Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
For the quarterly period ended June 30, 2007
or
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o |
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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)
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Nevada
(State or other jurisdiction of
incorporation or organization)
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76-0742386
(I.R.S. Employer Identification No.) |
171 North Altadena Drive, Suite 101, Pasadena, CA 91107
(Address of principal executive offices)
(626) 768-3360
(Issuers 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 þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. (Check one):
Large accelerated filer o Accelerated filer o Non-Accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 304,726,097 shares of $0.001 par value common stock issued and
outstanding as of August 6, 2007.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIASPACE INC.
CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
644,000 |
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$ |
1,861,000 |
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Accounts receivable, net of allowance for doubtful accounts of $21,000 in 2007 and 2006 |
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80,000 |
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231,000 |
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Marketable securities, available for sale |
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310,000 |
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419,000 |
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Inventory |
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45,000 |
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Other prepaid expenses and other current assets |
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73,000 |
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99,000 |
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TOTAL CURRENT ASSETS |
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1,152,000 |
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2,610,000 |
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FIXED ASSETS: |
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Fixed assets, net of accumulated depreciation of $141,000 and $106,000 in 2007 and
2006, respectively |
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189,000 |
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207,000 |
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OTHER ASSETS: |
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Intellectual property, net of accumulated amortization of $57,000 and $40,000 in 2007
and 2006, respectively |
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357,000 |
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375,000 |
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Deferred financing and offering costs |
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777,000 |
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Other assets |
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13,000 |
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30,000 |
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TOTAL OTHER ASSETS |
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370,000 |
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1,182,000 |
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TOTAL ASSETS |
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$ |
1,711,000 |
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$ |
3,999,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
262,000 |
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$ |
286,000 |
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Accrued expenses |
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244,000 |
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260,000 |
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Current portion of long-term debt |
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30,000 |
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29,000 |
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Current portion of convertible debenture, net of discounts |
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250,000 |
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Warrant and consultant stock option derivatives |
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20,000 |
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Related party payable |
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209,000 |
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193,000 |
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TOTAL CURRENT LIABILITIES |
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745,000 |
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1,038,000 |
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LONG-TERM LIABILITIES: |
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Convertible debenture and embedded derivatives, net of current portion |
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2,407,000 |
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Warrant and consultant stock option derivatives, net of current portion |
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3,106,000 |
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Deferred rent |
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15,000 |
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20,000 |
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Long-term debt, net of current portion |
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56,000 |
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71,000 |
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TOTAL LONG-TERM LIABILITIES |
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71,000 |
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5,604,000 |
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TOTAL LIABILITIES |
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816,000 |
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6,642,000 |
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COMMITMENTS AND CONTINGENCIES |
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MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: |
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Preferred Shareholder Minority Interest |
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500,000 |
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500,000 |
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Common Shareholder Minority Interest |
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72,000 |
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56,000 |
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572,000 |
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556,000 |
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3
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June 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
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(Continued) |
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STOCKHOLDERS EQUITY (DEFICIT): |
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Preferred stock, $0.001 par value,
10,000,000 shares authorized, zero shares
issued and outstanding |
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Common stock, $0.001 par value, 800,000,000
shares authorized, 304,385,436 and
292,512,205 issued and outstanding in 2007
and 2006, respectively |
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304,000 |
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293,000 |
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Additional paid in capital |
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16,762,000 |
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7,104,000 |
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Accumulated other comprehensive income |
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310,000 |
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436,000 |
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Accumulated deficit |
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(17,053,000 |
) |
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(11,032,000 |
) |
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Total stockholders equity (deficit) |
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323,000 |
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(3,199,000 |
) |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,711,000 |
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$ |
3,999,000 |
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The accompanying notes are an integral part of the consolidated financial statements.
4
VIASPACE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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REVENUES |
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Government contracts |
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$ |
21,000 |
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$ |
91,000 |
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$ |
102,000 |
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$ |
183,000 |
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Commercial contracts |
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111,000 |
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83,000 |
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269,000 |
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104,000 |
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Total revenues |
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132,000 |
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174,000 |
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371,000 |
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287,000 |
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COST OF REVENUES |
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84,000 |
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146,000 |
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287,000 |
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251,000 |
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GROSS PROFIT |
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48,000 |
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28,000 |
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84,000 |
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36,000 |
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OPERATING EXPENSES |
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Research and development |
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415,000 |
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271,000 |
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806,000 |
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453,000 |
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Selling, general and administrative expenses |
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1,740,000 |
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1,211,000 |
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3,406,000 |
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2,452,000 |
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Total operating expenses |
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2,155,000 |
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1,482,000 |
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4,212,000 |
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2,905,000 |
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LOSS FROM OPERATIONS |
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(2,107,000 |
) |
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(1,454,000 |
) |
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(4,128,000 |
) |
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(2,869,000 |
) |
OTHER INCOME (EXPENSE) |
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Interest income |
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16,000 |
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29,000 |
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35,000 |
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51,000 |
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Interest expense |
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(2,000 |
) |
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(3,000 |
) |
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(3,514,000 |
) |
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(6,000 |
) |
Gain on sale of marketable securities |
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219,000 |
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Adjustments to fair value of derivatives |
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1,383,000 |
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Total other income (expense) |
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14,000 |
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26,000 |
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(1,877,000 |
) |
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45,000 |
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LOSS BEFORE MINORITY INTEREST |
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(2,093,000 |
) |
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(1,428,000 |
) |
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(6,005,000 |
) |
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(2,824,000 |
) |
Minority interest loss (income) in
consolidated subsidiaries |
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(9,000 |
) |
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5,000 |
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(16,000 |
) |
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14,000 |
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NET LOSS |
|
$ |
(2,102,000 |
) |
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$ |
(1,423,000 |
) |
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$ |
(6,021,000 |
) |
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$ |
(2,810,000 |
) |
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LOSS PER SHARE OF COMMON STOCK BEFORE MINORITY
INTEREST |
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Basic and diluted |
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$ |
(0.01 |
) |
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$ |
* |
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$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
Minority interest in consolidated subsidiaries |
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* |
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* |
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* |
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* |
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NET LOSS PER SHARE OF COMMON STOCK |
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Basic and
diluted |
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$ |
(0.01 |
) |
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$ |
* |
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$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING |
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Basic and
diluted |
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304,046,460 |
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|
291,619,286 |
|
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|
299,766,092 |
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|
288,354,098 |
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* |
|
Less than $0.01 per common share. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
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NET LOSS |
|
$ |
(2,102,000 |
) |
|
$ |
(1,423,000 |
) |
|
$ |
(6,021,000 |
) |
|
$ |
(2,810,000 |
) |
Other Comprehensive Income: |
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Unrealized holding gain on securities |
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21,000 |
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|
301,000 |
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|
93,000 |
|
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|
296,000 |
|
Less reclassification adjustment for realized
gain on securities included in net loss |
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|
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|
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(219,000 |
) |
|
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|
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|
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|
|
|
|
|
|
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|
Net unrealized holding gain (loss) on securities |
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|
21,000 |
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|
301,000 |
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|
(126,000 |
) |
|
|
296,000 |
|
|
|
|
|
|
|
|
|
|
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|
COMPREHENSIVE LOSS |
|
$ |
(2,081,000 |
) |
|
$ |
(1,122,000 |
) |
|
$ |
(6,147,000 |
) |
|
$ |
(2,514,000 |
) |
|
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The accompanying notes are an integral part of the consolidated financial statements.
5
VIASPACE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
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Common Stock |
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Accumulated |
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Additional |
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Other |
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Paid in |
|
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Comprehensive |
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Accumulated |
|
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|
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|
Shares |
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Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
BALANCE, DECEMBER 31, 2006 |
|
|
292,512,205 |
|
|
$ |
293,000 |
|
|
$ |
7,104,000 |
|
|
$ |
436,000 |
|
|
$ |
(11,032,000 |
) |
|
$ |
(3,199,000 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,021,000 |
) |
|
|
(6,021,000 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,000 |
|
|
|
|
|
|
|
93,000 |
|
Reclassification of realized gain on securities to net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(219,000 |
) |
|
|
|
|
|
|
(219,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,147,000 |
) |
Stock compensation expense related to warrants |
|
|
|
|
|
|
|
|
|
|
329,000 |
|
|
|
|
|
|
|
|
|
|
|
329,000 |
|
Stock compensation expense related to stock options |
|
|
|
|
|
|
|
|
|
|
1,119,000 |
|
|
|
|
|
|
|
|
|
|
|
1,119,000 |
|
Shares issued to consultants and employees for services |
|
|
423,823 |
|
|
|
|
|
|
|
143,000 |
|
|
|
|
|
|
|
|
|
|
|
143,000 |
|
Restructuring of convertible debentures financing from
Cornell Capital into equity and the issuance of common shares
to Cornell Capital |
|
|
11,449,408 |
|
|
|
11,000 |
|
|
|
8,067,000 |
|
|
|
|
|
|
|
|
|
|
|
8,078,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JUNE 30, 2007 |
|
|
304,385,436 |
|
|
$ |
304,000 |
|
|
$ |
16,762,000 |
|
|
$ |
310,000 |
|
|
$ |
(17,053,000 |
) |
|
$ |
323,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
6
VIASPACE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,021,000 |
) |
|
$ |
(2,810,000 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
35,000 |
|
|
|
15,000 |
|
Amortization of intangible assets |
|
|
18,000 |
|
|
|
2,000 |
|
Amortization of discount related to conversion feature of debentures |
|
|
354,000 |
|
|
|
|
|
Stock option and warrant compensation expense |
|
|
1,449,000 |
|
|
|
724,000 |
|
Stock compensation expense related to restricted stock issued |
|
|
143,000 |
|
|
|
|
|
Change in fair value of derivatives |
|
|
(1,383,000 |
) |
|
|
|
|
Non-cash interest expense related to convertible debentures debt discount write off |
|
|
2,096,000 |
|
|
|
|
|
Non-cash interest expense related to loss on conversion of debentures |
|
|
953,000 |
|
|
|
|
|
Non-cash interest expense related to convertible debentures that was forgiven |
|
|
50,000 |
|
|
|
|
|
Non-cash interest expense related to deferred financing costs |
|
|
58,000 |
|
|
|
|
|
Gain on sale of marketable securities |
|
|
(219,000 |
) |
|
|
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
151,000 |
|
|
|
(3,000 |
) |
Inventory |
|
|
(45,000 |
) |
|
|
|
|
Prepaid expenses and other current assets |
|
|
26,000 |
|
|
|
16,000 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(24,000 |
) |
|
|
15,000 |
|
Accrued expenses and other |
|
|
11,000 |
|
|
|
51,000 |
|
Related party payable |
|
|
16,000 |
|
|
|
(20,000 |
) |
Minority interest |
|
|
16,000 |
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,316,000 |
) |
|
|
(2,020,000 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Additions to fixed assets |
|
|
(17,000 |
) |
|
|
(156,000 |
) |
Proceeds from gain on sale of marketable securities |
|
|
219,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
202,000 |
|
|
|
(156,000 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from restructuring of convertible debentures and issuance of common stock,
net of offering costs paid |
|
|
911,000 |
|
|
|
|
|
Payments on long-term debt |
|
|
(14,000 |
) |
|
|
(13,000 |
) |
Exercise of stock options by SNK Capital Trust |
|
|
|
|
|
|
2,000,000 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
897,000 |
|
|
|
1,987,000 |
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,217,000 |
) |
|
|
(189,000 |
) |
CASH AND CASH EQUIVALENTS, Beginning of period |
|
|
1,861,000 |
|
|
|
2,130,000 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, End of period |
|
$ |
644,000 |
|
|
$ |
1,941,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
3,000 |
|
|
$ |
6,000 |
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
Supplemental Disclosure of Non-Cash Financing:
|
|
|
The following transactions were a result of the restructuring of the convertible debentures on March 8, 2007: |
|
|
|
$85,000 of accrued interest expense was waived by Cornell Capital
Partners as part of the conversion of convertible debentures into common stock
equity. |
|
|
|
|
Embedded derivative liabilities of $1,651,000 were converted to equity. |
|
|
|
|
Warrant derivative liabilities of $2,442,000 were reclassified to equity. |
|
|
|
|
Stock option and Synthetica warrant derivative liabilities of $56,000 were reclassified to equity. |
|
|
|
|
Deferred offering costs of $719,000 were charged to paid in capital and
recorded against the proceeds from the issuance of equity. |
|
|
|
|
Convertible debentures with a face value of $2,700,000 were converted to
equity. |
The accompanying notes are an integral part of the consolidated financial statements.
7
VIASPACE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - VIASPACE Inc. (we, us, VIASPACE, or the Company) is dedicated to
commercializing proven space and defense technologies from NASA and the Department of Defense into
hardware and software products. VIASPACE is developing these technologies into hardware and
software products that we believe have the potential to fulfill high-growth market needs and solve
todays complex problems. The Company has expertise in energy/fuel cells, microelectronics, sensors
and software for defense, homeland security and public safety, information and computational
technology. VIASPACE has licensed patents, trade secrets, and software technology from California
Institute of Technology (Caltech), which manages the Jet Propulsion Laboratory (JPL) for NASA.
This technology was developed by scientists and engineers at JPL over the last decade and was
funded by NASA and the Department of Defense. VIASPACE is working to leverage this large government
research and development investment, made originally for space and defense applications into
commercial products.
Company Background and Merger On June 22, 2005, ViaSpace Technologies LLC (ViaSpace LLC)
acquired the non-operating shell company of Global-Wide Publication Ltd. (GW). GW was
incorporated in the State of Nevada on July 14, 2003. Upon the date of the merger, GW was renamed
VIASPACE Inc. The transaction was accounted for as a reverse merger and a recapitalization of the
Company.
ViaSpace LLC was founded in July 1998 with the objective of transforming proven space and defense
technologies from NASA and the Department of Defense into hardware and software solutions that have
the potential to solve todays complex problems. ViaSpace LLC benefits from important patent and
software licenses from Caltech, which manages NASAs JPL, and from relationships with research
laboratories, universities, and other organizations within the advanced technology community.
