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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
or
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-110680
VIASPACE INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 76-0742386 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
171 North Altadena Drive, Suite 101, Pasadena, CA 91107
(Address of principal executive offices)
(Address of principal executive offices)
(626) 768-3360
(Issuer’s telephone number)
(Issuer’s telephone number)
2400 Lincoln Ave., Altadena, CA 91001
(Former address if changed since last report)
(Former address if changed since last report)
Check whether the issuer (1) 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days YESþ NOo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:291,649,286 Shares of $0.001 par value Common Stock issued and outstanding as of May 11, 2006.
Transitional Small Business Disclosure Format (Check one): YESo NOþ
VIASPACE INC.
INDEX
Page | ||||||||
Part I. Financial Information: | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
21 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
35 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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ITEM 1. FINANCIAL STATEMENTS
VIASPACE INC.
CONSOLIDATED BALANCE SHEETS
March 31, | ||||||||
2006 | December 31, | |||||||
(Unaudited) | 2005 | |||||||
ASSETS | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 3,261,000 | $ | 2,130,000 | ||||
Accounts receivable, net of allowance for doubtful accounts of zero | 5,000 | 71,000 | ||||||
Prepaid expenses and other assets | 64,000 | 53,000 | ||||||
TOTAL CURRENT ASSETS | 3,330,000 | 2,254,000 | ||||||
FIXED ASSETS: | ||||||||
Fixed assets, net of accumulated depreciation of $70,000 and $67,000 in 2006 and 2005, respectively | 47,000 | 21,000 | ||||||
OTHER ASSETS | 46,000 | 40,000 | ||||||
TOTAL ASSETS | $ | 3,423,000 | $ | 2,315,000 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 299,000 | $ | 186,000 | ||||
Accrued expenses | 321,000 | 297,000 | ||||||
Unearned revenue | 100,000 | 100,000 | ||||||
Current portion of long-term debt | 28,000 | 27,000 | ||||||
TOTAL CURRENT LIABILITIES | 748,000 | 610,000 | ||||||
LONG-TERM DEBT, net of current portion | 93,000 | 100,000 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: | ||||||||
Preferred Shareholder Minority Interest | 500,000 | 500,000 | ||||||
Common Shareholder Minority Interest | 42,000 | 51,000 | ||||||
542,000 | 551,000 | |||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized, zero shares issued and outstanding | — | — | ||||||
Common stock, $0.001 par value, 400,000,000 shares authorized, 291,649,286 and 284,506,430 issued and outstanding in 2006 and 2005, respectively | 292,000 | 285,000 | ||||||
Additional paid in capital | 4,571,000 | 2,200,000 | ||||||
Accumulated other comprehensive loss | (5,000 | ) | — | |||||
Accumulated deficit | (2,818,000 | ) | (1,431,000 | ) | ||||
Total stockholders’ equity | 2,040,000 | 1,054,000 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,423,000 | $ | 2,315,000 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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VIASPACE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
REVENUES | ||||||||
Government contracts | $ | 92,000 | $ | 35,000 | ||||
Other contracts | 21,000 | 12,000 | ||||||
Total revenues | 113,000 | 47,000 | ||||||
COST OF REVENUES | 105,000 | 45,000 | ||||||
GROSS PROFIT | 8,000 | 2,000 | ||||||
OPERATING EXPENSES | ||||||||
Research and development | 182,000 | 45,000 | ||||||
Selling, general and administrative expenses | 1,241,000 | 226,000 | ||||||
Total operating expenses | 1,423,000 | 271,000 | ||||||
LOSS FROM OPERATIONS | (1,415,000 | ) | (269,000 | ) | ||||
Interest income and other, net | 19,000 | 17,000 | ||||||
LOSS BEFORE MINORITY INTEREST | (1,396,000 | ) | (252,000 | ) | ||||
Minority interest in consolidated subsidiaries | 9,000 | 39,000 | ||||||
NET LOSS | $ | (1,387,000 | ) | $ | (213,000 | ) | ||
NET LOSS PER SHARE OF COMMON STOCK—Basic and diluted | $ | * | $ | * | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING—Basic and diluted | 285,022,296 | 172,071,256 | ||||||
* | Less than $0.01 per common share. |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Unaudited)
NET LOSS | $ | (1,387,000 | ) | $ | — | |||
Other Comprehensive Loss: | ||||||||
Unrealized holding loss on securities | (5,000 | ) | — | |||||
COMPREHENSIVE LOSS | $ | (1,392,000 | ) | $ | — | |||
The accompanying notes are an integral part of the consolidated financial statements.
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VIASPACE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock | Accumulated | |||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Paid in | Comprehensive | Accumulated | ||||||||||||||||||||||
Shares | Amount | Capital | Loss | Deficit | Total | |||||||||||||||||||
BALANCE, DECEMBER 31, 2004 | 152,953,000 | $ | 153,000 | $ | 116,000 | $ | — | $ | 880,000 | $ | 1,149,000 | |||||||||||||
Investment by SNK Capital Trust | 10,800,000 | 11,000 | 989,000 | 1,000,000 | ||||||||||||||||||||
Shares issued for acquisition of Arroyo Sciences, Inc. | 60,843,000 | 61,000 | (61,000 | ) | — | |||||||||||||||||||
Membership interest to Caltech | 2,204,000 | 2,000 | (2,000 | ) | — | |||||||||||||||||||
Pre-existing post-split shares of Global-Wide Publication Ltd. | 54,000,000 | 54,000 | (118,000 | ) | (64,000 | ) | ||||||||||||||||||
BALANCE, JUNE 22, 2005 — Reverse Merger | 280,800,000 | $ | 281,000 | $ | 924,000 | $ | — | $ | 880,000 | $ | 2,085,000 | |||||||||||||
Exercise of options by SNK Capital Trust | 3,571,000 | 4,000 | 996,000 | 1,000,000 | ||||||||||||||||||||
Common stock issued in exchange for common shares in subsidiaries | 135,000 | — | ||||||||||||||||||||||
Stock compensation expense related to warrants | 247,000 | 247,000 | ||||||||||||||||||||||
Stock compensation expense related to stock options | 33,000 | 33,000 | ||||||||||||||||||||||
Net loss | (2,311,000 | ) | (2,311,000 | ) | ||||||||||||||||||||
BALANCE, DECEMBER 31, 2005 | 284,506,000 | $ | 285,000 | $ | 2,200,000 | $ | — | $ | (1,431,000 | ) | $ | 1,054,000 | ||||||||||||
Net loss | (1,387,000 | ) | (1,387,000 | ) | ||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||
Unrealized holding loss on securities | (5,000 | ) | (5,000 | ) | ||||||||||||||||||||
Comprehensive loss | (1,392,000 | ) | ||||||||||||||||||||||
Exercise of options by SNK Capital Trust | 7,143,000 | 7,000 | 1,993,000 | 2,000,000 | ||||||||||||||||||||
Stock compensation expense related to warrants | 162,000 | 162,000 | ||||||||||||||||||||||
Stock compensation expense related to stock options | 216,000 | 216,000 | ||||||||||||||||||||||
BALANCE, MARCH 31, 2006 | 291,649,000 | $ | 292,000 | $ | 4,571,000 | $ | (5,000 | ) | $ | (2,818,000 | ) | $ | 2,040,000 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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VIASPACE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,387,000 | ) | $ | (213,000 | ) | ||
Depreciation and amortization | 4,000 | 2,000 | ||||||
Stock compensation expense | 378,000 | — | ||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Accounts receivable | 66,000 | 148,000 | ||||||
Prepaid expenses | (11,000 | ) | (2,000 | ) | ||||
Other assets | (12,000 | ) | (9,000 | ) | ||||
Accounts payable | 113,000 | (77,000 | ) | |||||
Unearned revenue | — | (12,000 | ) | |||||
Accrued expenses and other | 24,000 | 4,000 | ||||||
Related party payable | — | (12,000 | ) | |||||
Minority interest | (9,000 | ) | (41,000 | ) | ||||
Net cash used in operating activities | (834,000 | ) | (212,000 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Additions to fixed assets | (29,000 | ) | (2,000 | ) | ||||
Purchase of Arroyo Sciences, Inc., net of cash and cash equivalents | — | 148,000 | ||||||
Net cash provided by (used in) investing activities | (29,000 | ) | 146,000 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Exercise of stock options by SNK Capital Trust | 2,000,000 | — | ||||||
Investment by SNK Capital Trust | — | 1,000,000 | ||||||
Payments on long-term debt | (6,000 | ) | (4,000 | ) | ||||
Net cash provided by financing activities | 1,994,000 | 996,000 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 1,131,000 | 930,000 | ||||||
CASH AND CASH EQUIVALENTS, Beginning of period | 2,130,000 | 1,933,000 | ||||||
CASH AND CASH EQUIVALENTS, End of period | $ | 3,261,000 | $ | 2,863,000 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||
Acquisition of Arroyo Sciences, Inc. | ||||||||
Cash purchase price | $ | — | ||||||
Working capital acquired, net of cash and cash equivalents of $118,758 | (98,000 | ) | ||||||
Long-term loan assumed | (50,000 | ) | ||||||
$ | (148,000 | ) | ||||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 3,000 | $ | 2,000 | ||||
Income taxes | $ | — | $ | — |
The accompanying notes are an integral part of the consolidated financial statements.
