend rights and no rights upon a liquidation event and is subject to cancellation when certain conditions are met.  On May 14, 2010, the Company issued one share of Series A Preferred Stock to Mr. Chang related to the acquisition of IPA by VIASPACE and VGE, effectively giving him a controlling interest in VIASPACE.

Common Stock

 

As of June 30, 2012 and December 31, 2011, 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, 2011, there were 1,333,796,601 shares of common stock outstanding. During 2012, the Company issued 1,000,438 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 48,350,043 unregistered shares of common stock to employees, consultants and vendors for services provided or to be provided to the Company.  All of the share issuances in 2012 were recorded at fair market value determined by the price of the Company’s common stock trading on the OTC Bulletin Board on the date of grant.  Stock compensation of $409,000 was recorded relating to these share issuances.  As of June 30, 2012, there were 1,383,147,082 shares of common stock outstanding.

 

NOTE 11 — INCOME TAX

 

The Company did not record a provision for income taxes for 2012 or 2011 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 $24,481,000 available at December 31, 2011 and State net operating loss carryovers of approximately $24,248,000 available at December 31, 2011, which expire through 2031.

 

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 June 30, 2012.  As of the date of these financial statements, the 2010, 2009, and 2008 income tax years are open to examination by federal and state taxing authorities.

 

FASB ASC 740 also addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC 740, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. During the three months ended June 30, 2012, the Company did not recognize any tax liabilities related to uncertain tax positions and does not have a balance for such liabilities as of June 30, 2012.

   

IPA China Income Taxes

 

IPA China is governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a statutory rate of 25% on income reported in the statutory financial statements after appropriated tax adjustments.

 

IPA BVI and VGE Income Taxes

 

IPA BVI and VGE are British Virgin Islands international company and not subject to any United States income taxes.  Companies in the United States that receive money from IPA BVI and VGE are responsible for paying United States income taxes on the money received.  IPA BVI and VGE do not have any deferred tax assets or liabilities recorded for the periods covered by the accompanying financial statements.

 

Ionfinity Income Taxes

 

Ionfinity is a partnership where VIASPACE is a partner and receives an Internal Revenue Service Form K-1 annually which includes VIASPACE’s share of any income or loss of VIASPACE. This amount is included on the VIASPACE Federal and state tax returns.

 

NOTE 12 — OPERATING SEGMENTS

 

The Company evaluates its reportable segments in accordance with FASB ASC Topic 280 “Disclosures about Segments of an Enterprise and Related Information”. As of June 30, 2012, the Company’s Chief Executive Officer, Dr. Carl Kukkonen, was the Company’s Chief Operating Decision Maker (“CODM”) pursuant to FASB ASC Topic 280.  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 which is currently inactive. 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 (but not including operations of its subsidiaries, IPA China and IPA BVI) are included in the Grass segment.

Energy Segment:

 

(i)

DMFCC: DMFCC was 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 may become replacements for traditional batteries and could 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.  DMFCC is currently inactive.

  

(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.  This segment is currently inactive.

 

Security Segment:

  

(i)

Ionfinity: Ionfinity was 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.  Ionfinity is currently inactive.

 

 

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 (but not including operations of its subsidiaries, IPA China and IPA BVI) and VIASPACE: 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 three and six months ended June 30, 2012 and 2011 is shown below:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Income (Loss) From Operations:
Energy		$	–			$	(9,000	)		$	–			$	(20,000	)
Security			–				25,000				–				28,000
Framed-Artwork			211,000				708,000				241,000				722,000
Grass			(225,000	)			(372,000	)			(669,000	)			(738,000	)
Loss From Operations by Reportable Segments			(14,000	)			352,000				(428,000	)			(8,000	)
Corporate Administrative Costs			(37,000	)			(39,000	)			(73,000	)			(160,000	)
Corporate Stock Compensation Expense			(166,000	)			(307,000	)			(446,000	)			(614,000	)
Loss From Operations		$	(217,000	)		$	6,000			$	(947,000	)		$	(782,000	)

 

 

 

		June 30, 2012				December 31, 2011
Assets:
Framed-Artwork		$	8,466,000			$	8,854,000
Grass			1,152,000				1,212,000
Security			2,000				145,000
Total Assets		$	9,620,000			$	10,211,000

 

For the three months ended June 30, 2012 and 2011, the Company had one customer which made up 94% and 97%, respectively, of our total revenues. For the six months ended June 30, 2012 and 2011, the Company had one customer which made up 95% of our total revenues in both periods.