Pursuant to the reverse merger, on June 22, 2005:
|
|
|
GW effected a 5 for 1 forward stock split (a 6 for 1 forward stock split was
previously effected May 23, 2005); |
|
|
|
|
The members of ViaSpace LLC were issued an aggregate of 226,800,000 post-split shares
of GW common stock in exchange for their membership interests in ViaSpace LLC at a rate of
5.4 common shares of GW in exchange for each membership unit. All pre-merger activity has
been retroactively adjusted and presented to account for this exchange; |
|
|
|
|
A total of 54,000,000 post-split shares (1,800,000 shares on a pre-split basis) of
the Companys common stock were held by the pre-existing GW shareholders as of the date of
the Merger. |
Prior to ViaSpace LLC acquiring the non-operating shell of GW:
|
|
|
On September 30, 2003, GW acquired all of the issued and outstanding shares of Marco
Polo World News Inc. (MPW), a British Columbia, Canada corporation that was engaged in
the production and distribution of an ethnic bilingual (English/Italian) weekly newspaper
called Marco Polo, in consideration of 63,000,000 restricted shares on a post-split basis
(2,100,000 shares on a pre-split basis) of GWs common stock issued to MPWs sole
shareholder, Mr. Rino Vultaggio, who became a director and officer of GW. As a result of
the transaction, MPW became a wholly owned subsidiary of GW. |
|
|
|
|
On May 19, 2005, GW entered into a Share Purchase Agreement with Mr. Robert Hoegler, a
former director and officer of GW, pursuant to which, upon the closing of the Merger, GW
purchased 72,000,000 shares on a post-split basis (2,400,000 shares on a pre-split basis)
of the Companys common stock for $24,000. |
|
|
|
|
In addition, on May 19, 2005, GW entered into an Acquisition Agreement with Mr. Rino
Vultaggio, pursuant to which, upon the closing of the Merger, GW sold 100% of its interest
in MPW to Mr. Vultaggio in exchange for 63,000,000 shares on a post-split basis (2,100,000
shares on a pre-split basis) of Company Common Stock. Thus, as of June 22, 2005, GW no
longer had any ongoing operations related to MPW, or any newspaper publication business. |
8
Basis of Presentation The accompanying unaudited consolidated financial statements of VIASPACE
have been prepared in accordance with generally accepted accounting principles (GAAP) for
financial information and with the instructions to Form 10-Q. Accordingly, the unaudited financial
statements do not include all of the information and footnotes required by GAAP. Operating results
for the six months ended June 30, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ended December 31, 2007. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys Annual Report on
Form 10-KSB, as amended, for the year ended December 31, 2006. 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 have been made to the June 30, 2006 consolidated financial statements in order to
conform to the June 30, 2007 consolidated financial statement presentation.
Principles of Consolidation The Company is generally a founding shareholder of its affiliated
companies, which are accounted for under the consolidation method. Affiliated companies Direct
Methanol Fuel Cell Corporation (DMFCC), VIASPACE Security, Inc. (VIASPACE Security), Ionfinity
LLC (Ionfinity) and Concentric Water Technology LLC (Concentric Water), in which the Company
owns, directly or indirectly, a controlling voting interest, are accounted for under the
consolidation method of accounting. Under this method, an affiliated companys results of
operations are reflected within the Companys consolidated statement of operations. Transactions
between the Company and its consolidated affiliated companies are eliminated in consolidation. The
Company also has a controlling interest in eCARmerce, Inc. (eCARmerce), an inactive company that
holds patents in the areas of interactive radio technology. The Company has adopted Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, which requires use of the
purchase method for all business combinations initiated after June 30, 2001.
Fiscal Year End The Companys fiscal year ends December 31.
Use of Estimates in the Preparation of the Financial Statements The preparation of financial
statements, in conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents The Company considers all highly liquid debt instruments, purchased
with an original maturity of three months or less, to be cash equivalents.
Concentration of Credit Risk The Companys financial instruments that are exposed to
concentration of 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 collectibility. 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 customers extended delinquency,
requests for restructuring and filings for bankruptcy.
Marketable Securities The Company accounts for marketable securities in accordance with the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities
(SFAS No. 115). SFAS No. 115 provides accounting and disclosure guidance for investments in
equity securities that have readily determinable fair values and all debt securities. SFAS No. 115
applies to marketable equity securities and all debt securities, carried at fair value with
unrealized gains and losses, net of related deferred tax effect, and requires that they be reported
as an item of other comprehensive income. At June 30, 2007, all of the Companys marketable
securities are available for sale.
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. Inventory includes material, direct labor and related manufacturing overhead.
At June 30, 2007, inventory included: Raw Materials $41,000, Work-in-process $0, and Finished
Goods $4,000.
Property and Equipment Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided for using the straight-line method over the estimated useful life of the
assets, which range from three to seven years.
9
Intangible Assets The Companys intangible assets consist of, among other things, (1) licenses to
patents that are being amortized over periods through the expiration date of the patents (up to
twenty years); (2) software application code that is being amortized over three years; and (3)
software licenses with an estimated useful life of five years. All intangible assets are subject to
impairment tests on an annual or periodic basis. The impairment test consists of a comparison of
the fair value of the intangible asset with its carrying amount. If the carrying amount of an
intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is
recognized. Amortizing intangibles are currently evaluated for impairment using the methodology set
forth in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Impairment of Long-lived Assets The Company evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset may no longer be
recoverable. If the estimated future cash flows (undiscounted and without interest charges) from
the use of an asset are less than the carrying value, a write-down would be recorded to reduce the
related asset to its estimated fair value. For purposes of estimating future cash flows from
impaired assets, the Company groups assets at the lowest level from which there is identifiable
cash flows that are largely independent of the cash flow of other groups of assets. There have been
no impairment charges recorded by the Company.
Deferred Financing and Offering Costs Costs incurred in connection with the issuance of
convertible debentures discussed in Note 7 including placement fees, broker fees and legal costs
have been apportioned to the three tranches of convertible debentures as they were to be received.
As of December 31, 2006, two tranches of convertible debentures had been received and $719,000 was
apportioned to the first two tranches of convertible debentures received. This amount was
originally to be used to offset proceeds of the third tranche of convertible debentures. In
addition, $54,000 of financing costs were being amortized over the term of the Standby Equity
Distribution Agreement discussed in Note 7. After the restructuring of the convertible debentures
discussed in Note 7, $58,000 was recorded as interest expense on March 8, 2007 and $719,000 was
recorded against the proceeds from the issuance of equity. The balance in deferred financing and
offering costs was zero as of March 8, 2007.
Minority Interest in Subsidiaries Minority interest in consolidated subsidiaries represents the
minority stockholders proportionate share of equity of DMFCC and Ionfinity. The Companys
controlling interest requires that the results of these companies operations be included in the
consolidated financial statements. The percentage of DMFCC and Ionfinity that is not owned by the
Company is shown as Minority Interest in Consolidated Subsidiaries in the Consolidated Statement
of Operations and Consolidated Balance Sheet. At June 30, 2007 and December 31, 2006, the Company
has recorded $500,000 as Preferred Shareholder Minority Interest representing an investment in
DMFCC by a minority shareholder. At June 30, 2007 and December 31, 2006, the Company has recorded
$72,000 and $56,000, respectively, representing Common Shareholder Minority Interest in Ionfinity.
Fair Value of Financial Instruments The recorded value of accounts receivables, 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.
Derivative Instruments SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities requires bifurcation of embedded derivative instruments and measurement of their fair
value for accounting purposes. In determining the appropriate fair value, the Company uses the
Black-Scholes-Merton Option Pricing Formula (the Black-Scholes Model). Derivative liabilities are
adjusted to reflect fair value at each period end, with any increase or decrease in the fair value
being recorded in results of operations as Adjustments to Fair Value of Derivatives. In addition,
the fair value of freestanding derivative instruments such as warrants are valued using
Black-Scholes Models.
Income Taxes Effective January 1, 2007, we adopted Financial Accounting Standard Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of SFAS No.
109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.
We utilize a recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
Deferred income taxes are provided using the liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and
rates of the date of enactment. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
10
management believes it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes, if any. Tax positions
taken are not offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that
is more than 50 percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax
benefits are classified as additional income taxes in the statement of operations. FIN 48
prescribes a comprehensive model for how a company should recognize, measure, present, and disclose
in its financial statements, uncertain tax positions that it has taken or expects to take on a tax
return. This Interpretation requires that a company recognize in its financial statements the
impact of tax positions that meet a more likely than not threshold, based on the technical merits
of the position.
Revenue Recognition Product Revenue. VIASPACE has generated revenues to date on product
revenue shipments. DMFCC recognized product revenue in 2006. In accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB No. 104), VIASPACE and DMFCC recognize product
revenue provided that (1) persuasive evidence of an arrangement exists, (2) delivery to the
customer has occurred, (3) the selling price is fixed or determinable and (4) collection is
reasonably assured. Delivery is considered to have occurred when title and risk of loss have
transferred to the customer. The price is considered fixed or determinable when it is not subject
to refund or adjustments. Our standard shipping terms are freight on board shipping point. If the
Company ships product whereby a customer has a right of return or review period, the Company does
not recognize revenue until the right of return or review period has lapsed. Prior to the period
lapsing, this revenue would be recorded as deferred revenue on the Companys Balance Sheet.
Product Development Revenue on Fixed-Price Contracts With Milestone Values Defined.
Ionfinity has generated revenues to date on fixed-price contracts for government contracts. These
contracts have clear milestones and deliverables with distinct values assigned to each milestone.
The government is not obligated to pay Ionfinity the complete value of the contract and can cancel
the contract if the Company fails to meet a milestone. Although the government can cancel the
contract if a milestone is not met, the Company is not required to refund any payments for prior
milestones that have been approved and paid by the government. The milestones do not require the
delivery of multiple elements as noted in Emerging Issues Task Force (EITF) Issue 00-21 Revenue
Arrangements with Multiple Deliverables (EITF No. 00-21). In accordance with SAB No. 104, the
Company treats each milestone as an individual revenue agreement and only recognizes revenue for
each milestone when all the conditions of SAB 104 defined earlier are met.
Product Development Revenue on Fixed-Price Contracts. VIASPACE Security has generated
revenues to date on fixed-price service contracts with private entities and has recognized revenues
using the proportional performance method of accounting. Sales and profits on each fixed-price
service contract are recorded based on the ratio of actual cumulative costs incurred to the total
estimated costs at completion of contract multiplied by the total estimated contract revenue, less
cumulative sales recognized in prior periods (the ''inputs method). A single estimated total
profit margin is used to recognize profit for each contract over its entire period of performance,
which can exceed one year. Losses on contracts are recognized in the period in which they are
determined. The impact of revisions of contract estimates, which may result from contract
modifications, performance or other reasons, are recognized on a cumulative catch-up basis in the
period in which the revisions are made. Differences between the timing of billings and the
recognition of revenue are recorded as revenue in excess of billings or deferred revenue.
Stock Based Compensation VIASPACE and DMFCC have stock-based compensation plans. Effective with
VIASPACE and DMFCCs fiscal year that began January 1, 2006, the Company has adopted the accounting
and disclosure provisions of SFAS No. 123(R), Share-Based Payments (SFAS No. 123(R)) using the
modified prospective application transition method.
Net Income (Loss) Per Share The Company computes net loss per share in accordance with SFAS No.
128, Earnings per Share (SFAS No. 128) and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic and
diluted net loss per share is computed by dividing the net loss available to common stockholders
for the period by the weighted average number of shares of common stock outstanding during the
period.
Research and Development The Company charges research and development expenses to operations as
incurred.
11
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following at June 30, 2007 and December 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Commercial customers |
|
$ |
101,000 |
|
|
$ |
169,000 |
|
U.S. Government customers |
|
|
|
|
|
|
83,000 |
|
|
|
|
|
|
|
|
Total accounts receivable |
|
|
101,000 |
|
|
|
252,000 |
|
Less: Allowance for doubtful accounts |
|
|
21,000 |
|
|
|
21,000 |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
80,000 |
|
|
$ |
231,000 |
|
|
|
|
|
|
|
|
NOTE 3 FIXED ASSETS
Fixed assets are comprised of the following at June 30, 2007 and December 31, 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Computer equipment and software |
|
$ |
221,000 |
|
|
$ |
204,000 |
|
Lab equipment |
|
|
15,000 |
|
|
|
15,000 |
|
Furniture and fixtures |
|
|
68,000 |
|
|
|
68,000 |
|
Leasehold improvements |
|
|
26,000 |
|
|
|
26,000 |
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
330,000 |
|
|
|
313,000 |
|
Less: Accumulated depreciation |
|
|
141,000 |
|
|
|
106,000 |
|
|
|
|
|
|
|
|
Fixed assets, net |
|
$ |
189,000 |
|
|
$ |
207,000 |
|
|
|
|
|
|
|
|
Depreciation expense was $18,000 and $12,000 for the three months ended June 30, 2007 and 2006,
respectively and $35,000 and $15,000 for the six months ended June 30, 2007 and 2006, respectively.
12
NOTE 4 MARKETABLE SECURITIES
Cantronic Systems Inc.
At December 31, 2006, the Company held 2,516,285 common shares of Cantronic Systems Inc.
(Cantronic) that are classified as marketable securities available for sale with a market value
of $257,000. In addition, as of December 31, 2006, the Company held 1,100,155 shares of Cantronic
that were subject to time restrictions on their release on the following dates: March 18, 2007,
September 18, 2007 and March 18, 2008. As of December 31, 2006, the Company has reflected the
value of these shares held in escrow at $51,000, reflecting a marketable securities discount rate
due to restrictions on marketability. Of the total shares in Cantronic that the Company has rights
to, Caltech is entitled to receive 198,869 shares as part of a prior agreement. The Company has
valued these shares owed to Caltech at $9,300 at December 31, 2006 and included this amount in
accrued expenses in the consolidated balance sheet.
On March 21, 2007, the Company received 366,718 shares of its Cantronic restricted common stock in
accordance with shares held in escrow by Cantronics. As of June 30, 2007, the Company held
2,883,002 shares classified as marketable securities available for sale with a fair market value of
$272,000. In addition, the Company holds 733,437 shares of Cantronic that are subject to time
restrictions on their release on September 18, 2007 and March 18, 2008. As of June 30, 2007, the
Company has reflected the value of these shares held in escrow at $38,000, reflecting a marketable
securities discount rate due to restrictions on marketability. Of the total shares in Cantronic
that the Company has rights to, Caltech is entitled to receive 198,869 shares as part of a prior
agreement. The Company has valued these shares owed to Caltech at $10,000 at June 30, 2007 and
included this amount in accrued expenses in the consolidated balance sheet.
During the three month period ended June 30, 2007, in accordance with SFAS No. 115, the Company
recorded an unrealized holding gain of $21,000 related to its investment in Cantronic and reported
this amount in the Companys Consolidated Statements of
Comprehensive Loss. During the six month period ended June 30, 2007, the Company recorded an
unrealized holding gain of $2,000 related to its investment in Cantronic and reported this amount
in the Companys Consolidated Statements of Comprehensive Loss.