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VIASPACE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background and Merger
VIASPACE Inc. (the “Company” or “VIASPACE”), formerly known as Global-Wide Publication Ltd., (“GW”), was incorporated in the state of Nevada on July 14, 2003
Pursuant to an Agreement dated August 29, 2003, on September 30, 2003, the Company acquired all of the issued and outstanding shares of Marco Polo World News Inc. (“MPW”), a British Columbia, Canada corporation that produces, publishes and distributes a weekly ethnic language newspaper called I1 Marco Polo Italian Weekly, in consideration of 2,100,000 restricted shares of its common stock issued to MPW’s sole shareholder, Rino Vultaggio, who became a director and officer of GW. As a result of the transaction, MPW became a wholly owned subsidiary of the Company and, as of the date of completion of the acquisition agreement, the financial operations of the two companies were merged.
Effective June 22, 2005, the Company acquired ViaSpace Technologies LLC (“ViaSpace LLC”) via a reverse merger of ViaSpace LLC with and into the Company (the “Merger”). 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 solve today’s complex problems, VIASPACE benefits from important patent and software licenses from California Institute of Technology (“Caltech”), which manages NASA’s Jet Propulsion Laboratory, and from relationships with research laboratories, universities, and other organizations within the advanced technology community.
Through its ownership in three companies, Direct Methanol Fuel Cell Corporation (“DMFCC”), Arroyo Sciences, Inc. (“Arroyo”), and Ionfinity LLC (“Ionfinity”), the Company works to transform proven space and defense technologies from NASA and the U.S. Department of Defense into hardware and software solutions. VIASPACE develops these technologies into hardware and software products that we believe fulfill high-growth market needs and solve today’s complex problems. The Company has expertise in energy/fuel cells, microelectronics, sensors, homeland security and public safety, information and computational technology. The Company also has ownership in eCARmerce Inc. (“eCARmerce”), a company that holds patents in the areas of interactive radio technology and Concentric Water Technology LLC (“Concentric Water”), which is exploring water technologies that could solve the technical and cost limitations of traditional water purification methods.
Pursuant to the Merger:
• | GW, as the surviving entity, changed its name to VIASPACE Inc.; | ||
• | The Company 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 of the Company’s common stock were held by the pre-existing GW shareholders as of the date of the Merger; | ||
• | The authorized capital of the Company became 400,000,000 shares of common stock ($0.001 par value) and 5,000,000 shares of preferred stock ($0.001 par value). |
On May 19, 2005, the Company entered into a Share Purchase Agreement with Robert Hoegler, a former director and officer of the Company, pursuant to which, upon the closing of the Merger, the Company purchased 2,400,000 shares (prior to the 6 for 1 forward stock split and the 5 for 1 forward stock split) of the Company’s common stock for $24,000.
In addition, on May 19, 2005, the Company entered into an Acquisition Agreement with Rino Vultaggio, a former director and officer of the Company, pursuant to which, upon the closing of the Merger, the Company sold 100% of its interest in MPW in exchange for
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2,100,000 shares of Company Common Stock (prior to the 6 for 1 forward stock split and the 5 for 1 forward stock split). Thus, as of June 22, 2005, the Company no longer had any ongoing operations related to MPW, or any newspaper publication business.
Basis of Presentation— The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for financial information and with the instructions to Form 10-QSB of Regulation S-B. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated on consolidation. Certain reclassifications have been made to the March 31, 2005 consolidated financial statements in order to conform to the March 31, 2006 consolidated financial statement presentation.
Fiscal Year End —The Company’s fiscal year ends December 31.
Principles of Consolidation— The Company is generally a founding shareholder of its affiliated companies, which are accounted for under the consolidation method. Affiliated companies, in which the Company owns, directly or indirectly a controlling voting interest, are accounted for under the consolidation method of accounting including DMFCC, Arroyo, Ionfinity and Concentric Water. Under this method, an affiliated company’s results of operations are reflected within the Company’s consolidated statement of operations. Transactions between the Company and its consolidated affiliated companies are eliminated in consolidation. The Company has adopted FASB 141, Statement of Accounting Standards No 141, “Business Combinations”, which requires use of the purchase method for all business combinations initiated after June 30, 2001.
Minority Interest in Subsidiaries—Minority interest in consolidated subsidiaries represents the minority stockholders’ proportionate share of equity of DMFCC, Ionfinity and Arroyo. The Company’s controlling interest requires that these companies’ operations be included in the consolidated financial statements. The percentage of Ionfinity, DMFCC, and Arroyo 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.
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.
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.
Impairment of Long-lived Assets— The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may no longer be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. For purposes of estimating future cash flows from impaired assets, the Company groups assets at the lowest level from which there is identifiable cash flows that are largely independent of the cash flow of other groups of assets. There have been no impairment charges recorded by the Company.
Fair Value of Financial Instruments— 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.
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.
Marketable Securities—The Company accounts for marketable securities in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. 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, be reported as an item of other comprehensive income. At March 31, 2006, all of the Company’s marketable securities are available for sale.
Intangible Assets—The Company’s intangible assets consist of (1) a license to a patent that is being amortized over twenty years and (2) software application code that is being amortized over three years. All intangible assets are subject to impairment tests on an
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annual or periodic basis. Note 4 describes the impact of accounting for the adoption of SFAS No. 142, “Goodwill and Intangible Assets”. 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.