   

NOTE 13 — 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) for the three months ended June 30, 2012 and 2011, respectively, that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:

 

		2012				2011
Stock Options			51,638,462				57,668,000
Warrants			–				624,000

 

The following table sets forth the computation of basic and diluted net loss per share for the three and six months ended June 30, 2012 and 2011, respectively:

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Basic and diluted net income (loss) per share:
Numerator:
Net income (loss) attributable to common stock		$	(273,000	)		$	(140,000	)		$	(874,000	)		$	(902,000	)
Denominator:
Weighted average shares of common stock outstanding			1,380,114,086				1,289,112,524				1,367,205,406				1,272,516,179
Net income (loss) per share of common stock, basic and diluted		$	*			$	*			$	*			$	*

_____________________

* Less than $0.01 per share

 

  

NOTE 14 — 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 June 30, 2012 and December 31, 2011 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 $37,000 and $44,000 from JJ for the three and six months ended June 30, 2012, respectively. IPA BVI is charging JJ interest income on the outstanding receivable balance at an interest rate of 6%. For the three months and six months ended June 30, 2012, $9,000 and $19,000, respectively, was recorded as interest income to JJ and is included in Other Income in the Company’s Consolidated Statements of Operations. Included in the Due from JJ International amount shown below is $158,000 and $139,000 at June 30, 2012 and December 31, 2011, respectively, representing cumulative interest income charged to JJ.

The following table represents a summary of Related Party Receivables at June 30, 2012 and December 31, 2011:

 

		2012				2011
Due from JJ International		$	1,238,000			$	1,236,000
Due from employee of IPA China			―				9,000
Total		$	1,238,000			$	1,245,000

 

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 was determined to be impaired at December 31, 2011 and impairment expense of $353,000 was recorded. The balance is $455,000 at June 30, 2012 and December 31, 2011 and is shown as an asset on the balance sheet of IPA BVI, but eliminated as a consolidation entry between IPA BVI and VIASPACE.

 

Related Party Payables

 

The following table is a summary of Related Party Payables at June 30, 2012 and December 31, 2011:

 

		2012				2011
Due to employee of IPA China		$	45,000			$	66,000
Due to JJ International			―				10,000
Due to Carl Kukkonen			660,000				672,000
Due to Stephen Muzi			15,000				―
Due to Changs LLC			432,000				519,000
Total		$	1,152,000			$	1,267,000

 

Amounts shown as due to Changs LLC at June 30, 2012 and December 31, 2011, represent accrued interest related to the Note owed to Changs LLC discussed in Note 9.

  

NOTE 15 — 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 three months ended June 30, 2012 and June 30, 2011 was $8,000 and $10,000, respectively. Rent expense charged to operations for six months ended June 30, 2012 and June 30, 2011 was $17,000 and $18,000, 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.

 

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. These two-year employment agreements ended May 14, 2012.

On April 19, 2012, the VGE Board of Directors approved new one-year employment agreements beginning June 1, 2012 for Dr. Kukkonen, Mr. Chang and Mr. Muzi. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum.

 

As discussed in the Subsequent Events footnote, on July 30, 2012, term sheets were signed associated with the separation of VIASPACE and VGE. In connection with these term sheets, Dr. Kukkonen and Mr. Muzi would relinquish their rights to these one-year employment contracts effective at the date of the signing of the definitive final agreements.

 

Litigation

 

The Company is not party to any material legal proceedings at the present time.

   

NOTE 16 — FINANCIAL ACCOUNTING DEVELOPMENTS

 

None.   

  

NOTE 17 – SUBSEQUENT EVENTS

 

On July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal term sheets outlining the mechanism and orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition, term sheets have also been signed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan.

 

Under the term sheets, VIASPACE will no longer have any ownership in VGE and the VIASPACE secured debt to Chang will not have to be paid. After the separation is finalized, for financial reporting purposes, the Company will no longer be able to consolidate the operations of VGE into the operations of the Company. This means that the artwork revenues and gross profits reported by VGE will no longer be included in the consolidated operations of the Company. Additionally, fixed assets of VGE will no longer be included in the Company’s consolidated balance sheets. The term sheets are non-binding other than provisions relating to intercompany transfers, confidentiality and transaction-related expenses. The parties intend to draft, negotiate and finalize definitive documents based on the term sheets within the next two months.

 

The details of the term sheets will be announced and made public when the final definitive documents have been executed and filed with the Securities and Exchange Commission.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion contains certain statements that constitute “forward-looking statements”.  Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.”  These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control.  Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission.  The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this Report and in conjunction with our 2011 Annual Report on Form 10-K as filed with the SEC.

 

VIASPACE Overview

 

VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) is a renewable energy company with a global reach. We operate in two separate businesses.  Our renewable energy is based on biomass-- in particular our dedicated energy crop with the trademarked name “Giant KingTM Grass”.  VIASPACE has 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 Giant King™ Grass (“GKG”), a proprietary dedicated energy crop, which can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use corn or other food sources as feedstock.  GKG can also be used as animal feed.  GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and that this process is carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy. GKG has been independently tested by customers and been shown to have excellent energy content, high bio methane production, and the cellulosic sugar content needed for biofuels and biochemicals.