ViaLogy plc
As of December 31, 2006, the Company owned 1,497,296 common shares of ViaLogy plc, or four-tenths
of one percent of the fully diluted shares of ViaLogy plc. Dr. Carl Kukkonen, CEO; Mr. Amjad
Abdallat, Vice President/COO; and Mr. Stephen J. Muzi, CFO of the Company together owned less than
eight-tenths of one percent of the fully diluted shares of ViaLogy plc at December 31, 2006. The
fair market value of the Companys shares of ViaLogy plc was $128,000 at December 31, 2006.
From December 31, 2006 through February 9, 2007, the Company recorded unrealized holding gains on
ViaLogy plc of $91,000 in accordance with SFAS No. 115 and reported this amount in the Companys
Consolidated Statements of Comprehensive Loss. On February 9, 2007, the Company sold its complete
share ownership in ViaLogy plc and recorded a realized gain of $219,000 on that date. The Company
received cash proceeds from the sale on April 11, 2007.
NOTE 5 OWNERSHIP INTEREST IN AFFILIATED COMPANIES
DMFCC. As of June 30, 2007 and December 31, 2006, the Company owned 71.4% of the outstanding shares
of DMFCC.
VIASPACE Security. As of June 30, 2007 and December 31, 2006, the Company owned 100% of the
outstanding shares of VIASPACE Security.
Ionfinity. As of June 30, 2007 and December 31, 2006, the Company owned 46.3% of the outstanding
membership interests of Ionfinity. The Company has two seats on Ionfinitys board of managers out
of four total seats. The Company provides management and accounting services for Ionfinity, and Dr.
Carl Kukkonen, Chief Executive Officer of the Company, acts as principal investigator on several of
Ionfinitys government contracts. 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
minority interest held by other members is disclosed separately in the Companys Consolidated
Financial Statements.
13
eCARmerce. As of June 30, 2007 and December 31, 2006, the Company owned 73.9% of the outstanding
shares of eCARmerce. On July 16, 2007, eCARmerce agreed to sell its patents and patent
applications to Viatech Communication LLC for net proceeds of approximately $325,000, subject to
customary closing conditions. The transaction is expected to close approximately August 31, 2007,
with the Company entitled to receive approximately $240,000 of the anticipated net proceeds based
on its ownership interest in eCARmerce. The patents and patent applications to be sold relate to
eCARmerces interactive radio technology. The Company retains a worldwide, non-exclusive license
under the patents. This sale of patents and patent applications would represent the sale of all
assets owned by eCARmerce. The Company expects to dissolve eCARmerce by December 31, 2007, after
the sale of assets is completed.
Concentric Water. As of June 30, 2007 and December 31, 2006, the Company owned 100% of the
membership interests of Concentric Water.
NOTE 6 STOCK OPTIONS AND WARRANTS
VIASPACE Inc. 2005 Stock Incentive Plan
On October 20, 2005, the Board of Directors (the Board) 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 Companys common
stock. The Plan originally provided for the reservation for issuance under the Plan of 28,000,000
shares of the Companys common stock. On May 18, 2006, the Board and the holders of a majority of
the Companys common stock approved an amendment to the Plan which increases the maximum aggregate
number of shares which may be issued in the Plan, effective January 1, 2007 and each January 1
thereafter during the term of the Plan, by an additional number of shares of common stock such that
the total number of shares of common stock reserved for issuance under the Plan is equal to 10% of
the total number of shares of common stock issued and outstanding as of the close of business on
the immediately preceding December 31, which is the last day of the Companys fiscal year. As of
January 1, 2007, the maximum number of shares which may be issued in the Plan increased from
28,000,000 to 29,251,220 as a result of this provision.
The 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. On February 13, 2006, the Board 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 Companys
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 Board of Directors as plan administrator of the 2006
Director Plan, to newly appointed outside members of the Companys Board and annual grants of
50,000 options, or such other number of options as determined by the Board of Directors, to outside
members of the Board that have served at least six months.
The Companys Board 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 date of the grant. The term of the
options granted under the Plan cannot be greater than 10 years. Options to employees and directors
vest generally over four years. An aggregate of 18,506,897 shares were available for future grant
at June 30, 2007. During the six months ended June 30, 2007, the Company granted 2,547,000 stock
options to employees, directors and consultants to purchase common shares with exercise prices
ranging from $0.30 to $0.60. During this same period, 60,000 stock options were cancelled due to
employees terminating employment with the Company.
Effective June 1, 2007, the Company put in place a cash conservation plan whereby the Company has
entered into agreements with certain employees and consultants to pay them a portion of their
salary or consulting payment in shares of common stock of the Company as opposed to payments in
cash. For the three months ended June 30, 2007, the Company issued 276,413 shares of common stock
under the Plan to employees and consultants for services provided to the Company under this cash
conservation plan. In addition, the Company issued 118,800 shares of common stock under the Plan
to two former holders of DMFCC stock options in exchange for the cancellation of their rights in
stock options they held in DMFCC. Finally, during the three months ended June 30, 2007, the
Company issued 28,610 shares of common stock under the Plan to a former employee as a severance
payment. The common stock issued in these instances under the Plan was with no restrictions or
holding period required. The stock compensation expense recorded relating to all of these share
issuances was based on fair market value on the date of grant.
On January 1, 2006, the Company adopted SFAS No. 123(R) which 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. SFAS No.
123(R) 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 Companys Consolidated Statements of Operations. Prior to the adoption
of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using
the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 as allowed
under SFAS No. 123.
14
The Company has elected to adopt the detailed method provided in SFAS No. 123(R) 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 SFAS No. 123(R).
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 Companys dividend history. The stock volatility factor is based on the historical volatility
of the Companys stock price. The expected life of an option grant is based on managements
estimate as no options have been exercised in the Plan to date. The Company has calculated a
forfeiture rate for employees and directors based on historical information. A forfeiture rate of
0% is used for options granted to consultants. The fair value of each option grant to employees,
directors and consultants is calculated by the Black-Scholes method and is recognized as
compensation expense on a straight-line basis over the vesting period of each stock option award.
For stock options issued, including those issued to employees, directors and consultants during the
six month period ended June 30, 2007 and June 30, 2006, the fair value was estimated at the date of
grant using the following range of assumptions:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Risk free interest rate |
|
|
4.58% - 5.12 |
% |
|
|
4.32% - 4.98 |
% |
Dividends |
|
|
0 |
% |
|
|
0 |
% |
Volatility factor |
|
|
118.51% - 125.13 |
% |
|
|
116.47% - 133.8 |
% |
Expected life |
|
6.67 years |
|
6.67 years |
Annual forfeiture rate |
|
|
0% - 6 |
% |
|
|
0 |
% |
Employee and Director Option Grants
The following table summarizes activity for employees and directors in the Companys Plan for the
period ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Price Per |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Term In Years |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
7,613,500 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,753,000 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(80,000 |
) |
|
|
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
9,286,500 |
|
|
$ |
0.99 |
|
|
|
9.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
1,282,167 |
|
|
$ |
1.67 |
|
|
|
8.6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted to employees and directors for
the six month period ended June 30, 2007 and 2006 was $0.37 and $1.18 per share, respectively. The
Company recorded $976,000 of compensation expense for employee and director stock options during
the six month period ended June 30, 2007. At June 30, 2007, there was a total of $5,468,000 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 3.5
years. At June 30, 2007, the fair value of options vested for employees and directors was
$346,000. There were no options exercised during 2007 or 2006.
15
Consultant Option Grants
The following table summarizes activity for consultants in the Companys Plan for the period ended
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Price Per |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Term In Years |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
220,000 |
|
|
$ |
0.86 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
794,000 |
|
|
|
0.29 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
1,014,000 |
|
|
$ |
0.41 |
|
|
|
8.4 |
|
|
$ |
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2007 |
|
|
612,500 |
|
|
$ |
0.45 |
|
|
|
8.4 |
|
|
$ |
6,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant date fair value of stock options granted to consultants for the six
month period ending June 30, 2007 and 2006 was $0.33 and $0.81 per share, respectively. The
Company recorded $142,000 of compensation expense for consultant stock options during the six month
period ended June 30, 2007. At June 30, 2007, there was a total of $120,000 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 1 year. At June 30,
2007, the fair value of options vested for consultants was $165,000. There were no options
exercised during 2007 or 2006.
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 board of directors of DMFCC, board members of
its parent company, consultants, and other independent advisors. As of June 30, 2007, options to
purchase 1,396,000 shares of DMFCC common stock were outstanding and 604,000 shares remained
available for grant under the DMFCC Option Plan. Of these outstanding options, 1,030,000 are
incentive stock options issued to employees and 366,000 are non-statutory stock options issued to
consultants. During the period ended June 30, 2007, DMFCC issued no stock options. DMFCC uses the
Black-Scholes option pricing model to calculate the fair market value of each option granted. The
Black-Scholes option pricing model includes assumptions for risk free interest rates, dividends,
stock volatility and expected life of an option grant. For stock options that are issued, the fair
value of each option grant is recognized as compensation expense on a straight-line basis over the
vesting period of each stock option award.
The following table summarizes activity in the DMFCC Option Plan for the period ended June 30,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Price Per |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Share |
|
|
Term In Years |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
1,581,000 |
|
|
$ |
.02 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(185,000 |
) |
|
|
.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
1,396,000 |
|
|
$ |
.02 |
|
|
|
7.2 |
|
|
$ |
185,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
1,315,250 |
|
|
$ |
.02 |
|
|
|
7.2 |
|
|
$ |
177,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMFCC recorded $1,500 of compensation expense for employee, director and consultant stock options
for the period ended June 30, 2007 and less than $1,000 of compensation expense for the period
ended June 30, 2006. At June 30, 2007, there were no unrecognized compensation costs related to
non-vested share-based compensation arrangements under the Plan. There were no options exercised
during 2007 or 2006. During the period ended June 30, 2007, two holders of 135,000 stock options
in DMFCC cancelled their rights in DMFCC stock options in exchange for the issuance of 118,800
shares of VIASPACE common stock.
16
Synthetica Warrants
The following is a table of warrants outstanding to Synthetica Ltd. as of June 30, 2007 and
December 31, 2006, at an exercise price of $4.00 per share:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Synthetica Warrants |
|
|
1,000,000 |
|
|
|
1,000,000 |
|
For the six month period ended June 30, 2007 and 2006, the Company recorded warrant compensation
expense of $329,000 in each period related to these warrants based on valuing these warrants using
the Black Scholes method. The following assumptions were used to calculate the warrant stock
compensation expense: discount rate 4.36%, volatility of Companys common stock 55.89%, term of 2
years, and an annual rate of dividends of zero. The term expires August 16, 2007.
NOTE 7 RESTRUCTURING OF CONVERTIBLE DEBENTURES AND STANDBY EQUITY DISTRIBUTION AGREEMENTS
10% Convertible Debentures Original Transaction
On November 2, 2006, the Company entered into a Securities Purchase Agreement (the SPA) with
Cornell Capital Partners, LP (Cornell), a Delaware limited partnership (the Buyer and together
with the Company, the Parties). We agreed to issue and sell to the Buyer $3,800,000 principal
amount of secured convertible debentures (the Debentures) in three tranches, which were to be
convertible into shares of our common stock. The funding of the initial tranche of $1,500,000
closed on November 3, 2006; the funding of the second tranche of $1,200,000 closed on November 29,
2006; and the funding of the third tranche of $1,100,000 was scheduled to close when a registration
statement covering the common stock underlying the Debentures was declared effective.
On November 6, 2006, the Company received net proceeds of $1,207,000 from the first tranche, which
reflects the payment of a commitment fee of 10%, a placement fee of 8% of the net proceeds, the
structuring fee and certain legal fees totaling an aggregate of $349,000. On November 29, 2006,
the Company received net proceeds of $994,000 from the second tranche, which reflects the payment
of a commitment fee of 10% and a placement fee of 8% of the net proceeds totaling $206,000.
Each Debenture was to accrue interest at a rate of 10% per annum and the principal and interest on
the Debentures was to be due and payable, if not converted, five years from the date of issuance of
the Debentures. The outstanding principal amount of the Debentures was to be convertible into
shares of our common stock at the option of the Buyer at a conversion price of $0.60 per share.
There were certain instances including an event of default by the Company under the Debentures or
in instances that the Companys common stock is sold at a per share price lower than $0.60 that the
conversion price of the Debentures could be reduced. The Company was to make redemption payments
of outstanding principal and interest on the Debentures in thirteen equal payments beginning on the
earlier of (i) the first trading day of the month immediately following the month the underlying
registration statement is declared effective or (ii) 6 months after the SPA was entered into.
There were certain circumstances whereby redemption payments would not be required, such as if the
weighted average price of the Companys Common Stock was trading at $0.66 per share or higher over
the thirty days prior to when the redemption payment was due. Furthermore, at anytime during the
twelve months following the effectiveness of the registration statement underlying the Debentures,
the Buyer, was to have the sole option to purchase up to $2,850,000 of additional convertible
debentures (Over Allotment Feature) from the Company on the same terms described above.
Contemporaneously with the execution and delivery of the SPA and the issuance by us to the Buyer of
the first Debenture, the Parties executed and delivered (i) an Investor Registration Rights
Agreement, pursuant to which we agreed to provide certain registration rights under the Securities
Act of 1933, as amended (the 1933 Act) and the rules and regulations promulgated there-under and
applicable state securities laws, covering the common stock into which the Debentures are
convertible; (ii) Security Agreements (the Security Agreements), pursuant to which we and our
wholly owned subsidiaries, VIASPACE Security and Concentric Water, agreed to provide to Buyer a
first priority security interest in certain Pledged Collateral (the assets of VIASPACE Security and
Concentric Water) to secure our obligations under the SPA, the Transaction Documents (as such term
is defined in the SPA), or any other of the Companys obligations to the Buyer; and (iii) Pledge
and Escrow Agreements with Dr. Carl Kukkonen, our Chief Executive Officer, and Amjad Abdallat, our
Vice President and Chief Operating Officer, pursuant to which Dr. Kukkonen and Mr. Abdallat agreed
to provide the Buyer a security interest in the Pledged Shares (representing a total 9,813,717
shares held by Dr. Kukkonen and Mr. Abdallat) to secure the Companys obligations under the SPA.