Income Taxes— The Company records income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” The standard requires, among other provisions, an asset and liability approach to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Revenue Recognition—The Company recognizes revenue on government contracts when the particular milestone is met and delivered to the customer and when the Company has received acceptance notification by the government program officer. Product sales revenue are recognized upon shipment, as titles passes, FOB shipping point. Management fees are recognized as received for services to third party entities. Revenue collected in advance of product shipment or formal acceptance by the customer is reflected as deferred revenue.
Stock Based Compensation—VIASPACE and DMFCC have stock-based compensation plans. Effective with VIASPACE and DMFCC’s current 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.
For fiscal years prior to January 1, 2006, the Company accounted for stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. VIASPACE and DFMCC had adopted the disclosure provisions of SFAS. No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” an amendment of SFAS No. 123. The following table illustrates the effect on net loss and loss per share if VIASPACE and DMFCC had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended March 31, 2005:
March 31, | ||||
2005 | ||||
Net loss applicable to common shares, as reported | $ | (213,000 | ) | |
Add: Stock-based employee compensation included in reported net loss | — | |||
Less: Total stock-based employee compensation expense determined under Black-Scholes option pricing model, net of tax effects | (10,000 | ) | ||
Pro forma net loss | $ | (223,000 | ) | |
Net loss per share — as reported: basic and diluted | $ | * | ||
Net loss per share — pro forma: basic and diluted | $ | * | ||
* | Less than $0.01 |
Net Income (Loss) Per Share—The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” and Securities and Exchange Commission Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS 128 and SAB 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.
Concentration of Credit Risk—The Company’s financial instruments that are exposed to concentration of credit 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.
Research and Development— The Company charges research and development expenses to operations as incurred.
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NOTE 2 — FIXED ASSETS
Fixed assets are comprised of the following at March 31, 2006 and December 31, 2005:
March 31, | ||||||||
2006 | December 31, | |||||||
(Unaudited) | 2005 | |||||||
Computer equipment and software | $ | 84,000 | $ | 66,000 | ||||
Lab equipment | 3,000 | — | ||||||
Furniture and fixtures | 25,000 | 19,000 | ||||||
Leasehold improvements | 5,000 | 3,000 | ||||||
Total property and equipment | 117,000 | 88,000 | ||||||
Less: Accumulated depreciation | 70,000 | 67,000 | ||||||
Fixed assets, net | $ | 47,000 | $ | 21,000 | ||||
Depreciation expense was $3,000 and $2,000 for the three months ended March 31, 2006 and 2005, respectively.
NOTE 3 — MARKETABLE SECURITIES
As of March 31, 2006, the Company owns 203,741 shares in QWIP. The fair market value of these shares was $19,000 at March 31, 2006 and $24,000 at December 31, 2005. In addition to these shares, the Company holds 3,936.38218 shares in QWIP Technologies that are redeemable into 1,777,206 shares of QWIP. The Company has not yet redeemed these shares. In addition, the Company holds 4,512.52168 shares in QWIP Technologies that are being held in escrow by QWIP subject to certain time restrictions. When the escrow restrictions lapse, these shares are redeemable and convertible into 2,037,323 shares of QWIP. The total shares owned in QWIP by the Company including the redeemable shares and those subject to time restrictions releases total 4,018,270 shares. Of the total shares of QWIP that the Company has rights to, California Institute of Technology is entitled to receive 220,966 QWIP shares as part of a prior agreement. This would result in net shares owned by the Company of 3,797,303 shares. As of March 31, 2006, the Company would hold approximately 37% of the total outstanding equity of QWIP.
In addition, the Company also holds 50 escrowed shares of QWIP Series A Preferred Stock that can be released from escrow on the basis of one share for every $10,000 of positive cash flow from operations generated by QWIP Technologies. As of March 28, 2006, no escrowed shares have been released. The escrow features lapse June 1, 2006 at which time these shares would be forfeited. Upon any voluntary or involuntary liquidation, dissolution or winding-up of QWIP, holders of Series A Preferred Stock are entitled to receive an amount equal to $2,551.124 per share for each share of Series A Preferred Stock held.
NOTE 4 — INTANGIBLE ASSETS
Intangible asset balances are comprised of the following at March 31, 2006 and December 31, 2005:
March 31, | ||||||||
2006 | December 31, | |||||||
(Unaudited) | 2005 | |||||||
Amortized intangible assets, gross: | ||||||||
License to patent | $ | 10,000 | $ | 10,000 | ||||
Software Code | 10,000 | 10,000 | ||||||
Total intangible assets, gross | 20,000 | 20,000 | ||||||
Less: Accumulated amortization | 5,000 | 4,000 | ||||||
Total intangible assets, net | $ | 15,000 | $ | 16,000 | ||||
Total amortization expense for intangible assets was $1,000 and zero for the three months ended March 31, 2006 and 2005, respectively.
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The annual amortization of intangible assets for each of the five fiscal years subsequent to December 31, 2005 and thereafter are as follows:
License to | Software | |||||||||||
Year | Patent | Code | Total | |||||||||
2006 | $ | 1,000 | $ | 3,000 | $ | 4,000 | ||||||
2007 | 1,000 | 4,000 | 5,000 | |||||||||
2008 | 1,000 | — | 1,000 | |||||||||
2009 | 1,000 | — | 1,000 | |||||||||
2010 | 1,000 | — | 1,000 | |||||||||
Thereafter | 4,000 | — | 4,000 | |||||||||
Total | $ | 9,000 | $ | 7,000 | $ | 16,000 | ||||||
NOTE 5 — OWNERSHIP INTEREST IN AFFILIATED COMPANIES
Ionfinity.As of March 31, 2006, the Company owned 46.3% of the outstanding membership interests of Ionfinity. The Company has two seats on Ionfinity’s board of managers out of four 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 Ionfinity’s two 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 Company’s Consolidated Financial Statements.
DMFCC.On January 19, 2006, the Company exercised an existing option it had with Caltech and the University of Southern California (“USC”) whereby the Company issued to Caltech and USC a total of 2,112,648 common shares in DMFCC in exchange for approximately 50 issued and 50 pending fuel cell technology patents. After the issuance of these shares, the Company owned 72% of the outstanding shares of voting stock of DMFCC at March 31, 2006. The Company has an additional option with Caltech with respect to additional fuel cell technology patents. This option provides for the issuance of 150,000 common shares to Caltech in DMFCC upon exercise of the option and execution of a license agreement with respect to these patents. Upon the exercise of this patent option, and accounting for the entire 2 million share common stock option pool in DMFCC as discussed in Note 10, the Company’s ownership of the outstanding shares of voting stock of DMFCC would be reduced to 64%.
Other Affiliated Companies.As of March 31, 2006, the Company owned 100% of the voting stock of Arroyo. As of March 31, 2006, the Company owned 100% of the membership interests of Concentric Water. As of March 31, 2006, the Company owned 73.9% of the capital stock of eCARmerce.
As of March 31, 2006, the Company owns 486,135 common shares of ViaLogy Corp. (“ViaLogy”), a company originally formed by ViaSpace LLC. The Company currently owns approximately 1.2% of the total outstanding equity of ViaLogy on a fully diluted basis. In addition, a former director of the Company owns approximately 15% of the outstanding equity of ViaLogy, and the CEO and Vice President of the Company own a combined approximately 2.6% of the outstanding equity of ViaLogy. The Company does not have any recorded basis on these shares included in the Consolidated Balance Sheet.