 

VGE is growing GKG on approximately 226 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 and pellet products.

 

On July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal term sheets outlining the mechanism and orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition, term sheets have also been signed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan.

 

Under the term sheets, VIASPACE will no longer have any ownership in VGE and the VIASPACE secured debt to Chang will not have to be paid. After the separation is finalized, for financial reporting purposes, the Company will no longer be able to consolidate the operations of VGE into the operations of the Company. This means that the artwork revenues and gross profits reported by VGE will no longer be included in the consolidated operations of the Company. Additionally, fixed assets of VGE will no longer be included in the Company’s consolidated balance sheets. The term sheets are non-binding other than provisions relating to intercompany transfers, confidentiality and transaction-related expenses. The parties intend to draft, negotiate and finalize definitive documents based on the term sheets within the next two months.

 

We have two inactive subsidiaries, Direct Methanol Fuel Cell Corporation (“DMFCC”), that produced disposable fuel cartridges that provide the energy source for portable electronics powered by fuel cells, and Ionfinity LLC (“Ionfinity”) which had US government contracts for a next-generation mass spectrometry technology for industrial process control and environmental monitoring.  

 

The Company maintained a corporate office in Irvine, California through March 31, 2012.  Effective April 1, 2012, our corporate office has relocated to Marietta, Georgia.  The Company also has business activities in China.

 

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.

 

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.

 

In accordance with FASB ASC 350-20-35, “Intangibles - Goodwill and Other”, management tests our goodwill for impairment annually, or more frequently if events or changes in circumstances suggest that the carrying amount may not be recoverable. Based upon their impairment analysis performed during the fourth quarter of 2011, management of the Company concluded there was an impairment of goodwill at December 31, 2011 and recorded an impairment adjustment.

 

In accordance with FASB ASC 360-10-35, “Property, Plant, and Equipment”, management reviews our long-lived asset groups, including property and equipment and other intangible assets, for impairment whenever events indicate that their carrying amounts may not be recoverable. Some of the events that we consider as impairment indicators for our long-lived assets, including goodwill, are:

   

	●	our significant underperformance relative to expected operating results;
	●	significant adverse change in legal factors or in the business climate;
	●	an adverse action or assessment by a regulator;
	●	unanticipated competition;
	●	a loss of key personnel;
	●	significant decrease in the market value of a long-lived asset; and
	●	significant adverse change in the extent or manner in which a long-lived asset is being used or its physical condition.

 

When management determines that one or more impairment indicators are present for an asset group, we compare the carrying amount of the asset group to net future undiscounted cash flows that the asset group is expected to generate. If the carrying amount of the asset group is greater than the net future undiscounted cash flows, an impairment loss is recognized for the excess of the carrying amount of the asset group over its fair value. The management of the Company has concluded that there were no impairment indicators relating to long-lived assets as of June 30, 2012.

 

Results of Operations

 

Three Months Ended June 30, 2012 Compared to June 30, 2011

 

Revenues

 

Revenues were $1,049,000 and $2,823,000 for the three months ended June 30, 2012 and 2011, respectively, a decrease of $1,774,000, or 63%. IPA BVI and IPA China recorded revenues of $1,022,000 for the three months ended June 30, 2012 from the sales of framed-artwork primarily to retail U.S. customers, a decrease of $1,753,000 from the comparable period in 2011 due to decreased customer orders and demand for artwork from US customers.  Ionfinity incurred revenues of $45,000 for the three months ended June 30, 2011 and zero for the three months ended June 30, 2012 as all US government contracts were completed in 2011. VGE recorded grass related revenues of $27,000 for the three months ended June 30, 2012 and $3,000 for the three months ended June 30, 2011, an increase of $24,000 in 2012.

 

Cost of Revenues

 

Costs of revenues were $719,000 and $1,924,000 for the three months ended June 30, 2012 and 2011, respectively, a decrease of $1,205,000, or 63%.   IPA BVI and IPA China recorded decreased cost of revenues of $1,209,000 due to reduced sales of framed-artwork to US customers during for the three months ended June 30, 2012 as compared with the same period in 2011. Ionfinity recorded lower cost of revenues of $18,000 during the three months ended June 30, 2012 as compared with the same period in 2011 as all US government contracts were completed in 2011.  Cost of revenues for VGE grass related sales increased $22,000 for the three months ended June 30, 2012 as compared with the same period in 2011 due to additional grass related sales in 2012.