17
In connection with the SPA, we also issued to the Buyer (1) a warrant to purchase 1,500,000 shares
of our common stock for a period of five years at an exercise price of $0.50 per share; (2) a
warrant to purchase 2,000,000 shares of our common stock for a period of five years at an exercise
price of $0.60 per share; (3) a warrant to purchase 885,000 shares of our common stock for a period
of five years at an exercise price of $0.75 per share; (4) a warrant to purchase 790,000 shares of
our common stock for a period of five years at an exercise price of $0.95 per share; and (5) a
warrant to purchase 600,000 shares of our common stock for a period of five years at an exercise
price of $1.15 per share (collectively, the Cornell Warrants). The common stock issuable under
the Cornell Warrants has piggy-back and demand registration rights. There are certain instances
including if the Companys common stock is sold at a per share price lower than the warrant
exercise price that the warrant exercise price could be adjusted lower than the warrant exercise
prices stated above.
Pursuant to an engagement letter we entered into with Gilford Securities Incorporated (Gilford)
relating to the Offerings, we paid Gilford a cash fee of 8% of the net proceeds of each tranche of
the sale of Debentures that was closed, and were obligated to pay 7% of the gross proceeds of
advances under the Standby Equity Distribution Agreement (as further described below). In
addition, we
issued to Gilford warrants to purchase up to 506,666 shares of our restricted unregistered common
stock at $0.60 per share (the Gilford Warrants).
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) and Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF No.
00-19), the Company allocated the entire amount of proceeds received between the embedded
derivatives within the debt agreement and the finance warrants issued based on their relative fair
values in accordance with applicable accounting literature. As a result, no amounts were allocated
to the debt agreement; therefore, the entire face value of the debt of $2,700,000 (as of December
31, 2006) was being accreted as additional interest expense over the expected term of the debt
(approximately 1.4 years) in accordance with Accounting Principles Bulletin (APB) No. 21. During
the fourth quarter of 2006, the Company recognized interest expense of $250,000 related to the
accretion of these debt discounts.
Additionally, the Company has assessed the conversion and over allotment features embedded in the
debentures, and all the warrants issued, to be liability instruments under EITF No. 00-19 and SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). The
Company recognized interest expense of $6,254,000 in 2006 due to the recognition of derivatives
which resulted in offering costs in excess of the proceeds received. As of December 31, 2006, the
fair values related to Cornell Warrants, Gilford Warrants, and embedded derivatives was $5,459,000
and included in Convertible Debentures and Embedded Derivatives in the accompanying balance sheet.
Standby Equity Distribution Agreement Original Transaction
Concurrently with the SPA described above, on November 2, 2006, we entered into a Standby
Equity Distribution Agreement (SEDA) with the Buyer, under which the Buyer had committed to
provide us with up to $20,000,000 of equity financing over 36 months. Each advance under the SEDA
would be for up to a maximum amount of $1,000,000, and there must be at least five trading days
between each advance. Our access to the SEDA financing was subject to us having an effective
re-sale registration statement on file with the SEC for the securities underlying the SEDA.
Each advance under the SEDA would be a sale by us to the Buyer of newly-issued shares of common
stock. Subject to a re-sale registration statement being in effect, we would determine whether and
when to request an advance, and the amount of the advance. The number of shares of common stock to
be sold to the Buyer would be determined by dividing the advance amount by 97% of the market price
for our stock. Market price is defined in the SEDA as the lowest daily volume weighted average
price of our common stock during the five consecutive trading days period immediately following the
date we send an advance notice to the Buyer. No amounts were drawn under the SEDA.
Upon execution of the SEDA, we paid the Buyer $10,000 as a structuring fee, and issued to the Buyer
850,592 shares of restricted unregistered common stock (the Investor Shares) which was valued at
fair market value on the date of issuance. At the time of each advance under the SEDA, we also
will pay the Buyer an amount equal to 5% of each advance amount, plus $500.
We engaged Newbridge Securities Corporation, a registered broker-dealer, to act as our placement
agent in connection with the SEDA. We also issued 12,327 shares of restricted unregistered common
stock (the Newbridge Shares) which was valued at fair market value on the date of issuance to
Newbridge as compensation for its services.
18
Contemporaneously with the execution and delivery of the SEDA, the Parties executed and delivered a
Registration Rights Agreement, pursuant to which we have agreed to provide certain registration
rights under the 1933 Act and the rules and regulations promulgated thereunder and applicable state
securities laws covering public resale of the shares of common stock to be sold to the Buyer under
the SEDA, the Investor Shares issued to the Buyer, and the Newbridge Shares. The accounting for
the SEDA resulted in deferred financing costs established of $57,000 at December 31, 2006. This
amount will be amortized as amounts are drawn on the SEDA.
Restructured Transaction
On December 29, 2006, the Company withdrew the previously filed registration statement covering the
common stock underlying the Debentures and the SEDA, as requested by the SEC, as the Company
determined it was going to renegotiate the original deal with Cornell.
On March 8, 2007, the Company entered into a Securities Purchase Agreement (the New SPA) with
Cornell in order to restructure the original deal. We issued and sold to Cornell, 5,175,000 Class
A Units and 600,000 Class B Units for an aggregate purchase price of $3,690,000, which includes the
conversion of the Debentures of the Company held by the Buyer in an aggregate amount of $2,700,000
and cash in the amount of $990,000. Each Class A Unit is comprised of 2.2609 shares of common
stock, $0.001 par value per share, and one (1) Class A Warrant to purchase one (1) share of common
stock at an exercise price of $0.30. Each Class B Unit is comprised of one (1) share of common
stock, and one (1) Class B Warrant to purchase one (1) share of common stock at an exercise price
of $0.40. The Warrants are exercisable for 5 years from their dates of issuance. The delivery of
the Class A and Class B Warrants pursuant to the New SPA, was satisfied by amending the exercise
price of the 5,775,000 warrants to purchase common stock issued by the Company to Cornell in
connection with the Securities Purchase Agreement dated November 2, 2006, and the delivery of
850,592 shares of common stock was satisfied by an issuance of 850,592 shares of common stock that
was made to the Buyer in November 2006. Additional shares of common stock totaling 11,449,408
shares were issued to Cornell on March 8, 2007. Total common shares to be issued to Cornell in
connection with the New SPA is 12,300,000 shares. On March 8, 2007, the Company received net
proceeds of $910,800 related to the New SPA, which reflects a placement fee of 8% of the proceeds.
Contemporaneously with the execution and delivery of the New SPA, the Parties executed and
delivered a Registration Rights Agreement, pursuant to which we have agreed to provide certain
registration rights under the Securities Act of 1933, as amended (the 1933 Act) and the rules and
regulations promulgated thereunder and applicable state securities laws, covering the common stock
and the common stock underlying the Warrants issued pursuant to the New SPA.
In connection with the New SPA, we also amended the exercise price of an aggregate of 5,775,000
warrants to purchase common stock that are held by Cornell. Such warrants were amended as follows:
the exercise price of 1,500,000 of the warrants was amended from $0.50 to $0.30; the exercise price
of 2,000,000 of the warrants was amended from $0.60 to $0.30; the exercise price of 885,000 of the
warrants was amended from $0.75 to $0.30; the exercise price of 790,000 of the warrants was amended
from $0.95 to $0.30, and the exercise price of 600,000 of the warrants was amended from $1.15 to
$0.40.
Pursuant to an the engagement letter entered into with Gilford, in connection with the New SPA we
paid a cash fee of 8% of the proceeds and issued additional warrants to Gilford to purchase up to
264,000 shares of common stock at $0.30 per share.
In connection with the New SPA, we entered into a Termination Agreement with Cornell, pursuant to
which certain agreements that we entered into in connection with a previous financing transaction
between us and Cornell were terminated. We terminated (i) the SEDA; (ii) the Investor Registration
Rights Agreement; (iii) the Restated Registration Rights Agreement; (iv) the Security Agreements;
and (v) the Pledge and Escrow Agreements.
As a result of the restructuring of Debentures into common stock and the cancellation of the SEDA,
for the period ended March 31, 2007, the Company made accounting adjustments as follows:
|
|
|
The face value of Debentures of $2,700,000 was reclassified from Convertible Debentures
to common stock and additional paid in capital. |
|
|
|
|
Net cash proceeds of $910,800 were recorded. |
|
|
|
|
A loss on conversion of the Debenture agreement of $953,000 was recorded as a result of
the fair value of common shares and warrants issued exceeding the fair value of the cash
proceeds, forgiveness of interest payable and the redemption of convertible debt and
derivatives. |
19
|
|
|
The fair value of the embedded derivative related to the conversion feature and the over
allotment feature of $1,651,000 as of the conversion date was reclassified to additional
paid in capital. The adjustment to the fair value of the embedded derivative relating to
the conversion feature was recorded as other income of $756,000 as of the conversion date. |
|
|
|
|
The fair value of the original warrant derivative liability of $2,442,000 as of the
conversion date was reclassified to additional paid in capital. The adjustment to the fair
value of the embedded derivative relating to the conversion feature was recorded as other
income of $611,000 as of the conversion date. |
|
|
|
|
The Company recorded a write off of $58,000 of deferred financing costs relating to the
cancellation of the SEDA agreement. As a result of the restructuring, the third tranche of
Debentures will be converted to an equity transaction. As such, the remaining $719,000 of
deferred offering costs will be recorded against the proceeds from the issuance of equity. |
|
|
|
|
The Company recorded additional interest expense of $354,000 related to the accretion of
the debt discount up to the date of the debt conversion. As of March 8, 2007, the debt
discount is $2,096,000. This was recorded to interest expense on the conversion of the
Debentures. |
|
|
|
|
Cornell received an amendment to the exercise price of their original warrants. The
fair value of the amended warrants on March 8, 2007 is $2,500,000. |
|
|
|
|
$85,000 of interest expense was accrued related to the Debentures as of the conversion
date and was forgiven by Cornell. |
The following table summarizes the Debentures, discount and derivative values outstanding at March
31, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
March 8, |
|
|
March 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debentures at face value |
|
$ |
2,700,000 |
|
|
$ |
2,700,000 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts on Debentures |
|
|
(2,700,000 |
) |
|
|
(2,700,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Convertible Debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount from derivatives |
|
|
250,000 |
|
|
|
604,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debentures |
|
|
250,000 |
|
|
|
604,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives at fair value |
|
|
2,407,000 |
|
|
|
1,651,000 |
|
|
|
|
|
Warrant derivative at fair value |
|
|
3,052,000 |
|
|
|
2,442,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Convertible Debentures, embedded
derivatives and warrant derivative |
|
$ |
5,709,000 |
|
|
$ |
4,697,000 |
|
|
|
|
|
The Company was required to revalue the derivatives each quarter to determine if the values of
these derivatives have changed from period to period, until the notes are redeemed or converted. An
increase in value of these derivatives will result in the Company having to record an expense to
the Adjustment to Fair Value of Derivatives on the Statement of Operations. Conversely, a decrease
in the value of these derivatives will result in the Company having to record income to the
Adjustment to Fair Value of Derivatives on the Statement of Operations. The following table
summarizes the Adjustments to Fair Value of Derivatives as of March 31, 2007 and December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Fair Value of |
|
|
Balance at |
|
|
Restructuring |
|
|
Balance |
|
|
|
December |
|
|
Derivatives at |
|
|
March 8, |
|
|
of Debt on |
|
|
at March |
|
Adjustment to Fair Value of Derivatives |
|
31, 2006 |
|
|
March 8, 2007 |
|
|
2007 |
|
|
March 8, 2007 |
|
|
31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives |
|
$ |
2,407,000 |
|
|
$ |
(756,000 |
) |
|
$ |
1,651,000 |
|
|
$ |
(1,651,000 |
) |
|
$ |
|
|
Warrant Derivative |
|
|
3,052,000 |
|
|
|
(610,000 |
) |
|
|
2,442,000 |
|
|
|
(2,442,000 |
) |
|
|
|
|
Adjustment to Fair
Value of Derivatives included in other
(income) expense |
|
|
|
|
|
$ |
(1,366,000 |
) |
|
$ |
4,093,000 |
|
|
|
|
|
|
|
|
|
20
Of the total proceeds from the issuance of the debentures and warrants, $4,427,000 was allocated to
the free standing warrants associated with the debentures based upon the fair value of the
warrants. The assumptions used in the Black-Scholes Model for determining the initial fair value of
the warrants were as follows: (1) dividend yield of 0%; (2) expected volatility of 134.0%, (3)
risk-free interest rate of 4.55%, and (4) expected life of 5 years. In accordance with SFAS No. 133
and EITF No. 00-19, the amounts allocated to the warrant represent a derivative liability that has
been recorded in the accompanying balance sheet at December 31, 2006. The carrying value of the
warrant derivative at December 31, 2006 has been adjusted to reflect its fair value of $3,052,000
based upon a Black-Scholes Model calculation as follows: (1) dividend yield of 0%; (2) expected
volatility of 122.0%, (3) risk-free interest rate of 4.70%, and (4) expected remaining life of 4.83
years. During the period ended December 31, 2006, a decrease in the fair value of the warrant
derivative of $1,375,000 was recorded through results of operations as income to the Adjustment to
Fair Value of Derivatives. The carrying value of the warrant derivative at March 8, 2007 has been
adjusted to reflect its fair value of $2,442,000 based upon a Black-Scholes Model calculation as
follows: (1) dividend yield of 0%; (2) expected volatility of 116.0%, (3) risk-free interest rate
of 4.45%, and (4) expected remaining life of 4.65 years. From January 1, 2007 through March 8,
2007, a decrease in the fair value of the warrant derivative of $610,000 was recorded through
results of operations as income to the Adjustment to Fair Value of Derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
Fair Value at |
|
|
Fair Value |
|
|
|
December 31, |
|
|
March 8, |
|
|
March 31, |
|
Warrant Derivative Liability |
|
2006 |
|
|
2007 |
|
|
2007 |
|
Warrant Derivative |
|
$ |
3,052,000 |
|
|
$ |
2,442,000 |
|
|
$ |
|
|
The original agreement included an Over Allotment Feature as well as the Debentures that required
separate valuation of embedded derivates in accordance with the requirements of SFAS No. 133 and
related accounting literature. The following table summarizes the fair values of embedded
derivatives at December 31, 2006, March 8, 2007 and March 31, 2007 followed by a description of the
valuation methodology utilized to determine fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
Fair Value at |
|
|
Fair Value |
|
|
|
December 31, |
|
|
March 8, |
|
|
March 31, |
|
Embedded Derivative Liability |
|
2006 |
|
|
2007 |
|
|
2007 |
|
|
Conversion Feature First Tranche |
|
$ |
521,000 |
|
|
$ |
358,000 |
|
|
$ |
|
|
|
Conversion Feature Second Tranche |
|
|
403,000 |
|
|
|
276,000 |
|
|
|
|
|
|
Over Allotment Feature |
|
|
1,483,000 |
|
|
|
1,017,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives |
|
$ |
2,407,000 |
|
|
$ |
1,651,000 |
|
|
$ |
|
|
On November 2, 2006, the fair value of the derivative for the Conversion Feature of the first
tranche of Debentures was determined to be $880,000 using a Black-Scholes Model with the following
inputs: (1) The Common Stock price on the valuation date was $0.81; (2) the exercise price was
based on the maximum conversion price of $0.60; (3) dividend yield of 0%; (4) expected volatility
of 134.0%, (5) risk-free interest rate of 4.97%, and (6) expected average remaining life of 1.41
years. The carrying value of the conversion feature of the first tranche of Debentures at December
31, 2006 has been adjusted to reflect its fair value of $521,000 based upon a Black-Scholes Model
calculation with the following inputs: (1) The Common Stock price at December 31, 2006 was $0.60;
(2) the exercise price was based on the maximum conversion price of $0.60; (3) dividend yield of
0%; (4) expected volatility of 122.0%, (5) risk-free interest rate of 5.00%, and (6) expected
average remaining life of 1.25 years. During the period ended December 31, 2006, a decrease in the
fair value of the conversion feature liability of $359,000 was recorded through results of
operations as income to Adjustment to Fair Value of Derivatives. The carrying value of the
conversion feature of the first tranche of Debentures at March 8, 2007 has been adjusted to reflect
its fair value of $358,000 based upon a Black-Scholes Model calculation with the following
inputs: (1) The Common Stock price at March 7, 2007 was $0.51; (2) the exercise price was based on
the maximum conversion price of $0.60; (3) dividend yield of 0%; (4) expected volatility of 116.0%,
(5) risk-free interest rate of 4.9%, and (6) expected average remaining life of 1.06 years. From
January 1, 2007 through March 8, 2007, a decrease in the fair value of the conversion feature
liability of $163,000 was recorded through results of operations as income to Adjustment to Fair
Value of Derivatives.