NOTE 6—LONG-TERM DEBT
Long-term debt is comprised of the following at March 31, 2006 and December 31, 2005:
March 31, | ||||||||
2006 | December 31, | |||||||
(Unaudited) | 2005 | |||||||
Community Development Commission of the County of Los Angeles, non-secured, with interest at 5% due 7/1/2009 | $ | 43,000 | $ | 45,000 | ||||
Community Development Commission of the County of Los Angeles, non-secured, with interest at 5% due 9/1/2009 | 78,000 | 82,000 | ||||||
Total Long-term Debt | 121,000 | 127,000 | ||||||
Less Current Portion | 28,000 | 27,000 | ||||||
Net Long-term Debt | $ | 93,000 | $ | 100,000 | ||||
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The monthly payments on these notes including interest are $2,762 effective August 1, 2005.
NOTE 7 — 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.
Ionfinity has consulting agreements with two minority owners and directors of Ionfinity to perform work on government contracts with the United States Navy and Air Force. One of these minority owners has a 47.9% membership interest in Ionfinity. As of March 31, 2006, $18,000 is included in accounts payable related to amounts owed to these individuals but not paid. During 2006, $20,000 has been billed by these two minority owners to Ionfinity during 2006 for consulting work on these 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 and Dr. Sandeep Gulati, a former director of the Company, for $20,000 from a 3rd party that handled a general assignment for the benefit of the creditors of ViaChange.com, Inc., a former majority-owned subsidiary. Dr. Kukkonen and Dr. Gulati subsequently sold this intellectual property to Arroyo for $20,000 and the Company has recorded a $20,000 payable included in accrued expenses ($10,000 each to Dr. Kukkonen and Dr. Gulati). This amount is expected to be paid in 2006.
Arroyo has included in accounts payable an amount of $7,500 due to ViaLogy for services performed by ViaLogy for Arroyo. This amount is expected to be paid in 2006. The Company owns 1.2% of the total outstanding equity of ViaLogy on a fully diluted basis. In addition, a former director of the Company owns approximately 15% of the outstanding equity of ViaLogy, and Dr. Carl Kukkonen, CEO of the Company and Mr. Amjad Abdallat, Vice President/COO of the Company, own a combined approximately 2.6% of the outstanding equity of ViaLogy.
In October of 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. Kukkonen’s employment without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500.
At March 31, 2006, the Company has included in accrued expenses a payable of $173,105 representing accrued salary and partner draw that was due to Dr. Kukkonen and Mr. Abdallat by ViaSpace LLC prior to its merger with the Company. These amounts were accrued by ViaSpace LLC prior to December 31, 2002. This amount remains on the Consolidated Balance Sheet as a liability of the Company.
NOTE 8 — INCOME TAX
The income tax (benefit) expense for the period ended March 31, 2006 and 2005 consist of the following:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Current | $ | 4,000 | $ | 5,000 | ||||
Deferred | — | — | ||||||
Income tax provision | $ | 4,000 | $ | 5,000 | ||||
Income tax (benefit) expense computed at the statutory federal income tax rate of 34% and a State income tax rate of 8.84%. The provision for income tax (benefit) expense in the financial statements for the period ended March 31, 2006 and 2005 are as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Provision computed at the statutory rate | $ | (471,000 | ) | $ | (72,000 | ) | ||
Permanent differences | 1,000 | 1,000 | ||||||
State tax (net of Federal benefit) | (78,000 | ) | (9,000 | ) | ||||
Other | — | (17,000 | ) | |||||
Change in valuation allowance | 552,000 | 102,000 | ||||||
Income tax provision | $ | 4,000 | $ | 5,000 | ||||
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The following are the components of the Company’s deferred tax assets and (liabilities) at March 31, 2006 and 2005:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Deferred Tax Assets: | ||||||||
Net operating loss carryforwards | $ | 1,253,000 | $ | 81,000 | ||||
Deferred revenue | 43,000 | 36,000 | ||||||
Stock compensation expense | 282,000 | — | ||||||
Accrual to cash adjustment | 8,000 | — | ||||||
Amortization expense | (16,000 | ) | (9,000 | ) | ||||
Current year state tax | 3,000 | 2,000 | ||||||
Less: Valuation Allowance | (1,463,000 | ) | (102,000 | ) | ||||
Total deferred tax assets | 110,000 | 8,000 | ||||||
Deferred Tax Liability: | ||||||||
State taxes | (110,000 | ) | (8,000 | ) | ||||
Total deferred tax liability | (110,000 | ) | (8,000 | ) | ||||
Net deferred tax assets | $ | — | $ | — | ||||
At March 31, 2006, the Company has a net operating loss carryforward of approximately $2,900,000 for federal and state income tax purposes, respectively. These net operating loss carryforwards begin to expire in 2015 through 2025. The net operating losses can be carried forward to offset future taxable income, if any. Realization of the above carryforwards may be subject to utilization limitations, which may inhibit the Company’s ability to use these carryforwards in the future.
NOTE 9 — STOCK OPTIONS AND WARRANTS
SNK Capital Trust Option
On February 25, 2005, the Company granted SNK Capital Trust (“SNK”) an option to purchase up to 27,000,000 shares of common stock of the Company for an aggregate purchase price of $7,500,000. SNK had previously purchased 39,690,000 shares of common stock of the Company for $1,500,000 in December 2004, and 10,800,000 shares of common stock of the Company for $1,000,000 in February 2005.
In May 2005, the Company agreed to increase the February 2005 option to allow SNK an option to purchase up to 36,000,000 shares of common stock of the Company for an aggregate purchase price of $10,000,000.
On June 15, 2005, the Company, and SNK entered into a stock option agreement (“Option Agreement”) to supercede and replace the previous option between the Company and SNK. This agreement granted SNK an option (the “Option”) to purchase up to 36,000,000 shares of common stock of the Company for $0.28 per share. The option term was based on four milestones and was set to expire no later than February 15, 2007. SNK timely met the first two milestones of the Option Agreement by exercising the Option Agreement to purchase $1,000,000 of Company common stock prior to August 15, 2005. On June 28, 2005, the Company received $500,000 from SNK for the exercise of a portion of the Option and 1,785,715 shares of common stock were issued to SNK on July 14, 2005. On August 31, 2005, the Company received an additional $500,000 from SNK for the exercise of an additional portion of the Option and 1,785,715 shares of common stock were issued to SNK. The third milestone was required to occur on or before February 15, 2006, and required that an additional $1,000,000 of Company common stock be purchased prior to that date. SNK remitted $999,980 to the Company on February 21, 2006, following the expiration period of the option.
On March 21, 2006, a majority of the shareholders and the Board of Directors of the Company voted to amend the Option Agreement (“Amended Option Agreement”) with SNK. The Amended Option Agreement reduced the total number of shares of common stock that could be purchased by SNK from 36,000,000 to 10,714,286 and changed the option expiration term from February 15, 2007 to March 31, 2006. The exercise price of the option remained the same. The Amended Option Agreement allowed the Company to accept the $999,980 remitted to the Company on February 21, 2006; and 3,571,357 shares of common stock were issued to SNK on that date. On March 30, 2006, the Company received an additional $1,000,020 from SNK to exercise the remaining 3,571,499 shares of common stock subject to the Option. As of March 30, 2006, the Option has been fully exercised. SNK holds 61,204,286 common shares at March 31, 2006, and on April 10, 2006 agreed to a lock-up of its shares until April 9, 2011.
