* Amounts derived from audited financial statements for the
year ended December 31, 2013
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes
are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
June 30, 2014 (Unaudited) and December
31, 2013 (Audited)
Note 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
–
VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) was founded in July 1998.
Its business involves renewable energy and is based on biomass, in particular our license to a dedicated energy crop with the trademark
“Giant King
®
Grass” (“GKG”). Through a sublicense for GKG we obtained from VIASPACE Green
Energy Inc. (“VGE”), we are able to commercialize GKG throughout the world, except for the People’s Republic
of China (“China”) and the Republic of China (“Taiwan”).
GKG can be burned in 100% biomass power
plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing
power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for
transportation, biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use
corn or other food sources as feedstock. GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide
from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the
same carbon dioxide that was removed from the atmosphere, and so this process is carbon neutral. Small amounts of fossil fuel are
used by the farm equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably
has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the
same amount of energy. GKG has been independently tested by customers and been shown to have excellent energy content, high bio
methane production, and the cellulosic sugar content needed for biofuels and biochemicals.
Going Concern –
The
Company has incurred significant losses from operations, resulting in an accumulated deficit of $49,846,000. The Company expects
such losses to continue. However, on September 30, 2012, as discussed in Note 4, the Company entered into a Loan Agreement with
Dr. Kevin Schewe, a member of the Company’s Board of Directors, whereby Dr. Schewe agreed to fund the Company up to $1,000,000
over a five year period in accordance with such agreement. The Company expects loans from Dr. Schewe and revenue generated from
future contracts using the sublicense it has for Giant King Grass to fund operations for the foreseeable future. However no assurance
can be given that Dr. Schewe will continue to fund the Company or that contracts will be obtained in the future, or if they are
obtained, that they will be profitable. Accordingly, there continues to be substantial doubt as to the Company’s ability
to continue as a going concern. The financial statements do not include any other adjustments that might result from the outcome
of these uncertainties.
Basis of Presentation -
The accompanying unaudited financial statements and related notes have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Results for interim periods should not be considered indicative of results for a full year. These interim financial statements
should be read in conjunction with the financial statements and related notes contained in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2013. The accounting policies used in preparing these financial statements are the same
as those described in Note 1 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December
31, 2013. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a
fair statement of the results for interim periods have been included.
The preparation of the 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 revenues and expenses during the reporting period. Actual results and outcomes
may materially differ from management’s estimates and assumptions.
Reclassifications of prior year’s
data have been made to conform to 2014 classifications. Such classifications had no effect on net loss reported in the statements
of operations.
Recently Issued Accounting Pronouncements
– In May 2014, the FASB issued new guidance on the recognition of revenue. The guidance states that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The standard will be effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. Our adoption begins with the
first fiscal quarter of fiscal year 2017. Early adoption is not permitted. We are currently evaluating the impact of the adoption
of this accounting standard update on our results of operations or financial position.
Subsequent Events -
We have
evaluated events and transactions subsequent to the balance sheet date. Based on this evaluation, we are not aware of any events
or transactions (other than those disclosed in Note 9) that occurred subsequent to the balance sheet date but prior to filing that
would require recognition or disclosure in our financial statements.
NOTE 2 – PREPAID EXPENSES
The Company has entered into agreements
with certain of its consultants and vendors whereby the Company issued registered shares of its common stock under an existing
registration statement on Form S-8 as well as unregistered shares of common stock in exchange for future services to be provided
to the Company. At June 30, 2014 and December 31, 2013, the total remaining value of these agreements was $150,000 and $182,000,
respectively, which is included in prepaid expenses in the accompanying balance sheets. The Company has engaged a third party provider
to pay certain expenses of the Company on behalf of the Company. As compensation for the payment of these expenses on behalf of
the Company, the Company pays the provider in shares of common stock equivalent to the expense paid plus a fee equal to 15% of
the expense paid. In 2014, the Company issued 10,000,000 unregistered shares of the Company’s common stock with a value of
$120,000 in advance of the payments made by the provider. As of June 30, 2014 and December 31, 2013, included in prepaid expenses
for this third party provider is $150,000 and $114,000, respectively, for shares of stock issued to the provider in excess of amounts
paid on the Company’s behalf. Other prepaid expenses (stock related) were zero and $68,000 as of June 30, 2014 and December
31, 2013, respectively. For the three months ended June 30, 2014 and 2013, the Company recorded $70,000 and $57,000, respectively,
of stock related expenses. For the six months ended June 30, 2014 and 2013, the Company recorded $154,000 and $172,000, respectively,
of stock related expenses.