21
On November 29, 2006, the fair value of the derivative for the Conversion Feature of the second
tranche of Debentures was determined to be $529,000 using a Black-Scholes Model with the following
inputs: (1) The Common Stock price on the valuation date was $0.68; (2) the exercise price was
based on the maximum conversion price of $0.60; (3) dividend yield of 0%; (4) expected volatility
of 134.0%, (5) risk-free interest rate of 4.98%, and (6) expected average remaining life of 1.34
years. The carrying value of the conversion feature of the second tranche of Debentures has been
adjusted to reflect its fair value of $403,000 based upon a Black-Scholes Model calculation with
the following inputs: (1) The Common Stock price at December 31, 2006 was $0.60; (2) the exercise
price was based on the maximum conversion price of $0.60; (3) dividend yield of 0%; (4) expected
volatility of 122.0%, (5) risk-free interest rate of 5.00%, and (6) expected average remaining life
of 1.25 years. During the period ended December 31, 2006, a decrease in the fair value of the
conversion feature liability of $126,000 was recorded through results of operations as income to
Adjustment to Fair Value of Derivatives. The carrying value of the conversion feature of the
second tranche of Debentures at March 8, 2007 has been adjusted to reflect its fair value of
$276,000 based upon a Black-Scholes Model calculation with the following inputs: (1) The Common
Stock price at March 7, 2007 was $0.51; (2) the exercise price was based on the maximum conversion
price of $0.60; (3) dividend yield of 0%; (4) expected volatility of 116.0%, (5) risk-free interest
rate of 4.9%, and (6) expected average remaining life of 1.06 years. From January 1, 2007 through
March 8, 2007, a decrease in the fair value of the conversion feature liability of $127,000 was
recorded through results of operations as income to Adjustment to Fair Value of Derivatives.
On November 2, 2006, the fair value of the derivative for the Over Allotment Feature of Debentures
was determined to be $2,630,000 using a Black-Scholes Model with the following inputs: (1) The
Common Stock price on the valuation date was $0.81; (2) the exercise price was based on the maximum
conversion price of $0.60; (3) dividend yield of 0%; (4) expected volatility of 134.0%, (5)
risk-free interest rate of 4.97%, and (6) expected average remaining life of 1.66 years. The
carrying value of the Over Allotment Feature at December 31, 2006 has been adjusted to reflect its
fair value of $1,483,000 based upon a Black-Scholes Model calculation with the following inputs:
(1) The Common Stock price at December 31, 2006 was $0.60; (2) the exercise price was based on the
maximum conversion price of $0.60; (3) dividend yield of 0%; (4) expected volatility of 122.0%, (5)
risk-free interest rate of 5.00%, and (6) expected average remaining life of 1.25 years. During the
period ended December 31, 2006, a decrease in the fair value of the conversion feature liability of
$1,147,000 was recorded through results of operations as income to Adjustment to Fair Value of
Derivatives. The carrying value of the conversion feature of the Over Allotment Feature of
Debentures at March 8, 2007 has been adjusted to reflect its fair value of $1,017,000 based upon
a Black-Scholes Model calculation with the following inputs: (1) The Common Stock price at March 7,
2007 was $0.51; (2) the exercise price was based on the maximum conversion price of $0.60; (3)
dividend yield of 0%; (4) expected volatility of 116.0%, (5) risk-free interest rate of 4.9%, and
(6) expected average remaining life of 1.06 years. From January 1, 2007 through March 8, 2007, a
decrease in the fair value of the conversion feature liability of $466,000 was recorded through
results of operations as income to Adjustment to Fair Value of Derivatives.
The accounting for the Debentures and Warrants resulted in deferred offering costs established of
$776,000 at December 31, 2006. Of this amount, $57,000 was recorded as interest expense on March
8, 2007 as a result of the restructuring of the convertible debentures and $719,000 was recorded
against the proceeds from the issuance of equity.
As of June 30, 2007 and December 31, 2006, the following is a table of warrants outstanding to
Cornell and Gilford:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Cornell No. 1 |
|
|
1,500,000 |
|
|
|
1,500,000 |
|
Cornell No. 2 |
|
|
2,000,000 |
|
|
|
2,000,000 |
|
Cornell No. 3 |
|
|
885,000 |
|
|
|
885,000 |
|
Cornell No. 4 |
|
|
790,000 |
|
|
|
790,000 |
|
Cornell No. 5 |
|
|
600,000 |
|
|
|
600,000 |
|
Gilford No. 1 |
|
|
200,000 |
|
|
|
200,000 |
|
Gilford No. 2 |
|
|
160,000 |
|
|
|
160,000 |
|
Gilford No. 3 |
|
|
264,000 |
|
|
|
¯ |
|
|
|
|
|
|
|
|
|
|
|
6,399,000 |
|
|
|
6,135,000 |
|
|
|
|
|
|
|
|
NOTE 8 OTHER LONG-TERM DEBT
Concentric Water entered into a long-term debt agreement with the Community Development Commission
in 2004 for $100,000, with an interest rate of 5%, monthly payments of $1,610, with the final
payment due in September 2009. The loan was secured by the assets of Concentric Water.
22
VIASPACE Security entered into a long-term debt agreement with the Community Development Commission
in 2004 for $50,000, with an interest rate of 5%, monthly payments of $1,151, with the final
payment due in September 2009. The loan was secured by the assets of VIASPACE Security.
Other long-term debt is comprised of the following at June 30, 2007 and December 31, 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
Community Development
Commission of the County of Los
Angeles, secured, with interest
at 5% due July 1, 2009 |
|
$ |
28,000 |
|
|
$ |
34,000 |
|
Community Development
Commission of the County of Los
Angeles, secured, with interest
at 5% due September 1, 2009 |
|
|
58,000 |
|
|
|
66,000 |
|
|
|
|
|
|
|
|
Total Long-term Debt |
|
|
86,000 |
|
|
|
100,000 |
|
Less Current Portion |
|
|
30,000 |
|
|
|
29,000 |
|
|
|
|
|
|
|
|
Net Long-term Debt |
|
$ |
56,000 |
|
|
$ |
71,000 |
|
|
|
|
|
|
|
|
NOTE 9 DERIVATIVE LIABILITIES RELATED TO WARRANTS AND STOCK OPTIONS
Warrant Derivative Liability
On November 2, 2006, the Companys evaluation of criteria under EITF No. 00-19 resulted in the
determination that the Companys outstanding warrants to Synthetica should be reclassified as a
derivative liability. In accordance with EITF No. 00-19, warrants which are determined to be
classified as derivative liabilities are marked to market each reporting period, with a
corresponding non-cash gain or loss reflected in the current period.
The fair market value of the derivative liabilities on November 2, 2006 related to the Synthetica
Warrants was determined to be $78,000 using a Black Scholes model valuation with the following
assumptions: expected dividend yield of zero, expected stock price volatility of 131.77%, risk free
interest rate of 4.97% and a remaining contractual life of 9 1/2 months.
The aggregate fair value of the warrant derivative liability at December 31, 2006 was determined to
be $17,000 using the following assumptions: expected dividend yield of zero, expected stock price
volatility of 126.49%, risk free interest rate of 5.00% and a remaining contractual life of 7 1/2
months. Based on this change in fair value, the Company has recorded a non-cash income adjustment
during the year ended December 31, 2006 of $61,000 and a corresponding decrease in the warrant
derivative liability.
The aggregate fair value of the warrant derivative liability at March 8, 2007, the date of the
conversion of the Debentures, was determined to be $1,000 using the following assumptions: expected
dividend yield of zero, expected stock price volatility of 116.00%, risk free interest rate of 4.9%
and a remaining contractual life of 5 1/4 months. Based on this change in fair value, the Company has
recorded a non-cash income adjustment during the period ended March 31, 2007 of $17,000 and a
corresponding decrease in the warrant derivative liability. After the conversion of the Debentures,
the balance of warrant derivative liability of $1,000 was reclassified to paid-in capital in
accordance with EITF No. 00-19 as the requirement to record the warrants as derivatives ceased.
Stock Option Derivative Liability
On November 2, 2006, the Companys evaluation of criteria under EITF No. 00-19 resulted in the
determination that the Companys outstanding vested stock options to consultants should be
reclassified as a derivative liability. In accordance with EITF No. 00-19, options which are
determined to be classified as derivative liabilities are marked to market each reporting period,
with a corresponding non-cash gain or loss reflected in the current period.
The fair market value of the derivative liabilities on November 2, 2006 related to outstanding
stock options to consultants was determined to be $62,000 using a Black Scholes model valuation
with the following assumptions: expected dividend yield of zero, expected stock price volatility of
131.77%, risk free interest rate ranging from 4.7% to 5% and contractual life ranging from 1 to 6.7
years.
The aggregate fair value of the stock option derivative liability at December 31, 2006 was
determined to be $56,000 using the following assumptions: expected dividend yield of zero, expected
stock price volatility of 126.49%, risk free interest rate ranging from 4.56% to 5% and contractual
life remaining ranging from 0.89 to 6.55 years. Based on this change in fair value, the Company has
recorded a non-cash income adjustment during the year ended December 31, 2006 of $6,000 and a
corresponding decrease in the warrant derivative liability.
23
The aggregate fair value of the stock option derivative liability at March 8, 2007, the date of the
conversion of the Debentures, was determined to be $55,000 using the following assumptions:
expected dividend yield of zero, expected stock price volatility of 116.00%, risk free interest
rate of 4.9% and a remaining contractual life ranging from 0.77 to 6.43 years. Based on this
change in fair value, the Company has recorded a non-cash income adjustment during the period ended
March 31, 2007 of $1,000 and a corresponding decrease in the stock option derivative liability.
After the conversion of the Debentures, the balance of stock option derivative liability of $55,000
was reclassified to paid-in capital in accordance with EITF No. 00-19 as the requirement to record
the warrants as derivatives ceased.
NOTE 10 STOCKHOLDERS EQUITY
Preferred Stock
There were zero shares outstanding of preferred stock as of June 30, 2007 and December 31, 2006.
Common Stock
There were 292,512,205 shares of Common Stock outstanding as of December 31, 2006. On March 9,
2007, as part of the financing arrangement discussed in Note 7, the Company issued 11,449,408
shares of Common Stock to Cornell Capital. Effective June 1, 2007, the Company put in place a cash
conservation plan whereby the Company has entered into agreements with certain employees and
consultants to pay them a portion of their salary or consulting payment in shares of common stock
of the Company as opposed to payments in cash. For the three months ended June 30, 2007, the
Company issued 276,413 shares of common stock under the Plan to employees and consultants for
services provided to the Company under this cash conservation plan. In addition, the Company
issued 118,800 shares of common stock under the Plan to two former holders of DMFCC stock options
in exchange for the cancellation of their rights in stock options they held in DMFCC. Finally,
during the three months ended June 30, 2007, the Company issued 28,610 shares of common stock under
the Plan to a former employee as a severance payment. The common stock issued in these instances
under the Plan was with no restrictions or holding period required. The stock compensation expense
recorded relating to all of these share issuances was based on fair market value on the date of
grant. As of June 30, 2007, there were 304,385,436 shares of Common Stock outstanding.
NOTE 11 INCOME TAX
On January 1, 2007, the Company adopted FIN 48. There were no unrecognized tax benefits as of
January 1, 2007, the date FIN 48 was adopted. As such, there was no reduction to the deferred tax
assets and corresponding reduction to the valuation allowance, which resulted in no net effect on
accumulated deficit. If any unrecognized benefit would have been recognized, it would not affect
the Companys effective tax rate since the Company is currently subject to a full valuation
allowance.
The Companys practice is to recognize interest and/or penalties related to income tax matters in
income tax expense. The Company has accrued zero for interest and penalties at June 30, 2007. As
of the date of these financial statements, the 2005, 2004, and 2003 income tax years are open to
the possibility of examination by federal, state, or local taxing authorities.
The Company did not record a provision for income taxes for the three month or six month periods
ended June 30, 2007 or 2006 as a result of operating losses for the current fiscal year. The
Company has 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
managements 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.
Note 12 RETIREMENT PLAN
Effective March 1, 2006, the Board of Directors of the Company approved and established the
VIASPACE Inc. 401(k) Plan (401(k) Plan). The 401(k) Plan covers employees of VIASPACE, DMFCC and
VIASPACE Security. The 401(k) Plan allows employees to make employee contributions up to Internal
Revenue Service limits. The Company does not offer an employer match of contributions at this time.