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The Option described above was originally granted to SNK subject to certain terms and conditions. Upon the completion of the Merger on June 22, 2005 as described in Note 1, out of a total of 50,490,000 shares of common stock to be issued to SNK in connection with the Merger, SNK received 17,990,000 shares of common stock outright. The balance of 32,500,000 shares (the “Held Shares”) of common stock registered to SNK at such time were held in trust by the Company, as part of the consideration for the granting of the Option. The Held Shares were to be released either to SNK as exercise thresholds were met by SNK, or to certain prior members of ViaSpace LLC if the Option expired without SNK meeting the exercise thresholds. On March 21, 2006, a majority of the shareholders and the Board of Directors of the Company voted to enter into a Stock Settlement Agreement with SNK. The Stock Settlement Agreement removed the conditions related to the Held Shares and all of the Held Shares were released to SNK.
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 Company’s common stock. The Plan provides for the reservation for issuance of 28,000,000 shares of the Company’s common stock. 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 Company’s common stock. The 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 Company’s 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 Company’s Board of Directors 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 Plans cannot be greater than 10 years. Options to employees vest generally over four years. Options issued to directors generally vest over one year. An aggregate of 26,195,000 shares were available for future grant at March 31, 2006. During the three months period ended March 31, 2006, the Company granted 320,000 stock options to employees and consultants to purchase common shares with exercise prices ranging from $1.42 to $2.03.
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 Company’s 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 Opinion No. 25 as allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation expense had been recognized in our Consolidated Statements of Operations for awards to employees and directors because the exercise price of stock option grants equaled the fair market value of the underlying common stock at the date of grant.
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 7-year constant maturity. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the last 60 days of market prices prior to the grant date. 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 has used a 0% forfeiture rate since no options had been forfeited at March 31, 2006. The fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award. For stock options issued during the three month period ended March 31, 2006, the fair value was estimated at the date of grant using the following range of assumptions:
Risk free interest rate | 4.32% - 4.69% | ||
Dividends | 0% | ||
Volatility factor | 62.91% - 70.99% | ||
Expected life | 6.67 years | ||
Annual forfeiture rate | 0% |
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The following table summarizes activity in the Company’s Plan for the period ended March 31, 2006:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average Exercise | Remaining | Aggregate | ||||||||||||||
Number of | Price Per | Contractual | Intrinsic | |||||||||||||
Shares | Share | Term In Years | Value | |||||||||||||
Outstanding at December 31, 2005 | 1,485,000 | $ | 2.50 | |||||||||||||
Granted | 320,000 | 1.82 | ||||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited | — | — | ||||||||||||||
Outstanding at March 31, 2006 | 1,805,000 | $ | 2.38 | 9.2 | $ | 63,000 | ||||||||||
Exercisable at March 31, 2006 | 91,000 | $ | 2.31 | 7.7 | $ | 8,000 | ||||||||||
A summary of the status of the Company’s nonvested shares as of March 31, 2006, and changes during the period ended March 31, 2006, is presented below:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at December 31, 2005 | 1,485,000 | $ | 2.50 | |||||
Granted | 320,000 | 1.82 | ||||||
Vested | (91,000 | ) | 2.34 | |||||
Forfeited | — | — | ||||||
Nonvested at March 31, 2006 | 1,714,000 | $ | 2.38 | |||||
The Company recorded $216,000 of compensation expense for employee, director and consultant stock options during the three months ended March 31, 2006. At March 31, 2006, there was a total of $2,062,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan. This cost is expected to be recognized over a weighted average period of 9.2 years. The total fair value of shares vested during the three months ended March 31, 2006 was $181,000.
No comparable information is presented for the three month period ended March 31, 2005, as the Company adopted the disclosure requirements for SFAS No. 123(R) using a modified prospective approach effective with periods commencing January 1, 2006, the first day of the Company’s 2006 fiscal year.
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 million shares of DMFCC 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 March 31, 2006, the DMFCC Option Plan has outstanding 1,631,000 option shares and 369,000 unissued option shares. Of these outstanding option shares, 1,155,000 are incentive stock options issued to employees and 476,000 are non-statutory stock options issued to consultants. During the three month period ended March 31, 2006, DMFCC issued zero stock options. If stock options are issued, 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. For stock options issued prior to March 31, 2006, the fair value of each option grant, as calculated by the Black-Scholes method, is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award.
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The following table summarizes activity in the DMFCC Option Plan for the period ended March 31, 2006:
Weighted- | ||||||||||||||
Weighted- | Average | |||||||||||||
Average Exercise | Remaining | Aggregate | ||||||||||||
Number of | Price Per | Contractual | Intrinsic | |||||||||||
Shares | Share | Term In Years | Value | |||||||||||
Outstanding at December 31, 2005 | 1,631,000 | $ .02 | ||||||||||||
Granted | — | — | ||||||||||||
Exercised | — | — | ||||||||||||
Forfeited | — | — | ||||||||||||
Outstanding at March 31, 2006 | 1,631,000 | $ .02 | 8.5 | $127,000 | ||||||||||
Exercisable at March 31, 2006 | 1,368,000 | $ .02 | 8.5 | $113,000 | ||||||||||
A summary of the status of the DMFCC’s nonvested shares as of March 31, 2006, and changes during the period ended March 31, 2006, is presented below:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Nonvested at December 31, 2005 | 290,000 | $ | .05 | |||||
Granted | — | — | ||||||
Vested | (27,000 | ) | .05 | |||||
Forfeited | — | — | ||||||
Nonvested at March 31, 2006 | 263,000 | $ | .05 | |||||
DMFCC recorded less than $1,000 of compensation expense for employee, director and consultant stock options during the three months ended March 31, 2006. At March 31, 2006, there was a total of $2,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan. The cost is expected to be recognized over a weighted average period of 8.5 years. The total fair value of shares vested during the three months ended March 31, 2006 was $3,000.
No comparable information is presented for the three month period ended March 31, 2005, as the Company adopted the disclosure requirements for SFAS No. 123(R) using a modified prospective approach effective with periods commencing January 1, 2006, the first day of DMFCC’s 2006 fiscal year.
Stock Warrants
On August 16, 2005, the Company entered into a two-year Consulting, Confidentiality and Proprietary Rights Agreement (the “Consulting Agreement”) with Synthetic/A/(America) Ltd., a California corporation (“Synthetica”). Pursuant to the Consulting Agreement, Synthetica provides the Company with consulting services and advice relating to capital market goals, strategic business planning, financial controls, regulatory compliance, revenue generation and business development. In connection with this Consulting Agreement, the Company issued three warrants to Synthetica to purchase shares of the Company’s common stock.
The first warrant issued to Synthetica (“Warrant No. 1”) gives Synthetica the right to purchase 250,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 1 was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets of the Company; (iii) August 16, 2007, provided that at least 25% of the outstanding capital stock of the Company has not been held by institutional investors (at any single moment) on or prior to such time; or (iv) August 16, 2009.
The second warrant issued to Synthetica (“Warrant No. 2”) gives Synthetica the right to purchase 500,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 2 was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets
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of the Company; (iii) August 16, 2007, provided that the Company has not completed a secondary offering equal to or in excess of $200,000,000; or (iv) August 16, 2009.