 

Gross Profit

 

The resulting effect on these changes in revenues and cost of revenues for the three months ended June 30, 2012 compared to the same period in 2011 was a decrease in gross profit from $899,000 for the three months ended June 30, 2011 to $330,000 for the three months ended June 30, 2012, a decrease of $569,000 or 63%.

 

Operations Expenses

 

Operations expenses were $53,000 and $60,000 for the three months ended June 30, 2012 and 2011, respectively, a decrease of $7,000, or 12%.  The decrease is primarily due to lower operations expenses incurred by VGE in the growth of GKG in China.  This includes operating costs for salaries, equipment, maintenance, utilities and fuel costs.  The Company expects operations expenses 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 $494,000 and $833,000 for the three months ended June 30, 2012 and 2011, respectively, a decrease of $339,000. Stock option expenses decreased $166,000 for the three months ended June 30, 2012 as compared with the same period in 2011 as vesting was completed related to certain previously issued stock options. Stock compensation expense decreased $88,000 in 2012 as compared with 2011 as less stock was issued by the Company.  Consulting increased $14,000 due to increased business development costs in 2012 as compared with 2011. Public relations expenses decreased $57,000 in 2012 as the Company incurred lower investor relations expenses. Payroll and benefits increased $11,000 for the three months ended June 30, 2012 as compared to the same period in 2011 due to higher compensation levels in 2012. Selling expenses related to IPA decreased $37,000 in 2012 as compared with 2011 due to the impact of lower artwork sales in 2012 as compared with the same period in 2011. Other selling, general and administrative expenses, net, decreased by $16,000 for the three months ended June 30, 2012 compared with the same period in 2011.

 

Loss from Operations

 

The resulting effect on these changes in gross profits, operations expenses, and selling, general and administrative expenses was an increase in loss from operations in 2012. For the three months ended June 30, 2011, the Company had income from operations of $6,000 compared with a loss from operations of $217,000 for the three months ended June 30, 2012, a decline of $223,000.

Other Income (Expense), Net

 

Other Income

 

Other income decreased $42,000 for the three months ended June 30, 2012 compared to the same period in 2011, primarily due to Ionfinity recording other income in 2011 related to the settlement of contract costs related to its government contracts and no such other income was recorded in 2012.

 

Six Months Ended June 30, 2012 Compared to June 30, 2011

 

Revenues

 

Revenues were $1,637,000 and $3,405,000 for the six months ended June 30, 2012 and 2011, respectively, a decrease of $1,768,000, or 52%.  IPA BVI and IPA China recorded revenues of $1,599,000 for the six months ended June 30, 2012 from the sales of framed-artwork primarily to retail U.S. customers, a decrease of $1,710,000 from the comparable period in 2011 due to decreased customer orders and demand for artwork from US customers.  Ionfinity incurred revenues of $93,000 for the six months ended June 30, 2011 and zero for the six months ended June 30, 2012 as all US government contracts were completed in 2011.  VGE recorded grass related revenues of $38,000 for the six months ended June 30, 2012 and $3,000 for the six months ended June 30, 2011, an increase of $35,000 in 2012.

 

Cost of Revenues

 

Costs of revenues were $1,152,000 and $2,385,000 for the six months ended June 30, 2012 and 2011, respectively, a decrease of $1,233,000, or 52%.   IPA BVI and IPA China recorded decreased cost of revenues of $1,203,000 due to reduced sales of framed-artwork to US customers during for the six months ended June 30, 2012 as compared with the same period in 2011.  Ionfinity recorded lower cost of revenues of $62,000 during the six months ended June 30, 2012 as compared with the same period in 2011 as all US government contracts were completed in 2011.  Cost of revenues for VGE grass related sales increased $32,000 for the six months ended June 30, 2012 as compared with the same period in 2011 due to additional grass related sales in 2012.

 

Gross Profit

 

The resulting effect on these changes in revenues and cost of revenues for the six months ended June 30, 2012 compared to the same period in 2011 was a decrease in gross profit from $1,020,000 for the six months ended June 30, 2011 to $485,000 for the six months ended June 30, 2012, a decrease of $535,000 or 52%.

 

Operations Expenses

 

