VSPC Viaspace Inc (CE)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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 license for GKG we obtained from Guangzhou Inter-Pacific Arts Corp., a Chinese wholly-owned foreign enterprise registered in Guangdong province ("IPA China") which is owned by 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 – We have incurred significant losses from operations, resulting in an accumulated deficit of $54,951,000. We expect such losses to continue. However, on November 30, 2016, we entered into a Loan Agreement with Vice Chairman Haris Basit whereby he agreed to fund us $100,000 over a two-year period. In addition, on February 23, 2017, we entered into a Loan Agreement with CEO Kevin Schewe whereby he agreed to fund us $100,000 over a two-year period.  After completing funding of this loan we entered into a new Loan Agreement with Dr. Schewe on May 24, 2018 whereby he agreed to fund us $100,000 over a two-year period. In addition, on July 25, 2017, we entered into a Loan Agreement with CTO Carl Kukkonen whereby he agreed to fund us $25,000 over a two-year period. We expect loans from Mr. Basit, Dr. Schewe and Dr. Kukkonen and revenue generated from future contracts using the license we have for Giant King Grass to fund operations for the foreseeable future. However, no assurance can be given that Mr. Basit, Dr. Schewe or Dr. Kukkonen will continue to fund us or that sales 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 our 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 unaudited interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with our financial statements for the year ended December 31, 2017 and notes thereto included in our annual report on Form 10-K. We follow the same accounting policies in the preparation of interim reports.

Results of operations for the interim periods are not indicative of annual results.

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Recent Accounting Standards – T he Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain excep tions.    The new guidance expands the scope of Accounting Standards Codification (ASC) 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance i n ASC 505-50.

The FASB launched the project in response to requests it received in its post-implementation review of Statement No. 123(R), Share-Based Payment.  The ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. The key changes from ASC 505-50 are:

Public entities must adopt the new standard in the fiscal year beginning on 12/15/2018. Companies can early adopt the new standard but are required to adopt ASC Topic 606 alongside their adoption of ASU 2018-07.  We adopted the standard utilizing the modified retrospective adoption method.  The adoption of this guidance does not have a material impact on our financial statements.

In May 2014, FASB and the International Accounting Standards Board jointly issued a new revenue recognition standard that is designed to improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance issued under Accounting Standards Update (" ASU ")  2014-09 ,  Revenue from Contracts with Customers  (" Topic 606 ", " ASU 2014-09 ") provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is 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. This guidance permits the use of either of the following transition methods: (i) a full retrospective method reflecting the application of the standard in each prior reporting period with the option to elect certain practical expediencies, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption, with additional footnote disclosures. The original effective date of the new standard was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued an ASU that deferred by one year the effective date of this new revenue recognition standard. As a result, the new standard was effective for annual reporting periods beginning after December 15, 2017, although companies could have adopted the standard as early as the original effective date. Early application prior to the original effective date was not permitted. In the first quarter of 2018, we adopted the standard utilizing the modified retrospective adoption method in order to provide for comparative results in all periods presented.  The adoption of this guidance does not have a material impact on our financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern (ASU 2014-15). The guidance in ASU 2014-15 sets forth management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern as well as required disclosures. ASU 2014-15 indicates that, when preparing financial statements for interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to

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address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim perio ds and annual periods thereafter. The adoption of this guidance does not have a material impact on our financial statements.

NOTE 2 – PREPAID EXPENSES

We entered into agreements with certain of its consultants and vendors whereby we issued unregistered shares of common stock in exchange for services to be provided to us. We engaged a third-party provider to pay certain of our expenses on our behalf. As compensation for the payment of these expenses on our behalf, we pay the provider in shares of common stock equivalent to the expense paid plus a fee equal to 15% of the expense paid. As of September 30, 2018 and December 31, 2017, included in prepaid expenses for this third-party provider is $19,000 and $22,000, respectively, for shares of stock issued to the provider in excess of amounts paid on our behalf.