The third warrant issued to Synthetica (“Warrant No. 3”) gives Synthetica the right to purchase 250,000 shares of Common Stock at an exercise price of $4.00 per share. Warrant No. 3. was fully vested upon issuance and expires upon the earliest to occur of the following: (i) the date of termination of the Consulting Agreement by the Company due to a material breach of the Consulting Agreement by Synthetica; (ii) the closing of a merger or consolidation of the Company pursuant to which the stockholders of the Company hold less than 50% of the voting securities of the surviving or acquiring entity, or a sale of all or substantially all the assets of the Company; (iii) August 16, 2007, provided that the Company’s Common Stock has not become publicly traded on NASDAQ on or prior to such time; or (iv) August 16, 2009.
For the three months ended March 31, 2006, the Company recorded stock compensation expense of $162,000 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 Company’s common stock 55.89%, term of 2 years, and an annual rate of dividends of zero.
DMFCC Shares Issued in Connection with License Agreements
DMFCC entered into a technology license agreement with California Institute of Technology (“Caltech”) and University of Southern California (“USC”) on May 21, 2002 and a second technology license agreement with Caltech on January 17, 2003. The licensed technology is composed of patents owned by Caltech and USC. According to the license agreements, upon the raising of equity by DMFCC in excess of $2,000,000, the Company can exercise its rights to designated patents in exchange for shares of DMFCC common stock. As of December 31, 2005, 25,000 shares of DMFCC had been issued to Caltech and USC related to these technology licenses. On January 19, 2006, DMFCC exercised the option rights to a certain group of patents and issued 2,112,648 DMFCC common shares to Caltech and USC. DMFCC still has the option to license a remaining group of patents from Caltech. Upon exercise of this option, 150,000 shares of DMFCC common stock will be issued to Caltech. Upon such exercise, a total of 2,287,648 shares of DMFCC common stock will be held by Caltech and USC, or 11.4% of total outstanding shares of DMFCC on a fully diluted basis.
Note 10 — 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 Arroyo. The 401(k) Plan allows employees to contribute up to Internal Revenue Service limits. The Company does not offer an employer match of contributions at this time.
Note 11 — 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 March 31, 2006, the Company’s Chief Executive Officer, Dr. Carl Kukkonen, was the Company’s Chief Operating Decision Maker (“CODM”) pursuant to SFAS No. 131. The CODM allocates resources to the segments based on their business prospects, product development and engineering, and marketing and strategy.
The Company has three reportable segments that operate in distinct market areas. The Company’s reportable segments are also represented as three separate subsidiaries of the Company: DMFCC, Arroyo and Ionfinity.
(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) Arroyo:Arroyo 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 a development stage company 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.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on income (loss) from operations excluding infrequent and unusual items.
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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 is as follows:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Revenues: | ||||||||
DMFCC | $ | 21,000 | $ | — | ||||
Arroyo | — | — | ||||||
Ionfinity | 92,000 | 47,000 | ||||||
Total Revenue | $ | 113,000 | $ | 47,000 | ||||
Income (Loss) From Operations: | ||||||||
DMFCC | $ | (305,000 | ) | $ | (133,000 | ) | ||
Arroyo | (209,000 | ) | (108,000 | ) | ||||
Ionfinity | (19,000 | ) | (10,000 | ) | ||||
Loss From Operations by Reportable Segments | (533,000 | ) | (251,000 | ) | ||||
Corporate Administrative Costs (including Stock Compensation Expense of $378,000 and zero in 2006 and 2005, respectively | (882,000 | ) | (18,000 | ) | ||||
Loss From Operations | $ | (1,415,000 | ) | $ | (269,000 | ) | ||
Assets: | ||||||||
DMFCC | $ | 776,000 | $ | 264,000 | ||||
Arroyo | 114,000 | 100,000 | ||||||
Ionfinity | 146,000 | 105,000 | ||||||
Corporate | 2,387,000 | 2,657,000 | ||||||
Total Assets | $ | 3,423,000 | $ | 3,126,000 | ||||
Note 12 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
In October of 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. Kukkonen’s employment without cause, the agreement provides for severance payments to Dr. Kukkonen equal to $112,500.
Royalty Commitments
Arroyo has a nonexclusive software license agreement with Caltech for executable code and source code pertaining to Spacecraft Health Inference Engine (“SHINE”) whereby Arroyo 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, 2006; $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 on each year from September 28, 2011 to 2015.
Arroyo 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 Arroyo 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 there after.
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Leases
Until April 30, 2006, the Company leased office and laboratory space on a month-to-month basis. On May 1, 2006, the Company relocated its office and laboratory space to a new location and entered into a five year lease. Future minimum lease payments due under this lease December 31, 2005 are as follows:
Years Ended | ||||
Fiscal Year | December 31, | |||
2006 | $ | 64,000 | ||
2007 | 130,000 | |||
2008 | 134,000 | |||
2009 | 138,000 | |||
2010 | 142,000 | |||
Thereafter | 73,000 | |||
Total minimum lease payments | $ | 681,000 | ||
Rent expense charged to operations for the three months ended March 31, 2006 and 2005 was $8,000 and $6,000, respectively.
Notes Payable
The annual installment of principal and interest on the notes payable included in Note 6 for each of the five fiscal years subsequent to December 31, 2005 and thereafter are as follows:
Fiscal Year | Principal | Interest | Total | |||||||||
2006 | $ | 27,000 | $ | 6,000 | $ | 33,000 | ||||||
2007 | 29,000 | 4,000 | 33,000 | |||||||||
2008 | 30,000 | 3,000 | 33,000 | |||||||||
2009 | 41,000 | 1,000 | 42,000 | |||||||||
2010 | — | — | — | |||||||||
Thereafter | — | — | — | |||||||||
Total | $ | 127,000 | $ | 14,000 | $ | 141,000 | ||||||
Litigation
The Company is not party to any legal proceedings at the present time.
NOTE 13 — 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 March 31, 2006 and 2005 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Stock Options | 1,805,000 | — | ||||||
Warrants | 1,000,000 | — |
The following table sets forth the computation of basic and diluted net loss per share:
Three Months Ended | ||||||||
March 31, | ||||||||
2006 | 2005 | |||||||
Basic and diluted net loss per share: | ||||||||
Numerator: | ||||||||
Net loss attributable to common stock | $ | (1,387,000 | ) | $ | (213,000 | ) | ||
Denominator: | ||||||||
Weighted average shares of common stock outstanding | 285,022,296 | 172,071,256 | ||||||
Net loss per share of common stock, basic and diluted | $ | * | $ | * | ||||
* | Less than $0.01 per common share. |
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Note 14 — FINANCIAL ACCOUNTING DEVELOPMENTS
In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations”. FIN No. 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Fin No. 47 is effective no later than the end of fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year companies). Retrospective application of interim financial information is permitted but is not required. Management does not expect adoption of FIN No. 47 to have a material impact on the Company’s financial statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” an amendment to Accounting Principles Bulletin (APB) Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” though SFAS No. 154 carries forward the guidance in APB No. 20 and SFAS No. 3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors. SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140). SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only
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such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instruments. The Company is currently evaluating the impact of this new Standard.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion contains certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission. The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto that appear elsewhere in this report.