Operations expenses were $98,000 and $96,000 for the six months ended June 30, 2012 and 2011, respectively, an increase of $2,000, or 2%. The increase is primarily due to higher operations expenses incurred by VGE in the growth of GKG in China. This includes operating costs for salaries, equipment, maintenance, utilities and fuel costs.  The Company expects operations expenses 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 $1,334,000 and $1,706,000 for the six months ended June 30, 2012 and 2011, respectively, a decrease of $372,000.  Stock option expenses decreased $193,000 for the six months ended June 30, 2012 as compared with the same period in 2011 as vesting was completed related to certain previously issued stock options.  Stock compensation expense decreased $87,000 in 2012 as compared with 2011 as less stock was issued by the Company.  Accounting expenses decreased $30,000 in 2012 as compared with the same period in 2011 due to a reduction in audit fees from a change in auditors.  Consulting costs decreased $15,000 due to reduced business development costs from consultants in 2012 as compared with 2011. Public relations expenses decreased $80,000 in 2012 as the Company incurred lower investor relations expenses.  Payroll and benefits increased $77,000 for the six months ended June 30, 2012 as compared to the same period in 2011 due to higher compensation levels in 2012.  Selling expenses related to IPA decreased $40,000 in 2012 as compared with 2011 due to the impact of lower artwork sales in 2012 as compared with the same period in 2011. Other selling, general and administrative expenses, net, decreased by $4,000 for the six months ended June 30, 2012 compared with the same period in 2011.

 

Loss from Operations

 

The resulting effect on these changes in gross profits, operations expenses, and selling, general and administrative expenses was an increase in loss from operations in 2012. For the six months ended June 30, 2011, the Company had loss from operations of $782,000 compared with a loss from operations of $947,000 for the six months ended June 30, 2012, a decline of $165,000.

 

Other Income (Expense), Net

 

Other Income

 

Other income increased $77,000 for the six months ended June 30, 2012 compared to the same period in 2011, primarily due to the Company realizing income due to the forgiveness of indebtedness related to accounts payable of IPA.

 

Liquidity and Capital Resources

 

The Company’s net loss for the six months ended June 30, 2012 was $941,000.   Non-cash expenses totaled $719,000 for the six months ended June 30, 2012 primarily due to stock options and stock compensation expense.   Cash used by changes in operating assets and liabilities was $233,000 in 2012.  Net cash used in operating activities was $455,000 for the six months ended June 30, 2012.  

 

Net cash used in investing activities was $89,000 for 2012 primarily due to capital expenditures by VGE for the GKG business.

  

The Company has incurred significant losses from operations, resulting in an accumulated deficit of $43,923,000. The Company expects such losses to continue. In addition, the Company has limited working capital and did have sufficient funds to pay the May 14, 2012 installment due on the note to Changs LLC. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On July 30, 2012, the Board of Directors and Management of the Company and Sung Chang executed formal term sheets outlining the mechanism and orderly transfer of the Company's equity interest in VGE to Mr. Chang. In addition, term sheets have also been signed which give VGE the right to commercially develop Giant King Grass in China and Taiwan and give VIASPACE the right to commercially develop Giant King Grass in the rest of the world outside China and Taiwan. Under the term sheets, the VIASPACE secured debt to Chang will not have to be paid. After the transfer of the Company’s equity interest in VGE to Mr. Chang, the Company will no longer be able to consolidate the operations of VGE into the operations of the Company. Therefore, revenues from the framed art business will no longer be recognized in the Company’s operations. The Company’s future revenues are expected to be generated from commercial contracts to develop Giant King Grass in the rest of the world outside China and Taiwan. The Company does not have any commercial contracts currently. See Subsequent Events footnote to the financial statements for more information.

  

Contractual Obligations

 

The following table summarizes our long-term contractual obligations at June 30, 2012:

 

Due to Changs LLC

 

VIASPACE was obligated to pay Sung Hsien Chang (“Chang”) $4,800,000 for the acquisition of IPA China and IPA BVI by VGE and the Company on October 21, 2008.  Chang is a Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI.  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 of VIASPACE or VGE.  All payments of VIASPACE or VGE common stock shall be valued at the 10-day average closing price of its respective common shares preceding the applicable payment date or by other reasonable methods determined by the board of directors of VIASPACE or VGE, as the case may be if the shares are not trading at the time of payment.  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.  If VIASPACE defaults in its obligation to Chang, Chang may foreclose on all assets of our Company and/or our subsidiaries with the exception of any assets of DMFCC and Ionfinity.   He may also seize the equity interests of our interest in VGE.   Any of these actions would cause us to relinquish all ownership of our assets.  Under such circumstances, the common stock of the Company may lose all of its value 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, 2011, the Company was in violation of the net worth covenant.  The Company received a waiver on this violation from Chang.

 

On May 16, 2011, VIASPACE and Chang entered into an Amendment to Secured Promissory Note (the "Note Amendment"). The parties desired to extend the installment payment due dates by one year as part of the Note Amendment.  The Note Amendment requires VIASPACE to make five equal annual installment payments of One Million Sixty Six Thousand and Two Hundred and Five Dollars ($1,066,205) each, together with interest per annum of six percent (6%), in arrears on the second, third, fourth, fifth and sixth anniversary dates of the Issue Date rather than the first, second, third, fourth and fifth anniversary dates of the Issue Date.  In addition, as part of the Note Amendment, the Holder of the Note has been changed from Sung Hsien Chang to Changs LLC, a limited liability company owned by Mr. Chang and his wife.  On September 23, 2011, the Company made an advance payment of $200,000 on the installment payment due to Changs LLC on May 14, 2012.   The current amount of the installment payment due to Changs LLC on May 14, 2012 is $866,205.