Other prepaid expenses (non stock related)
were $11,000 and $51,000 at June 30, 2014 and December 31, 2013, respectively.
NOTE 3 – STOCK OPTIONS, WARRANTS
AND ISSUED STOCK
The fair value of each stock option granted
is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has
assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest
rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining on the option.
Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical
volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as
no options have been exercised in the Plan to date. The Company calculated a forfeiture rate for employees and directors based
on historical information. A forfeiture rate of 0% is used for options granted to consultants. The fair value of each option grant
to employees, directors and consultants is calculated by the Black-Scholes method and is recognized as compensation expense on
a straight-line basis over the vesting period of each stock option award. There were no stock options issued in 2014. For stock
options issued to employees, directors, consultants and advisory board members in 2013, the fair value was estimated at the date
of grant using the following range of assumptions:
|
|
2013
|
|
Risk free interest rate
|
|
|
2.00% - 2.06%
|
|
Dividends
|
|
|
0%
|
|
Volatility factor
|
|
|
134.81% 138.17%
|
|
Expected life
|
|
|
6.67 years
|
|
Annual forfeiture rate
|
|
|
0%
|
|
The following table summarizes activity for employees and directors
in the Company’s Plan at June 30, 2014:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term In Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2013
|
|
|
73,408,000
|
|
|
$
|
0.0132
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
73,408,000
|
|
|
$
|
0.0132
|
|
|
|
6.40
|
|
|
$
|
141,000
|
|
Exercisable at June 30, 2014
|
|
|
67,408,000
|
|
|
$
|
0.0132
|
|
|
|
6.18
|
|
|
$
|
140,000
|
|
There were no stock options granted in
2014. The Plan recorded $25,000 of compensation expense for employees and director stock options in 2014. At June 30,
2014, there was $53,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the
Plan that is expected to be recognized over a weighted average period of approximately one year and three months. At June 30, 2014,
the fair value of options vested for employees and directors was $717,000. There were no options exercised during 2014.
During 2014, the Company issued 153,846
unregistered shares of common stock to a consultant for services provided to the Company. These share issuances were recorded at
$1,920 which is the fair market value determined by the price of the Company’s common stock trading on the OTC Markets on
the date of grant.
NOTE 4 –
SHORT-TERM AND LONG-TERM DEBT
Loan Agreement with Dr. Kevin Schewe
Effective September 30, 2012, the Company
entered into a Loan Agreement with Director Kevin Schewe whereby Dr. Schewe agreed to loan up to $1 million to the Company over
a five-year period based on requests from the Company. The loans would be evidenced by a Secured Convertible Note. Each individual
loan will accrue interest at 6% per annum and are secured by all assets of the Company. Each note would mature on the second anniversary
of the issuance date of such note. Each note is convertible at Dr. Schewe’s request, into a fixed number of shares of the
Company’s common stock based on the closing price of the Company’s common stock for the twenty trading days prior to
the issuance of the loan, less a 20% discount. In connection with the separation from VGE as discussed in Note 1, Chang granted
Dr. Schewe an irrevocable proxy that permits him to vote the Preferred Share, giving him the majority shareholder vote. As the
controlling shareholder of the Company he has the ability to increase the number of authorized shares without additional shareholder
approval. As such, if the outstanding balance on the loan was convertible into more shares than the Company has authorized, he
has the ability to increase the authorized shares. As a result, the conversion feature is not deemed to be a derivative instrument
subject to bifurcation.
From January through June 2014, Dr. Schewe
made loans of $102,000 to the Company. The Company recorded a discount on the loans of $26,000 as a result of a beneficial conversion
feature, which will be amortized over the term of the note on a straight-line basis, which approximates the effective interest
method. During 2014, Dr. Schewe converted loans totaling $102,000 into 10,862,346 common shares of the Company. At the time of
the conversions, the company recorded the discount as additional interest expense. As of June 30, 2014, the Company had remaining
availability under the note of $556,000.
NOTE 5 – STOCKHOLDERS’ EQUITY
During 2014, the Company issued 10,153,846
unregistered shares of common stock to employees, consultants and vendors for services provided or to be provided to the Company.
These share issuances were recorded at $122,000 which is the fair market value determined by the price of the Company’s common
stock trading on the OTC Markets on the date of grant. As of June 30, 2014, there were 1,510,349,191 shares of common stock outstanding.
The Company issued 10,862,346 shares of
common stock to Director Kevin Schewe as he converted loans into shares of common stock as allowed under an agreement he has with
the Company as discussed in Note 4.