Other prepaid expenses (non-stock related) were $0 and $0 at September 30, 2018 and December 31, 2017, respectively.

NOTE 3 – REVENUES

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On  January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of  January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

We did not have a cumulative impact as of January 1, 2018 due to the adoption of Topic 606 and there was not an impact to our statement of operations for the nine months ended September 30, 2018 as a result of applying Topic 606.

Note 4 – STOCK OPTIONS

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. The risk-free interest rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

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The following is a summary of the Company’s stock option activity for the nine months ended at September 30, 2018:

Stock options totalling 1,455,000,000 were granted during the nine months ended September 30, 2018.  The Plan recorded $467,000 of compensation expense for employees and director stock options in 2018. At September 30, 2018, there was $394,731 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan that is expected to be recognized over a weighted average period of approximately two year. There were no options exercised during the nine months ended September 30, 2018.

Note 5 – Investments

O ur 18.75% ownership interest in Almaden Energy Group, LLC (“AEG”), which became effective April 15, 2015, was sold July 16, 2018 to CMAC Agriculture, LLC (“CMAC”) and we received 3.375% ownership interest in CMAC in return. The sale included all AEG assets, intellectual property, and the license agreement with our company.

The Giant King Grass supply contract with Almaden Energy Group, LLC. (“AEG”) we entered into on April 13, 2015 included a license to grow Giant King Grass only for animal feed, nursery and research purposes anywhere within the 48 contiguous United States. AEG was permitted to sell Giant King Grass anywhere in the world with the exception of the State of Hawaii. The CEO of AEG is also the former CEO and current member of the Board of Directors of the Company.

We also own an 18.75% interest in Viaspace California, Inc (“VSCA”), a company formed on March 1, 2018.  VSCA is developing a business related to Cannabidiol (“CBD”), a cannabis compound that has significant medical benefits. The method of accounting for the investment is the equity method because a shareholder and controlling shareholder, both directors of Viaspace, along with the company collectively, has more than 50% control of Viaspace California. Dividends are recognized in income when declared and totaled $0 for the period ending September 30, 2018. The carrying value of the investment is $0 as of September 30, 2018.

On June 1, 2017, we acquired a 2.91% interest in Clean Energy Solutions, LLC’s (“CES”) outstanding membership interest units. We have accounted for this investment by the cost method because the membership interest units of that company are unlisted and the criteria for using the equity method of accounting are not satisfied as we are not able to exercise significant influence over CES. CES is a customer of the Company who is in discussion for future GKG contracts. At September 30, 2018, our interest in CES is recorded at $0.

As of September 30, 2018 the total balance of all investments is valued at $0.

NOTE 6 – CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES

Loan Agreement with Haris Basit

Effective November 30, 2016, we entered into a Loan Agreement with Director Haris Basit whereby Mr. Basit agreed to loan up to $100,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Mr. Basit’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. The Loan Agreement states that Mr. Basit will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.

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During the nine months ended September 3 0 , 201 8 , Mr. Basit made loans of $ 2 7 , 500 to us . We recorded a discount on the loans of $ 2 7 , 500 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 201 8 , Mr. Basit converted loans totalling $ 27,500 into 127,691,910 common shares of the Company. At the time of the conversions, we recorded the discount as additional interest expense. There are $0 loans outstanding at September 3 0 , 201 8 . As of September 3 0 , 201 8 , we had no remain ing availability under the note .

Loan Agreement with Kevin Schewe

Effective February 23, 2017, we entered into a Loan Agreement with CEO Kevin Schewe whereby Dr. Schewe agreed to loan up to $100,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Dr. Schewe’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. The Loan Agreement states that Dr. Schewe will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.

Effective May 24, 2018, we entered into a new Loan Agreement with CEO Kevin Schewe whereby Dr. Schewe agreed to loan up to $100,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Dr. Schewe’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. This Loan Agreement also states that Dr. Schewe will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.