 

The Company did not have the cash available to pay Changs LLC on May 14, 2012. Subsequent to that date the Company negotiated a separation of VIASPACE and VGE and a GKG licensing agreement between VGE and VIASPACE. Term sheets related to these agreements were signed on July 30, 2012. See Subsequent Event footnote for additional information.

At June 30, 2012 and December 31, 2011, there is accrued interest of $432,000 and $519,000, respectively, arising from the Note included in related party payable in the Company’s Consolidated Balance Sheet. During the second quarter of 2012, $240,000 was paid to Changs LLC as partial payment on the accrued interest balance.

  

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. These two-year employment agreements ended May 14, 2012.

 

On April 19, 2012, the VGE Board of Directors approved new one-year employment agreements beginning June 1, 2012 for Dr. Kukkonen, Mr. Chang and Mr. Muzi. Dr. Kukkonen and Mr. Chang would receive a salary of $240,000 per annum and Mr. Muzi would receive $180,000 per annum.

 

As discussed in the Subsequent Events footnote, on July 30, 2012, term sheets were signed associated with the separation of VIASPACE and VGE. Dr. Kukkonen and Mr. Muzi will give up their rights to these one-year employment contracts effective at the date of the signing of the definitive final agreements.

 

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 June 30, 2012.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk. Our exposure to interest rate risk primarily relates to interest income generated by cash invested in liquid investments with original maturities of three months or less. Such interest-earning instruments carry a degree of interest rate risk. We have not used any derivative financial instruments to manage our interest rate exposure. We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

 

Foreign Exchange Risk. Although we use US dollars as our reporting currency and our artwork revenue is denominated in US dollars, our operations are carried out in RMB and we maintain RMB denominated bank accounts. We, therefore, are subject to currency risk. Although the conversion of the RMB is highly regulated in China, the value of the RMB against the value of the US dollar or any other currency nonetheless may fluctuate in value within a narrow band against a basket of certain foreign currencies. China is currently under significant international pressures to liberalize this government currency policy, and if such liberalization were to occur, the value of the RMB could appreciate or depreciate against the US dollar. Unfavorable changes in the exchange rate between the RMB and the US dollar may result in a material effect upon accumulated other comprehensive income recorded as a charge in shareholders’ equity. We do not use derivative instruments to reduce our exposure to foreign currency risk.

 

In addition, the RMB is not a freely convertible currency. IPA China, our Chinese subsidiary, is not permitted to pay outstanding current account obligations in foreign currency, but rather must present the proper documentation to a designated foreign exchange bank. We cannot guarantee that all future local currency can be repatriated.

 

Inflation. Although China has experienced an increasing inflation rate, inflation has not had a material impact on our results of operations during 2012 and 2011.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.

For the period ended June 30, 2012, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In the course of this evaluation, our management considered the material weakness in our internal control over financial reporting as discussed in our Annual Report on Form 10-K for the period ended December 31, 2011. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report on Form 10-Q, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the registrant’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. To overcome this weakness, our principal executive and financial officers have reviewed and provided additional substantive accounting information and data in connection with the preparation of this quarterly report.  Therefore, despite the weaknesses identified, our principal executive and financial officers believe that there are no material inaccuracies or omissions of material facts necessary to make the statements included in this report not misleading in light of the circumstances under which they are made.  

 

Changes in Internal Control over Financial Reporting

 

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financing reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company does not have any material legal proceedings as of June 30, 2012.

 

ITEM 1A. RISK FACTORS

 

Risk Factors Which May Affect Future Results

 

The Company cautions that the following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company.

 

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, other than as set forth below:

 

Risks Related To Our Business

 

We have not paid our secured debt to Chang, and as a result, we will likely lose our equity interests in VGE, IPA BVI and IPA China. Although we are negotiating to operate the grass business through a license relationship with VGE, if we are unable to do to so, we will have no ongoing operating business.

 

On May 14, 2010, VIASPACE entered into a Secured Promissory Note with Sung Hsien Chang (“Chang”) and must pay Chang $5,331,025 over a five-year period.  Chang is a former Director of VIASPACE, President of VGE, and CEO of IPA China and IPA BVI.  Interest accrues at 6%.  On May 16, 2011, VIASPACE and Chang entered into an Amendment to Secured Promissory Note (the "Note Amendment"). Under the Note Amendment, VIASPACE was required pay Changs LLC principal in five equal installments of $1,066,205 on the second through sixth anniversary of the issuance date. The first payment was due May 14, 2012. 