24
Note 13 OPERATING SEGMENTS
The Company evaluates its reportable segments in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131). For the period ended June 30,
2007, the Companys Chief Executive Officer, Dr. Carl Kukkonen, was the Companys Chief Operating
Decision Maker (CODM) pursuant to SFAS No. 131. The CODM allocates resources to the segments
based on their business prospects, product development and engineering, and marketing and strategy.
The Company has four reportable segments that operate in distinct market areas. The Companys
reportable segments are represented by three separate subsidiaries of the Company in addition to
the parent company VIASPACE Inc. The reportable segments include DMFCC, VIASPACE Security,
Ionfinity and VIASPACE.
(i) DMFCC: DMFCC is a provider of disposable fuel cartridges and intellectual property protection
for manufacturers of direct methanol and other liquid hydrocarbon fuel cells. Direct methanol fuel
cells are replacements for traditional batteries and are expected to gain a substantial market
share 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. Direct methanol
fuel cell-based products are being
developed for laptop computers, cell phones, music players and other applications by major
manufacturers of portable electronics in Japan and Korea.
(ii) VIASPACE Security: VIASPACE Security is developing products and services based on inference
and sensor data fusion technology. Sensor fusion combines data, observations, and inferences
derived from multiple sources and sensors to generate reliable decision-support information in
critical applications where solution speed and confidence is of the utmost importance.
(iii) Ionfinity: Ionfinity is working on a next-generation mass spectrometry technology, which
could significantly improve the application of mass spectrometry for industrial process control and
environmental monitoring and could also spawn a new class of detection systems for homeland
security.
(iii) VIASPACE: Under its new VIASPACE Energy division established in 2007, VIASPACE is identifying
and pursuing additional business opportunities in areas including fuel cell test equipment such as
a relative humidity sensor, batteries and battery test equipment, alternative fuels, and new
products to conserve energy and reduce emissions.
The accounting policies of the reportable segments are the same as those 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 periods ended June 30, 2007 and 2006 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMFCC |
|
$ |
|
|
|
$ |
22,000 |
|
|
$ |
|
|
|
$ |
43,000 |
|
VIASPACE Security |
|
|
75,000 |
|
|
|
61,000 |
|
|
|
210,000 |
|
|
|
61,000 |
|
Ionfinity |
|
|
21,000 |
|
|
|
91,000 |
|
|
|
102,000 |
|
|
|
183,000 |
|
VIASPACE |
|
|
36,000 |
|
|
|
|
|
|
|
59,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
$ |
132,000 |
|
|
$ |
174,000 |
|
|
$ |
371,000 |
|
|
$ |
287,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMFCC |
|
$ |
(458,000 |
) |
|
$ |
(348,000 |
) |
|
$ |
(932,000 |
) |
|
$ |
(652,000 |
) |
VIASPACE Security |
|
|
(363,000 |
) |
|
|
(217,000 |
) |
|
|
(631,000 |
) |
|
|
(426,000 |
) |
Ionfinity |
|
|
16,000 |
|
|
|
(2,000 |
) |
|
|
27,000 |
|
|
|
(21,000 |
) |
VIASPACE |
|
|
(41,000 |
) |
|
|
|
|
|
|
(118,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations by Reportable Segments |
|
|
(846,000 |
) |
|
|
(567,000 |
) |
|
|
(1,654,000 |
) |
|
|
(1,099,000 |
) |
Corporate Administrative Costs |
|
|
(444,000 |
) |
|
|
(541,000 |
) |
|
|
(1,032,000 |
) |
|
|
(1,046,000 |
) |
Corporate Stock Compensation and Warrant Expense |
|
|
(817,000 |
) |
|
|
(346,000 |
) |
|
|
(1,442,000 |
) |
|
|
(724,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations |
|
$ |
(2,107,000 |
) |
|
$ |
(1,454,000 |
) |
|
$ |
(4,128,000 |
) |
|
$ |
(2,869,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2007 |
|
|
December 31, |
|
|
|
(Unaudited) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
DMFCC |
|
$ |
362,000 |
|
|
$ |
343,000 |
|
VIASPACE Security |
|
|
96,000 |
|
|
|
286,000 |
|
Ionfinity |
|
|
140,000 |
|
|
|
202,000 |
|
VIASPACE / Corporate |
|
|
1,113,000 |
|
|
|
3,168,000 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,711,000 |
|
|
$ |
3,999,000 |
|
|
|
|
|
|
|
|
For the six month period June 30, 2007, the Company had one customer whose recognized revenues
exceeded 10% of consolidated revenues. This customer was L3 Communications which generated
$210,000 of consolidated revenues (57% of total).
NOTE 14 NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No. 128, Earnings Per Share
(SFAS No. 128). Under the provision of SFAS No. 128, 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 SFAS No. 128 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 periods
ended June 30, 2007 and 2006, respectively, that are not included in the loss per share calculation
since their effect would be anti-dilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
10,320,500 |
|
|
|
3,769,000 |
|
Warrants |
|
|
7,399,000 |
|
|
|
1,000,000 |
|
The following table sets forth the computation of basic and diluted net loss per share for the
period ended March 31, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock |
|
$ |
(2,102,000 |
) |
|
$ |
(1,423,000 |
) |
|
$ |
(6,021,000 |
) |
|
$ |
(2,810,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding |
|
|
304,046,460 |
|
|
|
291,619,286 |
|
|
|
299,766,092 |
|
|
|
288,354,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock, basic and diluted |
|
$ |
(0.01 |
) |
|
$ |
* |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less than $0.01 per common share.
NOTE 15 RELATED PARTIES
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.
26
Ionfinity has a consulting agreement with one of the minority owners and director of Ionfinity who
has a 3.8% membership interest in Ionfinity to perform work on government contracts with the United
States Navy, Air Force and Army. A second minority owner and director has a 47.9% membership
interest in Ionfinity and was a consultant to Ionfinity prior to becoming an employee in 2006. As
of June 30, 2007 and December 31, 2006, zero and $1,500, respectively, is included as a related
party payable in the accompanying consolidated balance sheet related to amounts owed to these
minority owners. For the six months ended June 30, 2007 and 2006, $21,000 and $31,000,
respectively, was billed by these two minority owners to Ionfinity for work performed on government
contracts.
Certain intellectual property including patents, trademarks, website, artwork, domain names,
software code, and trade secrets were purchased by Dr. Carl Kukkonen, Chief Executive Officer of
the Company and Dr. Sandeep Gulati, a former director of the Company, for $20,000 in 2002 from a
third party that handled a general assignment for the benefit of the creditors of ViaChange.com,
Inc., a former majority-owned subsidiary of the Company. Dr. Kukkonen and Dr. Gulati subsequently
sold this intellectual property to VIASPACE Security for $20,000 in 2002 ($10,000 each to Dr.
Kukkonen and Dr. Gulati). Dr. Kukkonen was paid $10,000 in June 2006. Dr. Gulati is expected to be
paid in 2007. The $10,000 owed to Dr. Gulati is included in related party payable as of June 30,
2007 and December 31, 2006 in the accompanying consolidated balance sheet.
VIASPACE Security has included in accounts payable as of June 30, 2007 and December 31, 2006, an
amount of $7,500 due to ViaLogy plc for consulting services performed by ViaLogy plc for VIASPACE
Security. This amount is expected to be paid in 2007. The Company sold its complete ownership in
ViaLogy plc during 2007 as discussed in Note 4.
In October 2004, DMFCC entered into an employment agreement with Dr. Carl Kukkonen, Chief Executive
Officer of the Company and of DMFCC. Under the agreement, Dr. Kukkonen is entitled to receive an
annual base salary of $225,000 and a performance-based bonus of up to 25% of his base salary for
the first three years of employment. In the event DMFCC terminates Dr. Kukkonens employment
without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500.
This agreement expires on October 15, 2007 and will be automatically renewed for one year periods
unless either party gives a termination notice not later than 90 days prior to the end of the term
of the employment agreement.
At June 30, 2007 and December 31, 2006, the Company has included as a related party payable
$173,105 representing accrued salary and partner draw that was due to Dr. Kukkonen, CEO, and Mr.
Amjad Abdallat, VP, by ViaSpace Technologies, LLC (ViaSpace LLC) prior to its merger with the
Company on June 22, 2005. These amounts were accrued by ViaSpace LLC prior to December 31, 2002.
In addition, at June 30, 2007, the Company has included in related party payable $23,000
representing deferred salary payments that are owed to the Company from Dr. Kukkonen, Mr. Abdallat,
and Mr. Stephen Muzi, CFO. These officers have agreed to defer a portion of their salaries for a
four-month period beginning June 1, 2007. These salary payments are expected to be repaid to these
officers upon the completion of future financing with the Company.
On October 31, 2006, the Company entered into a Consulting Agreement (the Consulting Agreement)
with Denda Associates Co. Ltd. (Denda Associates). Pursuant to the Consulting Agreement, Denda
Associates will provide the Company with consulting and business development expertise to assist
the Company with expanding into the Japanese market. Denda Associates was founded by Mr. Nobuyuki
Denda, who serves as its CEO and who also serves on the Board of Directors of the Company. The
Consulting Agreement is for a term of one (1) year and will be automatically renewed for successive
one (1) year terms unless either party notifies the other of their intent not to renew within sixty
(60) prior to the expiration of the term. Denda Associates will be paid cash compensation of $6,667
per month plus commissions based on sales to certain customers approved by the Company and on sales
of certain of the Companys products. The commission rate is initially 5% until total commissions
of $40,000, in the aggregate, has been received by Denda Associates, at which point the commission
rate is reduced to 3%. In addition, bonuses in the form of restricted stock of the Company are
available to Denda Associates if certain milestones are met within 12 months of the signing of the
Consulting Agreement. As of June 30, 2007 and December 31, 2006, zero and $7,900, respectively, is
included as a related party payable in the accompanying consolidated balance sheet.
Note 16 COMMITMENTS AND CONTINGENCIES
Royalty Commitments
On March 2, 2007, VIASPACE entered a nonexclusive worldwide license agreement with Caltech for new
software capabilities that should significantly enhance the functionality of its SHINE inference
engine technology. The newly licensed Knowledge Base Editor is expected to enable VIASPACE to
accelerate the development of SHINE-based applications tailored to meet the requirements of
customers in the commercial, defense and homeland security sectors. VIASPACE has agreed to pay
Caltech a license issue fee of $25,000 which will be paid in five installments of $5,000 each. The
first installment was paid in May 2007. The next four installments are due on the anniversary
dates of the agreement beginning on March 2, 2008. VIASPACE has the option of extending the term
of the license by an additional eight years with an extension fee of $25,000 if such extension fee
is paid prior to March 2, 2011.
27
Note 17 FINANCIAL ACCOUNTING DEVELOPMENTS
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159) which permits entities to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. SFAS No. 159 will be effective for us on January 1, 2008. We are currently evaluating
the impact of adopting SFAS No. 159 on our consolidated financial statements.
Note 18 GOING CONCERN
As reflected in the accompanying consolidated financial statements, the Company has a net loss and
negative cash flows from operations which raises doubt about the Companys ability to continue as a
going concern and fund cash requirements for operations
through June 30, 2008. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts of and classification of
liabilities that might be necessary in the event the Company is unable to continue in existence.
As described more fully in Note 7, the Company raised $2,201,000 in net proceeds from the issuance
of Convertible Debentures in November 2006. On March 8, 2007, the Company closed $990,000 in
financing from Cornell Capital Partners, LP in straight-equity financing and converted the existing
$2,700,000 Convertible Debentures into straight-equity at the same time. In connection with this
new financing, the Company terminated (i) the Standby Equity Distribution Agreement, (ii) the
related Investor Registration Rights Agreements; and (iv) the Security Agreements of VIASPACE
Security and Concentric Water of a first priority security interest. The Company believes these
are positive steps for our success including removing debt from our Balance Sheet and increasing
shareholders equity. In addition, on April 9, 2007, we filed a blanket shelf registration
statement for $50,000,000 in order for the Company to raise additional capital. This blanket shelf
registration statement for $50,000,000 was declared effective by the SEC on June 12, 2007.
Although the Company is seeking to raise additional financing, no signed agreements have been
entered into for additional investment and no assurances can be given that additional financing
will ultimately be completed.
Note 19 SUBSEQUENT EVENT
On July 16, 2007, eCARmerce agreed to sell its patents and patent applications to Viatech
Communication LLC for net proceeds of approximately $325,000, subject to customary closing
conditions. The transaction is expected to close approximately August 31, 2007, with the Company
entitled to receive approximately $240,000 of the anticipated net proceeds based on its ownership
interest in eCARmerce. The patents and patent applications to be sold relate to eCARmerces
interactive radio technology. The Company retains a worldwide, non-exclusive license under the
patents. This sale of patents and patent applications would represent the sale of all assets owned
by eCARmerce. The Company expects to dissolve eCARmerce by December 31, 2007, after the sale of
assets is completed.
28
ITEM 2. MANAGEMENTS 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, Managements 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 2006 annual report on Form 10-KSB.
VIASPACE Overview
VIASPACE Inc. (VIASPACE or the Company) is dedicated to commercializing proven space and
defense technologies from NASA and the Department of Defense into hardware and software products.
VIASPACE is developing these technologies into hardware and software products that we believe have
the potential to fulfill high-growth market needs and solve todays complex problems. The Company
has expertise in energy/fuel cells, microelectronics, sensors and software for defense, homeland
security and public safety, information and computational technology. VIASPACE has licensed
patents, trade secrets, and software technology from California Institute of Technology
(Caltech), which manages the Jet Propulsion Laboratory (JPL) for NASA. This technology was
developed by scientists and engineers at JPL over the last decade and was funded by NASA and the
Department of Defense. VIASPACE is working to leverage this large government research and
development investment made originally for space and defense applications into commercial
products.
The Company operates through its ownership in subsidiaries Direct Methanol Fuel Cell Corporation
(DMFCC), VIASPACE Security Inc., formerly known as Arroyo Sciences, Inc. (VIASPACE Security),
and Ionfinity LLC (Ionfinity). As of June 30, 2007, the Company holds a 71.4% ownership interest
in DMFCC, a 100% ownership interest in VIASPACE Security, and a 46.3% ownership interest in
Ionfinity. The Company also owns 73.9% of eCARmerce Inc. (eCARmerce), an inactive company that
holds patents in the areas of interactive radio technology. On July 16, 2007, eCARmerce agreed to
sell its patents and patent applications to Viatech Communication LLC for net proceeds of
approximately $325,000, subject to customary closing conditions. The transaction is expected to
close approximately August 31, 2007, with the Company entitled to receive approximately $240,000 of
the anticipated net proceeds based on its ownership interest in eCARmerce. The patents and patent
applications to be sold relate to eCARmerces interactive radio technology. The Company retains a
worldwide, non-exclusive license under the patents. This sale of patents and patent applications
would represent the sale of all assets owned by eCARmerce. The Company expects to dissolve
eCARmerce by December 31, 2007, after the sale of assets is completed. The Company also owns 100%
of Concentric Water Technology LLC (Concentric Water), an inactive company that plans to explore
water technologies that could solve the technical and cost limitations of traditional water
purification methods. The Company may also pursue future opportunities based on technologies
licensed from Caltech and other organizations. The Companys 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 that companies provide additional
disclosure and commentary on those accounting policies considered most critical. FRR 60 considers
an accounting policy to be critical if it is important to the Companys 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 Companys significant accounting policies, including the
critical accounting policies discussed below, see the accompanying notes to the consolidated
financial statements.