NOTE 6 – NET LOSS PER SHARE
The Company computes net loss per share
in accordance with FASB ASC Topic 260. Under its provisions, basic loss per share is computed by dividing net loss by
the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings would
customarily include, if dilutive, potential shares of common stock issuable upon the exercise of stock options and warrants. The
dilutive effect of outstanding stock options and warrants is reflected in earnings per share in accordance with FASB ASC Topic
260 by application of the treasury stock method. For the periods presented, the computation of diluted loss per share
equaled basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings
per share calculation in the periods presented.
The following table sets forth common stock
equivalents (potential common stock) at June 30, 2014 and 2013 that are not included in the loss per share calculation since their
effect would be anti-dilutive for the periods indicated:
|
|
2014
|
|
|
2013
|
|
Stock Options
|
|
|
73,408,000
|
|
|
|
67,408,000
|
|
The following table sets forth the computation
of basic and diluted net loss per share for the three months ended June 30, 2014 and 2013, respectively:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock
|
|
$
|
(157,000
|
)
|
|
$
|
(152,000
|
)
|
|
$
|
(357,000
|
)
|
|
$
|
(325,000
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
1,507,132,326
|
|
|
|
1,460,192,797
|
|
|
|
1,503,907,859
|
|
|
|
1,447,562,472
|
|
Net loss per share of common stock, basic and diluted
|
|
$
|
*
|
|
|
$
|
*
|
|
|
$
|
*
|
|
|
$
|
*
|
|
* Less than $0.01
NOTE 7 – RELATED PARTY TRANSACTIONS
Included in the Company’s balance
sheets at June 30, 2014 and December 31, 2013 are Related Party Payables. The Company has a payable of $680,000 at June 30, 2014
and December 31, 2013. Included in the amount is $640,000 owed to Dr. Kukkonen, CEO of the Company. Of the amount to Dr. Kukkonen,
there is a cash component totaling $136,000 and a common stock component totaling $504,000. Dr. Kukkonen deferred a portion of
his 2009, 2010 and 2011 stock awards and is entitled to the following unregistered shares of Company common stock at June 30, 2014:
11,195,707 shares for deferred 2009 compensation; 8,467,939 shares for deferred 2010 compensation; and 24,730,678 shares for deferred
2011 compensation.
Additionally, the Company has agreed to
pay VGE $40,000 as reimbursement for legal fees and costs in connection with the separation of the Company and VGE. This amount
is due by September 30, 2014.
The Company has a loan agreement with Director Dr. Kevin Schewe
which is described in Note 4.
On December 18, 2013, the Company entered
into a Representation in Pakistan and Giant King Grass Supply contract with Winergy Pakistan Private Limited (“Winergy”),
a company incorporated and existing under the laws of Pakistan. Mr. Khurram Irshad, a director of the Company, is a director and
shareholder of Winergy. Winergy was also appointed the exclusive representative of the Company in Pakistan. Winergy is developing
bioenergy and animal feed projects in Pakistan and seeking a biomass source. The Company's Giant King Grass will be supplied to
Winergy and a propagation nursery and test plot is to be established in Pakistan. Winergy will operate and pay the expenses for
a Giant King Grass propagation nursery and test plot in Pakistan. Winergy paid a one-time fee of $5,000 to the Company upon the
signing of the contract. The Company expects to receive additional license fees in the future from Winergy when they are able to
secure customer relationships who will use the Company's Giant King Grass in their particular application. No additional revenues
were received in 2014.
NOTE 8 – OTHER COMMITMENTS AND CONTINGENCIES
Leases
The Company currently has no long term
office lease. The Company leases land in San Diego County, California where it grows Giant King Grass. Rent expense charged to
operations for the three and six months ended June 30, 2014 was $4,000 and $6,000, respectively. Rent expense charged to operations
for three and six months ended June 30, 2013 was $2,000 and $4,000, respectively.
Collaborative Agreements
We are a party to certain collaborative
agreements with various entities for the joint operation of test plots to establish that GKG grows well in the area and optimal
agronomic practices are developed. These agreements are in the form of development collaborations and licensing agreements. Under
these agreements, we have granted rights to grow and use of GKG. In return, we are entitled to receive certain payments for the
operations of the test plots and license fees on the harvesting of GKG should it ultimately be commercialized.
All of our collaborative agreements are
subject to termination by either party, without significant financial penalty to them. Under the terms of these agreements, upon
a termination we are entitled to reacquire all rights in our technology at no cost and are free to re-license the technology to
other collaborative partners.