 

VIASPACE was not able to make the cash payment due to Chang on May 14, 2012, and pending notice from Chang, such payment delinquency has caused the Company to default on the Note. As a result Chang is entitled to foreclose on most of the assets of VIASPACE’s business, including without limitation, all shares of VGE capital stock which the Company has already pledged to Chang. If such foreclosure occurred, the Company would no longer have any ownership in VGE and would have no ongoing business.

 

To date, Chang has not foreclosed on the Company assets and instead has executed a non-binding term sheet with the Company on July 30, 2012 that would result in a recapitalization of VGE and a sublicense from VGE to VIASPACE (“VGE Separation”). In particular, among other things, the term sheet would result in: (1) VIASPACE no longer owning VGE equity; (2) Chang increasing his ownership of VGE equity; (3) the Company would not have to pay Chang for any obligations under the Note; and (4) the Company would obtain a sublicense to the Giant King Grass (GKG) license held by IPA China to commercialize and develop GKG anywhere in the world other than the PRC or Taiwan. The parties intend to negotiate and finalize definitive, binding agreements based on this term sheet in the next few months.

 

If the parties enter into such agreements, VIASPACE will no longer own have any ownership in VGE, IPA BVI and IPA China and thus will have no ownership in the framed artwork business any longer. It will no longer derive any revenue from such business. It will have a GKG sublicense which it intends to develop as its business going forward.

 

However, if the parties are unable to finalize such agreements and if Chang should foreclose on the assets, then the Company will likely declare bankruptcy and will likely cease ongoing operations. The shares of Company common stock will likely then lose all value.

 

We have incurred losses and anticipate continued losses for the foreseeable future.

 

Our net loss for the six months ended June 30, 2012 was $941,000. We have not yet achieved profitability and expect to continue to incur net losses until we recognize increased revenues from GKG related sales. Further, we will soon no longer have any ownership of VGE, and therefore no longer have any revenue from framed artwork business, currently our sole source of business. We will rely solely on the GKG grass business for revenue for the foreseeable future. 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 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 future financing.

 

Hein & Associates LLP, our independent registered public accounting firm, included an explanatory paragraph in its report on our financial statements for 2011, which expresses substantial doubt about our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in Hein & Associates 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.

 

Our revenues to date have been to a few customers in the framed artwork business which will soon no longer be owned by the Company. Therefore, the Company will lose substantially all of its current revenues which are related to the artwork business. after the VGE separation occurs.

 

The Company had one customer who made up 95% of the consolidated revenues of the Company for the six months ended June 30, 2012 related to the framed artwork business.  Whether through finalizing the VGE Separation or a foreclosure on the Company’s assets, we believe that the Company will no longer have majority ownership of VGE, and thus, no longer own the framed artwork business. Therefore, the Company will suffer significantly reduced recognized revenues for the foreseeable future. If the VGE Separation occurs and the Company retains a sublicense to the GKG technology, then the Company will rely on future revenues from the GKG business along with proceeds from any debt and equity capital sales in order to maintain its operations.

 

 

If we fail to comply with our obligations in our intellectual property licenses, 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. We intend to enter into a sublicense agreement with Mr. Chang and VGE pursuant to which VGE will sublicense their license to the GKG intellectual property. Because this is a sublicense arrangement, we are also dependent on Mr. Chang to maintain the license properly. Any failure by Mr. Chang to comply with its terms under its license may have a ripple effect that materially and adversely affects our sublicense with Mr. Chang.

 

These 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.

 

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.

 

VGE sublicenses our intellectual property to the GKG from China Gate Technology Co., Ltd. (China Gate) which licenses the intellectual property from the original licensor. If the VGE Separation is finalized, we will have a sublicense from VGE to commercialize GKG on a worldwide basis except the PRC and Taiwan. To summarize, our license rights to GKG will then be sublicensed from VGE which are sublicensed from China Gate.

 

The term of this license from China Gate 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 sublicensors (either China Gate or VGE) would affect our rights as the sublicensee. The original licensor is aware of our China Gate 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.

 

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, or if our competitors develop products that are favored by our customers, our growth will be adversely affected.

 

In addition, our business will initially depend on VGE and the seedlings produced in the Guangdong province of the PRC. Under the VGE Separation terms, we will no longer own VGE, and therefore, we will no longer control the plantations where GKG is currently grown in the Guangdong area. Instead, we expect that VGE will be a supplier of seedlings to us in the short term at least. Since we will not directly own the farms, however, we are subject to greater risk if VGE is unable or unwilling to supply us the seedlings. For the long term prospects, we will likely have to produce GKG in other locations outside China. If we are unable to generate our existing products in sufficient quantities – either from VGE or through our own locations - our growth prospects may be materially and adversely affected and our revenues and profitability may decline.