The preparation of the Companys financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) 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 require significant management
judgments and estimates:
29
VIASPACE has generated revenues to date on product revenue shipments. DMFCC recognized product
revenue in 2006. In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB
No. 104), VIASPACE and DMFCC recognize product revenue provided that (1) persuasive evidence of an
arrangement exists, (2) delivery to the customer has occurred, (3) the selling price is fixed or
determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when
title and risk of loss have transferred to the customer. The price is considered fixed or
determinable when it is not subject to refund or adjustments. Our standard shipping terms are
freight on board shipping point. If the Company ships product whereby a customer has a right of
return or review period, the Company does not recognize revenue until the right of return or review
period has lapsed. Prior to the period lapsing, this revenue would be recorded as deferred revenue
on the Companys Balance Sheet.
Ionfinity has generated revenues to date on fixed-price contracts for government contracts in 2007
and 2006. These contracts have clear milestones and deliverables with distinct values assigned to
each milestone. The government is not obligated to pay Ionfinity the complete value of the contract
and can cancel the contract if the Company fails to meet a milestone. The milestones do not
require the delivery of multiple elements as noted in Emerging Issues Task Force (EITF) Issue No.
00-21 Revenue Arrangements with Multiple Deliverables (EITF No. 00-21). In accordance with
SAB No. 104, the Company treats each milestone as an individual revenue agreement and only
recognizes revenue for each milestone when all the conditions of SAB No. 104 defined earlier are
met.
VIASPACE Security has generated revenues to date on fixed-price service contracts with private
entities and has recognized revenues using the proportional performance method of accounting in
2007 and 2006. Sales and profits on each fixed-price service contract are recorded based on the
ratio of actual cumulative costs incurred to the total estimated costs at completion of contract
multiplied by the total estimated contract revenue, less cumulative sales recognized in prior
periods (the ''inputs method). A single estimated total profit margin is used to recognize profit
for each contract over its entire period of performance, which can exceed one year. Losses on
contracts are recognized in the period in which they are determined. The impact of revisions of
contract estimates, which may result from contract modifications, performance or other reasons, are
recognized on a cumulative catch-up basis in the period in which the revisions are made.
Differences between the timing of billings and the recognition of revenue are recorded as revenue
in excess of billings or deferred revenue.
During November 2006, the Company issued convertible debentures that are subject to SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities which requires bifurcation of
embedded derivative instruments and measurement of their fair value for accounting purposes. In
determining the appropriate fair value, the Company uses the Black-Scholes-Merton Option Pricing
Formula (the Black-Scholes Model). Derivative liabilities are adjusted to reflect fair value at
each period end, with any increase or decrease in the fair value being recorded in results of
operations as Adjustments to Fair Value of Derivatives. In addition, the fair value of freestanding
derivative instruments such as warrants are valued using Black-Scholes Models.
The Company bases its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. There is no assurance that actual results will not differ from these estimates.
See footnotes in the accompanying financial statements regarding recent financial accounting
developments.
Three Months Ended June 30, 2007 Compared to June 30, 2006
Results of Operations
Revenues
Revenues were $132,000 and $174,000 for the three months ended June 30, 2007 and 2006,
respectively, a decrease of $42,000. A decrease in revenues in Ionfinitys U.S. Government
contracts of $70,000 due to lower billings was offset in part by an increase in revenues by
VIASPACE Security and VIASPACE. VIASPACE Security recorded an increase in revenues of $14,000 from
a contract it has with L-3 Communications (L-3) for the Advanced Container Security Device, or
ACSD project, under a contract awarded to L-3 by the U.S. Department of Homeland Security. In
addition, VIASPACE recorded $36,000 in revenues for the three months ended June 30, 2007 and zero
for the same period in 2006 related to the sales of its ViaSensor HS-1000 humidity sensors. This
represents a new product line for VIASPACE which saw its first sale in the first quarter of 2007.
DMFCC recorded sales of $22,000 during the three months ended June 30, 2006 from the sale of fuel
cell cartridges and no revenues during the same period of 2007.
30
Cost of Revenues
Costs of revenues were $84,000 and $146,000 for the three months ended June 30, 2007 and 2006,
respectively, a decrease of $60,000. Lower revenues at Ionfinity contributed to the decrease in
cost of revenues as reduced subcontractor and consulting costs were incurred on Ionfinitys U.S.
Government contracts.
Research and Development
Research and development expenses were $415,000 and $271,000 for the three months ended June 30,
2007 and 2006, respectively, an increase of $144,000. The increase relates primarily to an increase
in payroll and payroll benefit costs of $67,000 as the Company hired additional employees in its
DMFCC and VIASPACE Security subsidiaries to perform engineering and research and development
activities. At June 30, 2007, the Company had 8 employees performing engineering and research and
development activities. The amount of research and development costs incurred by consultants to
the Company increased $19,000 from 2006 to 2007 due primarily to VIASPACE Security using
consultants with specialize expertise on its research and development projects. Stock compensation
expense incurred by Company research and development employees and consultants increased by $72,000
during the three months ended June 30, 2007 compared with the same period in 2006 due to the
Company issuing restricted stock to employees and consultants in lieu of cash compensation. Other
research and development costs, net, decreased by $14,000 in 2007. We expect that research and
development expenses will continue to increase in the future at VIASPACE, DMFCC and VIASPACE
Security as we work to develop and commercialize products and explore new opportunities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,740,000 and $1,211,000 for the three months
ended June 30, 2007 and 2006, respectively, an increase of $529,000. This is due to higher stock
compensation expense of $501,000 related to stock option compensation expense for stock options
granted to employees and consultants as well as expense related to restricted stock issued to
employees and consultants in lieu of cash compensation. Payroll related expenses increased by
$35,000 in 2007 as compared to 2006. At June 30, 2007, the Company had 9 selling, general and
administrative employees.
Consulting fees decreased by $78,000 in 2007 attributable to the decreased use of consultants in
this period as compared to the same period in 2006. The Companys legal fees increased $45,000
due to increased costs associated with patent filing and financing efforts. Accounting fees
increased $50,000 due to increased audit and audit-related fees incurred. Rent increased by
$11,000 as the Company moved into larger offices in May 2006 to accommodate its larger employee
base and to have laboratory facilities. Other selling, general and administrative expenses, net,
decreased by $35,000 during 2007. We expect selling, general and administrative expenses will
continue to increase in the future as we seek to expand our business.
Other Income (Expense), Net
Interest expense decreased by $1,000 for the three months ended June 30, 2007 as compared with the
same period in 2006. Interest income decreased $13,000 for the three months ended June 30, 2007 as
compared with the same period in 2006 as the Company has maintained lower cash balances in 2007.
Six Months Ended June 30, 2007 Compared to June 30, 2006
Results of Operations
Revenues
Revenues were $371,000 and $287,000 for the six months ended June 30, 2007 and 2006, respectively,
an increase of $84,000. A decrease in revenues in Ionfinitys U.S. Government contracts of $81,000
due to lower billings was offset by an increase in revenues by VIASPACE Security and VIASPACE.
VIASPACE Security recorded an increase in revenues of $149,000 from a contract it has with L-3
Communications (L-3) for the Advanced Container Security Device, or ACSD project, under a
contract awarded to L-3 by the U.S. Department of Homeland Security. In addition, VIASPACE
recorded $59,000 in revenues for the six months ended June 30, 2007 and zero for the same period in
2006 related to the sales of its ViaSensor HS-1000 humidity sensors. DMFCC recorded sales of
$43,000 during the six months ended June 30, 2006 from the sale of fuel cell cartridges and no
revenues during the same period of 2007.
31
Cost of Revenues
Costs of revenues were $287,000 and $251,000 for the six months ended June 30, 2007 and 2006,
respectively, an increase of $36,000. The primary reason for the increase is due to VIASPACE
Securitys increased direct labor, direct material and overhead costs on its contract with L-3 for
the ACSD contract. An increase in costs related to VIASPACEs humidity sensor sales was offset by
lower direct costs at Ionfinity on their government contracts.
Research and Development
Research and development expenses were $806,000 and $453,000 for the six months ended June 30, 2007
and 2006, respectively, an increase of $353,000. The increase relates primarily to an increase in
payroll and payroll benefit costs of $187,000 as the Company hired additional employees in its
DMFCC and VIASPACE Security subsidiaries to perform engineering and research and development
activities. At June 30, 2007, the Company had 8 employees performing engineering and research and
development activities. The amount of research and development costs incurred by consultants to
the Company increased $79,000 from 2006 to 2007 due primarily to VIASPACE Security using
consultants with specialize expertise on certain on its research and development projects. Stock
compensation expense incurred by Company research and development employees and consultants
increased by $105,000 during the six months ended June 30, 2007 compared with the same period in
2006 due to the Company issuing restricted stock to employees and consultants in lieu of cash
compensation. Other research and development costs, net, decreased by $18,000 in 2007. We expect
that research and development expenses will continue to increase in the future at VIASPACE, DMFCC
and VIASPACE Security as we work to develop and commercialize products and explore new
opportunities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3,406,000 and $2,452,000 for the six months
ended June 30, 2007 and 2006, respectively, an increase of $954,000. This is due to higher stock
compensation expense of $764,000 related to stock option compensation expense for stock options
granted to employees and consultants as well as expense related to restricted stock issued to
employees and consultants in lieu of cash compensation. Payroll related expenses increased by
$169,000 in 2007 as compared to 2006 due to new employees being on staff for a full six-month
period in 2007 and a partial period in 2006. At June 30, 2007, the Company had 9 selling, general
and administrative employees.
Consulting fees decreased by $100,000 in 2007 attributable to the decreased use of consultants in
this period as compared to the same period in 2006. The Companys legal fees increased $133,000
due to increased costs associated with patent filing and financing efforts. Accounting fees
increased $148,000 due to increased audit and audit-related fees incurred. Recruiting costs
decreased by $101,000 as the Company hired new employees during 2006 and paid recruiters in these
employee placements and did not pay any recruiting costs in 2007. Public relations and investor
relations costs decreased by $54,000 in 2007 as compared with 2006 due to lower use of services
during this period. Travel expenses increased by $21,000 as more sales and marketing trips to Asia
and domestic travel were incurred. Rent increased by $36,000 as the Company moved into larger
offices in May 2006 to accommodate its larger employee base and to have laboratory facilities.
Other selling, general and administrative expenses, net, decreased by $62,000 during 2007. We
expect selling, general and administrative expenses will continue to increase in the future as we
seek to expand our business.
Other Income (Expense), Net
Interest Expense
Interest expense increased by $3,508,000 from 2006 to 2007. As discussed in Note 7 to the
consolidated financial statements, on November 2, 2006, the Company entered into a convertible
debenture arrangement, a standby equity distribution agreement, issued warrants to the buyer and
its broker, and also offered the buyer an over allotment feature to obtain additional convertible
debentures in the future. On March 8, 2007, the convertible debentures were converted to equity
and certain of the other agreements were amended or terminated. In accordance with Accounting
Principles Bulletin No. 21, the Company is required to accrete any debt discount up to the face
value of the debentures and the debt discount is being accreted over the expected term of the
debentures using the effective interest rate method. During 2007, the Company accreted $354,000 of
this debt discount to interest expense. As of March 8, 2007, the balance of the debt discount was
$2,096,000 and was reclassified to interest expense after conversion of the debentures to equity.
Interest expense of $50,000 was recorded in 2007 related to the convertible debentures and was
subsequently waived by Cornell Capital on March 8, 2007 after the debentures were converted to
equity. Transaction costs related to the issuance of the debentures was $57,000 and was charged to
interest expense on March 8, 2007. At the time of the conversion, Cornell Capital received a
reset to its outstanding warrants and Gilford Securities received an additional grant of warrants.
In addition, Cornell Capital was issued
additional shares of common stock. The fair value of the consideration issued including the
modification to the prices of the warrants and the issuance of additional shares of common stock in
excess of the fair value of the consideration of the cash investments, forgiveness of interest and
cancellation of embedded derivatives, resulted in an inducement of $953,000 which was recorded as
interest expense in Statement of Operations for the period ended March 31, 2007, in accordance
with SFAS No. 84 Induced Conversions of Convertible Debt.
32
Adjustment to the Fair Value of Derivatives
The adjustment to the fair value of derivatives represents a total income adjustment of $1,383,000
during 2007. The adjustment to the fair value of warrants recorded as a derivative liability is an
income adjustment of $611,000. The adjustment to the fair value of the derivatives related to the
conversion feature of the convertible debentures is an income adjustment of $756,000. In addition,
due to the derivative nature of the convertible debentures, the Company was required to account for
its stock options with consultants as derivative liabilities, and accordingly, at March 31, 2007,
made an in adjustment to the fair value of derivatives of $16,000. There were no adjustments
during the three months ended June 30, 2007 as the Company no longer is required to account for the
fair value of derivatives as further explained in Note 7 to the consolidated financial statements.
Interest Income
Interest income decreased $16,000 for the six months ended June 30, 2007 in comparison to the same
period in 2006 as the Company has maintained lower cash balances in 2007.
Gain on Sale of Marketable Securities
During the six months ended June 30, 2007, the Company recognized a gain on the sale of marketable
securities of $219,000 related to its ownership in shares of ViaLogy plc. The Company received the
net proceeds in April 2007. There were no realized gains on the sale of marketable securities in
2006.
Liquidity and Capital Resources
Net cash used in operating activities was $2,316,000 and $2,020,000 for the six months ended June
30, 2007 and 2006, respectively. The Companys net loss from operations increased from $2,869,000
to $4,128,000 from 2006 to 2007, an increase of $1,259,000. Of this increase, $869,000 is related
to an increase in stock option compensation expense for stock options granted to employees and
consultants as well as expense related to restricted stock issued to employees and consultants in
lieu of cash compensation. The remaining increase of $390,000 was due to an increase in other
research and development costs of $248,000, an increase in other selling, general and
administrative expenses of $190,000 and an increase in gross profit of $48,000 from 2006 to 2007.