During the nine months ended September 30, 2018, Dr. Schewe made loans of $56,000 to us. We recorded a discount on the loans of $56,000 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 2018, Dr. Schewe converted loans totalling $56,000 into 353,351,835 common shares of the Company. At the time of the conversions, we recorded the discount as additional interest expense. There are $0 loans outstanding at September 30, 2018. As of September 30, 2018, we had $64,000 remaining availability under the new note.

Loan Agreement with Carl Kukkonen

Effective July 25, 2017, we entered into a Loan Agreement with CTO Carl Kukkonen whereby Dr. Kukkonen agreed to loan up to $25,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Dr. Kukkonen’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. The Loan Agreement states that Dr. Kukkonen will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.

During the nine months ended September 30, 2018, Dr. Kukkonen made loans of $0 to the Company and there are $0 loans outstanding at September 30, 2018. As of September 30, 2018, the Company had remaining availability under the note of $13,500.

NOTE 7 – STOCKHOLDERS’ EQUITY

Preferred Stock

At September 30, 2018 and December 31, 2017, the number of authorized shares of our preferred stock was 10,000,000. The par value of the preferred stock is $0.0001.

At September 30, 2018 and December 31, 2017, there is one share of Series A Preferred Stock outstanding.

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Common Stock

As of January 1, 2018, the number of authorized shares of our common stock was 3,900,000,000. As of June 30, 2018 the number of authorized shares was increased to 8,000,000,000. The par value of the common stock is $0.0001.

During the 9 months ended September 30, 2017, we issued 50,000,000 unregistered restricted shares of common stock respectively to a funding source so that the funding source can pay for future expenses on our behalf. The shares are issued to the funding source to cover the amount of future expenses plus a fee of 15% of such future expenses. At the time of the future payment of the expenses incurred by us, the common stock and additional paid in capital are credited for the amount of the future payment plus 15%. During the period ending September 30, 2018, there is no accounting impact from this transaction because the shares remain in our possession.

During 2018, we issued 4,400,000 shares of common stock to a consultant of the Company. The shares were issued at fair market value of approximately $3,000 on the date of the issuance.

During 2018, we issued 353,351,835 shares of common stock to CEO Kevin Schewe as he converted loans into shares of common stock as allowed under an agreement he has with us as discussed in Note 5. During 2018, we issued 127,691,910 shares of common stock to Director Haris Basit as he converted loans into shares of common stock as allowed under an agreement he has with us as discussed in Note 5.

As of September 30, 2018, there were 3,887,958,192 shares of common stock issued and 3,787,958,192 shares of common stock outstanding.

NOTE 8 – NET LOSS PER SHARE

We compute 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 was equal to 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 September 30, 2018 and 2017 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:

The following table sets forth the computation of basic and diluted net loss per share for 2018 and 2017, respectively:

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NOTE 9 – RELATED PARTY TRANSACTIONS

Included in our balance sheets at September 30, 2018 and December 31, 2017 are Related Party Receivables of $2,000 and $0, respectively.  We have a receivable of $2,000 at September 30, 2018 due from Viaspace California, Inc., which represents start-up costs for the new entity.

Also included in our balance sheets at September 30, 2018 and December 31, 2017 are Related Party Payables of $749,000 and $749,000, respectively. We have a payable of $689,000 and $689,000, at September 30, 2018 and December 31, 2017 owed to Dr. Carl Kukkonen, CTO. Of the amount owed to Dr. Kukkonen, there is a cash component totalling $185,000 and a common stock component totalling $504,000. Dr. Kukkonen deferred a portion of his 2009, 2010 and 2011 stock awards and is entitled to the following unregistered shares of our common stock at September 30, 2018: 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. We also owe Director Haris Basit $60,000 at September 30, 2018, representing salary earned but not paid.  In addition, at September 30, 2018 there are Other Related Party Payables owed to Dr. Kukkonen, in the amount of $2,000, to Mr. Basit, in the amount of $18,000 and to Mr. Nicholas Stoll, in the amount of $9,000.