 

 

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. For instance, pursuant to the VGE Separation, Sung Hsien Chang, President of VGE and CEO of IPA BVI, will no longer be part of our management. Key personnel remaining include Dr. Carl Kukkonen, our CEO.

 

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.

 

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 will need to raise additional capital to maintain any ongoing business. We anticipate that the issuance of newly-issued shares to maintain our business will likely 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 1,383,147,082 were issued and outstanding as of June 30, 2012. Of these issued and outstanding shares, 632,543,464 shares (45.7%) are currently held by our executive officers, directors, and principal shareholders including related parties (including Dr. Carl Kukkonen, CEO and Director; Mr. Stephen J. Muzi, CFO; Mr. Sung Hsien Chang, President of VGE and a former director of the Company; Ms. Angelina Galiteva, Director; and Dr. Kevin L. Schewe, Director).  Of the shares issued and outstanding at June 30, 2012, 550,246,707 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.  832,900,375 shares of the Company’s common stock are accounted for by our transfer agent as free trading at June 30, 2012.

 

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.

 

 

Our executive officers, directors and principal shareholders own 45.7% 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 45.7% of our outstanding shares as of June 30, 2012.  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 Board and did not require shareholder vote.  The Certificate created a new class of preferred stock known as Series A Preferred Stock. There is one share designated as Series A Preferred Stock. One share of Series A Preferred Stock is entitled to 50.1% of the outstanding votes on all shareholder voting matters. Series A Preferred Stock has no dividend rights and no rights upon a liquidation event and is subject to cancellation when certain conditions are met.  On May 14, 2010, the Company issued one share of Series A Preferred Stock to Mr. Chang related to the acquisition of IPA by VIASPACE and VGE.  This empowers Chang with supermajority voting rights even after he holds less than a majority of outstanding voting securities. Under the term sheet relating to the VGE Separation, Chang would give a proxy to Director Dr. Schewe during the term of any GKG sublicense from VGE. Dr. Schewe may be willing to provide additional financing to the Company. In the event he provides such financing, his ownership in the Company will further increase.

 

We will lose our interests in VGE which would impact our stock price.

 

As explained in the Subsequent Event footnote and in the Risk Factors earlier, the Company did not make the debt payment due to Chang on May 14, 2012. However, Mr. Chang did not foreclose on all assets of our Company and/or our subsidiaries.   If he were to, we would no longer have any business. Instead, VIASPACE and VGE negotiated a non-binding term sheet that is intended to result in a separation agreement and a Giant King Grass license agreement in which we intend to license GKG from VGE. If such agreement is finalized and executed, VIASPACE would give to Chang all the shares VIASPACE owns in VGE. In return, VIASPACE would not have to pay the secured debt to Chang. The Company cannot predict the impact these events will have on your securities’ value.

 

   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On April 4, 2012, the Company issued Dr. Carl Kukkonen, CEO of the Company, 5,725,077 unregistered shares of the Company’s common stock for salary valued at $50,400. On April 4, 2012, the Company issued Mr. Stephen Muzi, CFO of the Company, 3,409,091 unregistered shares of the Company’s common stock for salary valued at $30,000.  On May 1, 2012, the Company issued Dr. Kukkonen 5,193,885 unregistered shares of the Company’s common stock for salary valued at $50,400.  On May 1, 2012, the Company issued Mr. Muzi 3,092,784 unregistered shares of the Company’s common stock for salary valued at $30,000.  

 

The shares were issued in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.  We made a determination that these parties were sophisticated investors with enough knowledge and experience in business to evaluate the risks and merits of accepting our shares as payment for their services and the Company believes that each party was given or had access to detailed financial and other information with respect to the Company.  These vendors acquired the shares for investment purposes without view to distribution, and there was no general advertising or general solicitation in connection with the issuance of the shares.  Further, restrictive transfer legends were placed on all certificates issued to these parties, and no underwriting or selling commissions were paid in connection with these share issuances.

  

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

  

ITEM 6. EXHIBITS

 

(a) Exhibits

 

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *
101.INS	XBRL Instance Document *
101.SCH	XBRL Schema Document *
101.CAL	XBRL Calculation Linkbase Document *
101.DEF	XBRL Definition Linkbase Document *
101.LAB	XBRL Label Linkbase Document *
101.PRE	XBRL Presentation Linkbase Document *

 

* Filed herewith.

  

[SIGNATURES PAGE FOLLOWS]

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	VIASPACE Inc. (Registrant)
Date: August 13, 2012	By:	/s/ CARL KUKKONEN
		Carl Kukkonen
		Chief Executive Officer
Date: August 13, 2012	By:	/s/ STEPHEN J. MUZI
		Stephen J. Muzi
		Chief Financial Officer