Revenue earned from collaborative agreements
is comprised of negotiated payments for the establishment and operations of the test plots. Deferred revenue represents customer
payments received which are related to future performance. Generally for collaborative agreements establishing test plots, the
Company recognizes revenue only after the Giant King Grass is planted in the customer’s location. Until that time any money
received is recorded as deferred revenue. Once the planting is complete, the collaborative agreement payments are amortized over
a period of six and one-half months which represents the growing season of Giant King Grass. During the three and six months ended
June 30, 2014, the Company received zero and $103,000, respectively, in payments under these collaborative agreements. During the
three and six months ended June 30, 2013, the Company received $16,000 and $26,000, respectively, in payments under these collaborative
agreements. The payments were deferred until the planting of the seedlings and then recorded as revenue through the date of the
first harvest. The Company recognized revenue from these collaborative agreements of $46,000 and $32,000 for the three months ended
June 30, 2014 and 2013, respectively. The Company recognized revenue from these collaborative agreements of $70,000 and $63,000
for the six months ended June 30, 2014 and 2013, respectively.
License Agreement
Effective as of September 30, 2012, VIASPACE
and VGE entered into a Supply, License and Commercialization Agreement (“License Agreement”) pursuant to which VGE
granted to VIASPACE a nontransferable, royalty-bearing exclusive license to commercialize Giant King Grass anywhere within the
world other than China and Taiwan. Additionally, the License Agreement allows VIASPACE to use the Giant King Grass intellectual
property and VIASPACE Green Energy trade name in connection with its efforts to commercialize Giant King Grass. The Company assigned
no value to the sublicense due to uncertainties of future revenues.
VIASPACE agreed that it would not during
the term of the License Agreement and a three-year period thereafter, (i) manufacture, commercialize or otherwise engage in any
research or development of a grass or any other product or material having similar or otherwise competitive properties to Giant
King Grass.
VGE agreed to provide VIASPACE with Giant
King Grass seedlings that will be filled at an agreed upon price as set forth in the License Agreement. VIASPACE agreed to pay
VGE for and during the Term a royalty of eight percent (8%) on net sales made in its territory.
The initial term of the License Agreement
is for two years (“Initial Term”). As a condition to the right to renew after the first two-year term for an additional
two year term, VISPACE needs to achieve the milestones in the first two year period:
|
☐
|
One or more fully-executed, third party sales contracts for the sale of Giant King Grass shall have been entered into during the Initial Term, pursuant to which VIASPACE is to be paid an aggregate amount of at least $200,000 within that 24 consecutive monthly period; and two or more, third party growing locations of at least 10 hectares in total shall have been obtained and planted during the Initial Term. The Company expects to meet the milestones by September 30, 2014 and renew the license for an additional two year term. The Company has entered into various collaborative agreements with entities for the joint operation of test plots that the Company believes will help to satisfy these milestones. However, there can be no assurance that the Company will meet the milestones prior to the renewal date.
|
There are additional milestones that need
to be met as a condition to renew the license for subsequent two year periods, in order for VIASPACE to maintain the license.
Employment Agreements
Effective October 1, 2013, the Company
entered into one-year employment agreements with Carl Kukkonen and Stephen Muzi. Dr. Kukkonen serves as Chief Executive Officer
of the Company and Mr. Muzi serves as Chief Financial Officer, Treasurer and Secretary. Dr. Kukkonen will receive a salary of $164,800
per annum and Mr. Muzi would receive $61,800 per annum. Each of them would also be entitled to a bonus as determined by the Company’s
Board of Directors, customary insurance and health benefits, and reimbursement for out-of-pocket expenses in the course of his
employment. Additionally, Dr. Kukkonen is to receive 20 business days paid leave per year and Mr. Muzi is to receive 10 business
days paid leave.
Litigation
The Company is not party to any material
legal proceedings at the present time.
NOTE 9 – SUBSEQUENT EVENTS
On July 18, 2014, Kevin Schewe, advanced
an additional $20,000 pursuant to the convertible loan agreement and immediately converted the $20,000 loan into 2,439,024 shares
of Company common stock at a conversion price of $0.0082 per common share. Following this issuance, the Company had remaining availability
under the note of $536,000. On July 29, 2014, the Company issued 10,000,000 unregistered shares of common stock to a consultant
for prepaid services to be provided to the Company. These share issuances were recorded at $99,000 which is the fair market value
determined by the price of the Company’s common stock trading on the OTC Markets on the date of grant.