VIASPACE History
VIASPACE Inc. (the “Company” or “VIASPACE”) is the successor organization to ViaSpace Technologies LLC (“ViaSpace LLC”), which was founded in July 1998 with the objective of transforming technologies from NASA and the Department of Defense into commercial products. The Company engaged in a reverse merger with ViaSpace LLC on June 22, 2005. VIASPACE was formerly known as Global-Wide Publication Ltd., (“GW”), which was incorporated in the state of Nevada on July 14, 2003.
Pursuant to an Agreement dated August 29, 2003, on September 30, 2003, the Company 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 2,100,000 restricted shares of its common stock issued to MPW’s sole shareholder, Rino Vultaggio, who became a director and officer of GW. As a result of the transaction, MPW became a wholly owned subsidiary of the Company and, as of the date of completion of the acquisition agreement, the financial operations of the two companies were merged.
On May 19, 2005, the Company entered into an Acquisition Agreement with Rino Vultaggio, pursuant to which, upon the closing of the Merger noted above, the Company sold 100% of its interest in MPW in exchange for 2,100,000 shares of Company Common Stock (prior to a 6 for 1 forward stock split and a 5 for 1 forward stock split). As of June 22, 2005, the Company no longer had any active operations in the newspaper publication business.
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VIASPACE Overview
VIASPACE works to transform proven space and defense technologies from NASA and the Department of Defense into hardware and software solutions. VIASPACE develops these technologies into hardware and software products that we believe will fulfill high-growth market needs and solve today’s complex problems. The Company has expertise in energy/fuel cells, microelectronics, sensors, 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 Defense. VIASPACE plans to leverage this large government research and development investment – made originally for space and defense applications into commercial products. The Company may also pursue future opportunities based on technologies licensed from Caltech and other organizations. The Company’s web site is www.VIASPACE.com.
The Company operates through its ownership in subsidiaries Direct Methanol Fuel Cell Corporation (“DMFCC”), Arroyo Sciences, Inc. (“Arroyo”), and Ionfinity LLC (“Ionfinity”). As of March 31, 2006, the Company holds a 72% ownership interest in DMFCC, a 100% ownership interest in Arroyo, 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 and owns 100% of Concentric Water Technology LLC, an inactive company that plans to explore water technologies that could solve the technical and cost limitations of traditional water purification methods. On January 19, 2006, DMFCC exercised an existing option it had with Caltech and University of Southern California (“USC”) whereby the Company issued to Caltech and USC common shares in DMFCC in exchange for licenses to approximately 50 issued and 50 pending fuel cell technology patents. After the issuance of these shares, the Company’s ownership in DMFCC was reduced from 81.6% to 72%.
VIASPACE Subsidiary—Direct Methanol Fuel Cell Corporation (“DMFCC”)
Direct Methanol Fuel Cell Corporation (“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. Electronic devices based on direct methanol fuel cells may reach the marketplace in 2007. With expertise in fuel cartridge design and safety certification, established cartridge manufacturing partners, and licenses to an extensive suite of fuel cell patents, DMFCC is positioned to advance and benefit from this exciting new technology. DMFCC is co-located with VIASPACE in Altadena, California and also has operations in Tokyo, Japan and Seoul, Korea. VIASPACE holds a 72% ownership in DMFCC. Other shareholders include Caltech, the University of Southern California (“USC”) and Itochu Corporation of Japan. More information on DMFCC can be found on the web sitewww.DMFCC.com.
DMFCC Disposable Cartridge Design and Safety Certification
DMFCC has expertise in fuel cell cartridge design and safety certification. Since 2002, DMFCC has been working with the fuel cell industry, Underwriters Laboratories (UL), CSA International and the International Electrotechnical Commission (“IEC”) to develop international standards for the safety and performance of fuel cells and disposable fuel cartridges. The IEC is the electrical counterpart of the International Standards Organization (“ISO”). The IEC Micro Fuel Cell safety regulations were drafted in 2005 and were published in February 2006. These regulations cover both the fuel cell and fuel cartridges. More detail on these safety regulations are given below in the section on Regulatory Issues. Based on these regulations, the International Civil Aviation Organization (“ICAO”) Dangerous Goods Panel voted to allow methanol fuel cells and fuel cartridges to be carried in the passenger compartment of aircraft. This approval must be ratified by the entire ICAO. Ratification is in process and may be completed by January 2007. Fuel cells using formic acid and butane were also approved at the same time, but hydrogen based fuel cells were not. It was also stipulated that the fuel cartridges should not be refillable by the user. DMFCC disposable fuel cartridges are designed to comply with the challenging international safety and child-resistance requirements. DMFCC is focusing on methanol fuel cartridges, but may produce cartridges for any liquid fuel including formic acid.
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DMFCC Cartridge Manufacturing
DMFCC designs, safety certifies and markets cartridges. DMFCC’s cartridges are manufactured by experienced manufacturing partners that have a track record of supplying critical products to major manufacturers (“OEMs”) of consumer electronics. For example, one of DMFCC’s manufacturing partners is Elentec Co., Ltd., a publicly traded Korean company that is Samsung’s largest supplier of lithium ion battery packs. Elentec is located in Suwon City, South Korea which is also the home to Samsung. Elentec also provides battery packs to other OEMs. Another DMFCC cartridge manufacturing partner is SMC, Co., Ltd., a Korean company, which supplies lithium battery packs to LG Electronics and other OEMs.
DMFCC Rights to Approximately 56 Issued and 63 Pending Patents Worldwide
The direct liquid hydrocarbon fuel cell was co-invented and developed by the NASA Jet Propulsion Laboratory (“JPL”), which is operated by Caltech, and by USC. Hydrocarbon fuels include methanol, ethanol, formic acid, formaldehyde, dimethoxymethane and others. Methanol is the most common fuel. Caltech and USC have approximately 56 issued and 63 pending patents worldwide on the direct liquid hydrocarbon fuel cell technology. DMFCC has license rights to all of these patents, some patents with the right to sublicense and other patents without the right to sublicense. Caltech and USC are shareholders in DMFCC. DMFCC has licensed approximately 50 issued and 50 pending Caltech patents, and is in the process of finalizing the terms and conditions of an option granted by Caltech to DMFCC on January 17, 2003, and subsequently exercised by DMFCC on August 17, 2005, regarding additional issued and additional pending patents solely owned by Caltech.
The Caltech patent portfolio includes claims directed to the fundamental idea of a direct hydrocarbon (including methanol) fuel cell that uses a polymer electrolyte membrane (“PEM”), construction of the catalysts, anodes, cathodes, and membrane electrode assemblies (“MEAs”), as well as alternative membranes. Other patents address water recovery, methanol sensors and filters, monopolar geometry, and electrolysis of methanol to produce hydrogen. A list of these patents may be obtained by contacting the Company.
DMFCC Partnering to Advance Fuel Cell Adoption
DMFCC intends to work cooperatively with fuel cell manufacturers and OEMs to provide them with the patent protection they need, using DMFCC’s “have made”, “import”, and licensing rights. DMFCC intends to work with OEMs on cartridge supply arrangements which would allow DMFCC to provide innovative and safe fuel cartridges specific to each fuel cell-powered device manufactured by the OEM. DMFCC and its partners plan to manufacture cartridges to an OEM’s specifications, certify that the cartridges meet international safety standards, and distribute them on a global basis. If an OEM also desires to perform any of these functions, DMFCC is willing to work in partnership with the OEM. Rather than requiring a substantial fee and royalties to provide intellectual property protection, DMFCC will encourage the fuel cell manufacturers and OEMs to use a cartridge produced by DMFCC and its cartridge partners. Using this approach, which does not require upfront payment by the OEMs, DMFCC will share the market risk with the OEM and also will provide a valuable service by supplying cartridges to the marketplace. DMFCC will thus have the opportunity to derive revenue from the cartridge business which represents a substantial recurring revenue stream.