Net cash provided by financing activities during 2007 was $897,000. Net cash proceeds received
from Cornell Capital Partners, LP (Cornell) was $910,800 during March 2007 as the Company
received equity financing as discussed in detail in Note 7 to the consolidated financial
statements.
We have incurred substantial losses during the six months ended June 30, 2007 and in 2006. As
described more fully in Note 7 to the consolidated financial statements, the Company received net
proceeds of $910,800 in financing on March 8, 2007 from Cornell through the sale of its common
stock and warrants and converted the existing $2,700,000 Convertible Debentures into common stock.
In connection with this new financing, we terminated (i) the Standby Equity Distribution Agreement,
(ii) the related Investor Registration Rights Agreements; and (iii) the Security Agreements which
granted Cornell a first priority security interest, that were entered into in November 2006 with
Cornell. The Company believes these are positive steps for our success including removing debt
from our Balance Sheet and increasing shareholders equity. In addition, on April 9, 2007, we
filed a blanket shelf registration statement for $50,000,000 in order for the Company to raise
additional capital. This blanket shelf registration statement for $50,000,000 was declared
effective by the SEC on June 12, 2007. Although the Company is seeking to raise additional
financing, no signed agreements have been entered into for additional investment and no assurances
can be given that additional financing will ultimately be completed. Without the raising of
additional equity or debt financing, or the generation of additional revenues to support cash
flows, the Company will not have adequate financial resources to support its operations at the
current level for the next twelve months.
33
Contractual Obligations
The following table summarizes our long-term contractual obligations as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
Long-term debt obligations (a) |
|
$ |
91,500 |
|
|
$ |
16,500 |
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
Operating lease obligations (b) |
|
$ |
552,000 |
|
|
$ |
65,000 |
|
|
$ |
414,000 |
|
|
$ |
73,000 |
|
|
|
|
|
|
(a) |
|
The annual installment of principal and interest on the notes payable owed to the
Community Development Commission as discussed in Note 8 to the consolidated financial
statements are noted. |
|
|
(b) |
|
On May 1, 2006, the Company relocated its office and laboratory space to a new location
in Pasadena, California and entered into a five year lease. Future minimum lease payments
are noted. |
Other major outstanding contractual obligations are summarized as follows:
Employment Agreements
In October 2004, DMFCC entered into an employment agreement with Dr. Carl Kukkonen, Chief Executive
Officer of the Company and DMFCC. Under the agreement, Dr. Kukkonen is entitled to receive an
annual base salary of $225,000 and a performance-based bonus of up to 25% of his base salary for
the first three years of employment. In the event DMFCC terminates Dr. Kukkonens employment
without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500.
This agreement expires on October 15, 2008 and will be automatically renewed for one year periods
unless either party gives a termination notice not later than 90 days prior to the end of the term
of the employment agreement.
Royalty Commitments
VIASPACE Security has a nonexclusive software license agreement with Caltech for executable code
and source code pertaining to Spacecraft Health Inference Engine (SHINE) whereby VIASPACE
Security has agreed to pay Caltech royalties from the sale or licensing of software or license
products related to SHINE. This SHINE agreement provides for the following minimum royalties to
Caltech: $10,000 due September 28, 2007; $12,500 due September 28, 2008; $15,000 due September 28,
2009; $17,500 due September 28, 2010; and $20,000 due each year from September 28, 2011 to 2015.
VIASPACE Security also has a nonexclusive software license agreement with Caltech for executable
code and source code pertaining to U-Hunter (unexploded ordnance detection using electromagnetic
and magnetic geophysical sensors) and to MUDSS (mobile underwater debris survey system) whereby
VIASPACE Security has agreed to pay Caltech royalties from the sale or licensing of software or
license products related to U-Hunter and MUDSS. These agreements provide for a minimum royalty
payment of $10,000 to be made annually beginning on June 19, 2007.
On March 15, 2006, VIASPACE entered an exclusive software license agreement for certain fields of
use with Caltech for executable code and source code pertaining to Spacecraft Health Inference
Engine (VIASPACE SHINE Agreement). VIASPACE has agreed to pay Caltech royalties from the sale or
licensing of software or license products related to the VIASPACE SHINE Agreement. It provides for
the following minimum royalties to Caltech: $25,000 due February 1, 2008 and every year thereafter.
On March 2, 2007, VIASPACE entered a nonexclusive worldwide license agreement with Caltech for new
software capabilities that should significantly enhance the functionality of its SHINE inference
engine technology. The newly licensed Knowledge Base Editor is expected to enable VIASPACE to
accelerate the development of SHINE-based applications tailored to meet the requirements of
customers in the commercial, defense and homeland security sectors. VIASPACE has agreed to pay
Caltech a license issue fee of $25,000 which will be paid in five installments of $5,000 each. The
first installment was due on March 2, 2007 and is included in accounts payable in the accompanying
balance sheet. The next four installments are due on the anniversary dates of the agreement
beginning on March 2, 2008. VIASPACE has the option of extending the term of the license by an
additional eight years with an extension fee of $25,000 if such extension fee is paid prior to
March 2, 2011.
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.
34
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as of June 30, 2007.
Other Matters
We were contacted informally by the Pacific Regional Office of the SEC in March 2006 requesting the
voluntary provision of documents concerning the reverse merger of Global-Wide Publication, Ltd. and
Viaspace Technologies LLC in June 2005 and related matters. The SEC or its staff has made no
indication that any violations of the law have occurred. We are cooperating fully with this
inquiry.
On December 27, 2006, the Company received comments from the SEC on the registration statement that
was filed on November 30, 2006, pursuant to the registration rights agreement executed in
connection with the financing discussed in Note 7 to the consolidated financial statements. This
registration statement was subsequently withdrawn on December 29, 2006. The comments from the SEC
also addressed disclosures in the Companys Annual Report on Form 10-KSB for the year ending
December 31, 2005, and the Companys Period Report on Form 10-QSB for the period ending September
30, 2006. The Company submitted a response the questions asked by the SEC on April 6, 2007.
On May 4, 2007, the Company received comments from the SEC on the registration statements that were
filed on April 9, 2007, pursuant to the registration rights agreement executed in connection with
the financing discussed in Note 7 to the consolidated financial statements. The comments from the
SEC also addressed disclosures in the Companys Annual Report on Form 10-KSB for the year ending
December 31, 2006. On May 18, 2007, the Company submitted a response the questions asked by the
SEC, filed an amendment to the Companys Annual Report on Form 10-KSB for the year ending December
31, 2006, and also refiled the registration statements.
On June 4, 2007, the Company received comments from the SEC on the registration statements that
were filed on May 18, 2007 and a Form 8-K filed by the Company on May 15, 2007. On June 8, 2007,
the Company amended the Form 8-K to address the SEC comments. On June 12, 2007, the Company
received notice from the SEC that the registration statements filed by the Company were declared
effective.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined to our cash and cash equivalents. We invest excess cash and
cash equivalents in high-quality money market funds that invest in federal agency notes and United
States treasury notes, which we believe are subject to limited credit risk. We currently do not
hedge interest rate exposure. The effective duration of our portfolio is all current with no
investment of a long-term duration. Due to the short-term nature of our investments, we do not
believe that we have any material exposure to interest rate risk arising from our investments.
Most of our transactions are conducted in United States dollars, although we do have some research
and development, and sales and marketing agreements with consultants outside the United States. The
majority of these transactions are conducted in United States dollars. If the exchange rate changed
by ten percent, we do not believe that it would have a material impact on our results of operations
or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures. Disclosure controls are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed under the Exchange
Act, such as this periodic report, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls
are also designed to reasonably assure that such information is accumulated and communicated to our
management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no
matter how well designed and implemented, can provide only reasonable assurance of achieving an
entitys disclosure objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal control can occur because
of human failures such as simple errors, mistakes or intentional circumvention of the established
processes.
35
At the end of the period covered by this report, the Companys management, with the participation
of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer
and
Chief Financial Officer concluded that these disclosure controls and procedures were effective at
the reasonable assurance level described above as of the end of the period covered in this report.
Changes in internal controls over financial reporting. Management, with the participation of the
Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in
the Companys internal control over financial reporting that occurred during the most recent fiscal
quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial
Officer of the Company have concluded that no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during
the six month period ended June 30, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The Company is a non-accelerated filer and is required to comply with the internal control
reporting and disclosure requirements of Section 404 of the Sarbanes-Oxley Act for fiscal years
ending on or after December 15, 2007. Although the Company is working to comply with these
requirements, the Company has only 17 employees. The Companys small number of employees is
expected to make compliance with Section 404 including segregation of duty control requirements
very difficult and cost ineffective.
36
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any litigation, nor are there any pending legal proceedings at this time.
ITEM 1A. RISK FACTORS
Risk Factors Which May Affect Future Results
The Company wishes to caution that the following important factors, among others, in some cases
have affected and in the future could affect the Companys 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-KSB for the fiscal year ended December 31, 2006, as amended, other than as set forth below:
Risks Related To Our Business
We have incurred losses and anticipate continued losses for the foreseeable future.
Our net loss for the six months ended June 30, 2007 was $6,021,000. We have not yet achieved
profitability and expect to continue to incur net losses until we recognize sufficient revenues
from licensing activities, customer contracts, product sales or other sources. Because we do not
have an operating history upon which an evaluation of our prospects can be based, our prospects
must be considered in light of the risks, expenses and difficulties frequently encountered by
companies seeking to develop new and rapidly evolving technologies. To address these risks, we
must, among other things, respond to competitive factors, continue to attract, retain and motivate
qualified personnel and commercialize and continue to develop our technologies. We may not be
successful in addressing these risks. We can give no assurance that we will achieve or sustain
profitability.
Our ability to continue as a going concern is dependent on future financing.
Singer Lewak Greenbaum & Goldstein LLP, our independent registered public accounting firm, included
an explanatory paragraph in its report on our financial statements for the fiscal year ended
December 31, 2006, which expressed substantial doubt about our ability to continue as a going
concern. The inclusion of a going concern explanatory paragraph in Singer Lewak Greenbaum &
Goldstein LLPs report on our financial statements could have a detrimental effect on our stock
price and our ability to raise additional capital.
Our financial statements have been 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 continue to raise capital in order to fund the
development and commercialization of our products. Failure 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, the loss of which could result in a severe
decline in revenues.
For the six months ended June 30, 2007, the Company had one customer who made up 57% of the total
revenues of the Company recognized during that period. We believe that this trend of revenues to a
few customers will continue in the near future. A loss of any customer by the Company could
significantly reduce recognized revenues.
37
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 have
the effect of depressing the trading price of our common stock. 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 800,000,000 authorized shares of common stock, of which 304,385,436 were issued and
outstanding as of June 30, 2007. Of these issued and outstanding shares, 203,652,477 shares (67% of
the total issued and outstanding shares) are currently held by our executive officers, directors
and greater than 5% principal shareholders including Dr. Sandeep Gulati, former Director of the
Company, and SNK Capital Trust. On April 10, 2006, SNK Capital Trust agreed to a lock-up of its
61,204,286 shares until April 9, 2011. In addition, three other shareholders of the Company
collectively owning 18,900,000 shares have agreed to a lock-up of their shares until April 9, 2011.
On July 19, 2007, 8,100,000 shares were released to one shareholder who was previously subject to
a lock-up of their shares until April 9, 2011.
As of June 22, 2007, 220,812,000 shares that were previously restricted under Rule 144 of the
Securities Act of 1933 met the two year holding limitation and became available for sale in the
future, subject to volume and manner of sale restrictions under Rule 144 of the Securities Act of
1933. As of June 30, 2007, 244,761,313 shares of the Company are still accounted by our transfer
agent as restricted under Rule 144 as these shares have not had restrictions requested to be
released. 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.
On June 12, 2007, the Company received notice that the registration statement filed on April 9,
2007 related to the resale of 19,711,327 shares of common stock was declared effective. The
registration statement covered 12,300,000 shares of common stock owned by Cornell Capital Partners,
5,775,000 warrants granted to Cornell Capital Partners, 624,000 warrants granted to Gilford
Securities Inc., 12,327 shares of common stock owned by Newbridge Securities Corporation, and
1,000,000 warrants granted to Synthetica Ltd.
In addition, on June 12, 2007, the Company received notice that the blanket shelf registration
statement for $50 million filed on April 9, 2007 was declared effective. As of August 10, 2007,
the Company has not issued any stock against this blanket shelf registration statement.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 3, 2007, the Company entered into an agreement with an independent research provider to
provide paid analyst research coverage in exchange for fees payable in cash, shares of common stock
and a warrant. The Company agreed to issue a warrant to purchase 35,000 shares of its common stock
at an exercise price of $0.4834 per share to the provider. Under the agreement, the Company also
agreed to issue $250,000 worth of common stock to a principal of the provider (the Fee Shares),
based on the average closing price over the five trading day period preceding May 3, 2007, in
monthly amounts not to exceed 75,000 shares per month. During August 2007, the Company will pay
its first installment of Fee Shares by issuing 75,000 shares of common stock. The shares, the
warrant and the shares underlying the warrant are not registered. The shares issued to date and
the warrant were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended. The
parties to the agreement agreed that the securities issued would be restricted and could not be
resold except in accordance with all applicable state and federal securities laws [and legends to
that effect will be affixed to the instruments representing the securities issued]. In addition to
the 35,000 shares which may be issued pursuant to the warrant, the maximum total number of Fee
Shares that could be issued related to this agreement is 517,170 shares and was calculated based on
the 5 day average closing price of the Companys common stock for the 5-days preceding the signing
of the agreement on May 3, 2007, which was $0.4834 per share. The Company has a right to terminate
this agreement at any time by giving the independent research group two weeks written notice. The
Company would only be responsible for issuing the remaining stock payments up to the end of the
month in which the termination occurs. The number of shares issuable in connection with the Fee
Shares and the warrant is subject to adjustment in the case of stock splits or combinations.
38
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. * |
|
|
32.1 |
|
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. * |
* Filed herewith.
39
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 10, 2007 |
/s/ CARL KUKKONEN
|
|
|
Carl Kukkonen |
|
|
Chief Executive Officer |
|
|
|
|
|
Date: August 10, 2007 |
/s/ STEPHEN J. MUZI
|
|
|
Stephen J. Muzi |
|
|
Chief Financial Officer |
|
|
40
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
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. * |
|
|
|
32.1
|
|
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. * |
* Filed herewith.
41