Also, Mr. Basit was granted 37,500,000 options at September 30, 2017, and 500,000,000 options at September 30, 2018.  During the nine months ended September 30 2018 the Company granted Dr. Kevin Schewe, Dr. Carl Kukkonen, Mr. Nick Stoll and Ms. Angelina Galiteva 350,000,000, 150,000,000, 100,000,000 and 10,000,000 options, respectively.  See Note 4 for valuations of the stock options.

We have a loan agreement with CEO Dr. Kevin Schewe, Director Haris Basit and CTO Carl Kukkonen which is described in Note 6.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Leases

We currently have no long term office lease. We terminated the lease on land in San Diego County, California on August 31, 2017, where we grew Giant King Grass. Rent and utility expense charged to operations for the three months ended September 30, 2018 and 2017, was $0 and $4,000, respectively.  Rent and utility expense charged to operations for the nine months ended September 30, 2018 and 2017 was $0 and $9,000, 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. 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, evaluation and operations of GKG test plots. Deferred revenue represents customer payments received which are related to future performance. Generally, for collaborative agreements establishing test plots, we recognize 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. During the three months ended September 30, 2018 and 2017, we received $0 and $0 payments under these collaborative agreements. During the nine months ended September 30, 2018 and 2017 we received $20,000 and $0, respectively, in payments under these collaborative agreements.  We recognized revenue from these collaborative agreements of $13,846 and $0 for the nine months ended September 30, 2018 and 2017.

Global Supply, License, and Commercialization Agreement

Executed on April 4, 2016 and effective as of March 28, 2016, the Company, VGE and Guangzhou Inter-Pacific Arts Corp., a Chinese wholly-owned foreign enterprise registered in Guangdong province ("IPA") owned by VGE, entered into the Global Supply, License, and Commercialization Agreement (the "New Agreement").

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Prior to the New Agreement, IPA and VGE had entered into a certain Supply and Commercialization Agreement dated September 30, 2012 regarding a license and supp ly arrangement between IPA and VGE regarding Giant King Grass ("IPA-VGE Agreement"). In turn, VGE and the Company also entered into a certain Supply and Commercialization Agreement dated September 30, 2012 regarding a license and supply arrangement between VGE and the Company regarding Giant King Grass ("VGE-VIASPACE Agreement").

Under the New Agreement, VGE and the Company terminated the VGE-VIASPACE Agreement and IPA directly granted the Company an exclusive, perpetual license to commercialize its intellectual property rights to three (3) types of high yield, non-genetically modified grasses ("Three GK Grasses") throughout the world except Cambodia, People’s Republic of China, Taiwan, Thailand, Myanmar, Malaysia, Laos, Vietnam and Singapore ("VIASPACE Territory"). It and VGE agreed to subordinate the terms of the IPA-VGE Agreement to the terms of the New Agreement. IPA also granted the right to use and market the name "Giant King Grass" and other related names.

The Company would owe royalty payments on the Net Sales of the Three GK Grasses. This license would be sublicenseable in the VIASPACE Territory. IPA held all rights of ownership to the Three GK Grasses. The Company would own any grasses resulting from any modifications or improvements to the Three GK Grasses. IPA would use commercially reasonable efforts to maintain its intellectual property rights. The Company would use commercially reasonable efforts to commercialize the Three GK Grasses throughout the VIASPACE Territory.

Employment Agreements

On July 25, 2017, the Company announced that effective July 31, 2017, Haris Basit resigned as CEO of the Company to move to a position leading a Silicon Valley based technology company. Mr. Basit became Vice-Chairman of the Company’s Board of Directors and thus continues to be involved in the overall strategic direction of the Company. During this transition of leadership, Dr. Kevin Schewe, who is the largest shareholder of the Company and Board Chairman, became the acting CEO.

Litigation

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