DMFCC intends to work cooperatively with all fuel cell and electronics manufacturers worldwide to allow them to bring their fuel cell products to market within a cost effective business model. DMFCC and its partners also plan to work with fuel cell manufacturers and OEMs to develop custom cartridges for their applications, ensure that these cartridges meet exacting technical, safety, and child resistance standards, and are available to consumers at an attractive price. Recognizing that each application may require a cartridge with a different size, shape, or feature, DMFCC intends to work in partnership with OEM customers to rapidly develop and patent custom disposable cartridges for their specific applications. DMFCC can also provide global cartridge distribution.
Background Information on Fuel Cells and Fuel Cartridges
The IEC safety regulations specify that methanol (and other fuels) must be in a safe sealed container which is called the cartridge. The cartridge must not be refillable by the consumer because this may lead to damage to and overuse of the cartridge valve leading to potentially dangerous leaks. Disposable cartridges are consistent with the IEC safety regulations.
Low cost fuel cartridges are analogous to disposable alkaline batteries, but a cartridge containing 50 mL of methanol could power a laptop for five or more hours compared to 10 minutes if an alkaline battery were to be used. When a laptop is plugged into an electrical outlet, no methanol is consumed.
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Direct methanol fuel cells, or DMFCs, are electrochemical devices that convert high energy density fuel (liquid methanol) directly to electricity. They operate silently, at relatively low temperatures and offer much longer operating time than today’s batteries. Unlike a battery, DMFCs do not need to be recharged. They can provide electricity continuously to the consumer electronic devices as long as oxygen and fuel are supplied to the fuel cell. To achieve this, DMFCs can be “hot-swapped” and instantly recharged with replacement methanol cartridges. Furthermore, this convenience eliminates the need for consumers to carry electrical cords or adapters.
The heart of a fuel cell consists of catalysts for the electrochemical reaction and a special piece of plastic that can conduct protons. The technical term for this special plastic is polymer electrolyte membrane or PEM. One PEM used in DMFCs today is Nafion™, produced by DuPont. Other PEMs are produced by companies such as Polyfuel, Inc. and Gore Fuel Cell Technologies. The most common catalysts used are PtRu alloy for the anode and Pt for the cathode.
In the fuel cell, the fuel is not burned, but rather is converted into electricity through an electrochemical process that splits methanol molecules into protons, electrons, and carbon dioxide at the anode and then combines these protons and electrons with oxygen at the cathode to produce water.
Methanol is being pursued as a fuel cell fuel by many companies because as a liquid it is easy to store and transport. Methanol is inexpensive and readily available. It also has high energy density, which means longer operating time.
VIASPACE Subsidiary — Arroyo Sciences, Inc.
Arroyo Sciences Inc. (“Arroyo”), a wholly owned subsidiary of VIASPACE, 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. Arroyo is working on solutions for important and difficult problems, especially in the areas of national and commercial security and asset management. Arroyo’s sensor fusion application platform is expected to allow for the intelligent use of large volumes of real-time sensor data and enables an entirely new generation of applications that up until now were considered to be prohibitively expensive or intractable.
Arroyo License Agreements from Caltech
Arroyo is building upon a cache of intellectual property developed at NASA/JPL and licensed from Caltech, as well as its own internal development efforts. This IP includes a commercialization license to a real-time inference engine (software platform) called SHINE (Spacecraft Health Inference Engine) that was originally developed and used by NASA/JPL for space flight operations. It is intended for systems in which inference speed, portability and reuse is of critical importance. SHINE embodies technology concepts in knowledge representation and data flow mapping that go well beyond traditional expert systems. SHINE can process over 200 million rules per second on desktop class computer processors and may deliver over 100X increase in inference speed over the best comparable commercial product. To our knowledge, SHINE is the only inference engine with an extremely small executable size which enables deployment in embedded systems, microcontrollers or other special purpose hardware devices. SHINE has the potential to help Arroyo deploy sophisticated knowledge bases and computational intelligence in hardware to deliver a new generation of surveillance and homeland and commercial security applications. Examples include embedded applications for on-board system diagnostics of machinery or large complex systems, or real-time policy engines applications running in conjunction with multiple sensors inputs such as surveillance or building management.
Arroyo Applications
Arroyo is also investigating the development of an application platform for a real-time scanning system for isolating individuals such as a suicide bomber wearing or carrying camouflaged explosives. This standoff detection system would leverage advances in high resolution infrared photodetectors and sensor processing, and utilizes Arroyo’s proprietary and patent pending scanning and pixel interpretation technology for complex “feature of interest” detection based on differential emissivity. The feature of interest in this case is a bomb concealed under clothing. Differential emissivity means that the feature of interest has a different infrared signature from human skin which is also under the clothing. Related applications may potentially utilize this technology to detect stolen items or other contraband that is concealed beneath a person’s clothing. The DEEPSCAN™ Standoff Detection System is designed for scenarios susceptible to threats of suicide bombers or human IED transports. In particular, the system may be useful for locations with high-volume human traffic requiring a number of security precautions, including airports, bus stations, subway entrances, stadiums, arenas, and convention centers. These situations have a high volume of human traffic that moves at a quick pace, making current
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screening solutions impractical and cumbersome. Methods such as x-ray examination, millimeter wave radar, mass spectrometry, and neutron spectrometry are only effective when deployed at a close proximity (generally less than five meters) and usually require a significant amount of cooperation by the subject. The detection of concealed explosives or contraband is at a standoff distance of greater than 100 feet or prior to entering a security checkpoint is highly desirable.
Arroyo’s strategy is to partner with leading defense contractors and OEMs in homeland and commercial security space to leverage customers, distribution channels and manufacturing. Arroyo’s business model focuses on those partnerships to generate contract revenue and royalties on products marketed by them. By leveraging the above mentioned core enabling technologies into a reusable sensor fusion platform, Arroyo plans to position itself as a technology leader and generate near-term and long-term revenues by exploiting business opportunities in the homeland and commercial security markets. Arroyo is currently in negotiations to partner with a large defense contractor work on a government sponsored proposal for demonstrating an advanced cargo security container system for trans-global maritime security. Since only approximately 2% of containers are inspected in the U.S. today, Arroyo’s efforts can contribute to overall security by intelligently deciding which containers pose risk and should be inspected.
VIASPACE Subsidiary — Ionfinity LLC
Ionfinity is a development stage company working on a next-generation mass spectrometry (“MS”) technology, which could significantly improve the application of MS for industrial process control and environmental monitoring and could also spawn a new class of detection systems for homeland security. The technology combines two inventions made at JPL—The Soft Ionization Membrane and the Rotating Field Mass Spectrometer. These technologies should enable the system to provide a 10x increase in sensitivity, a 10x increase in mass range and the ability to miniaturize the product to make it portable and low cost. Currently this technology is under development and significant development risks remain. Ionfinity has licensed one patent from Caltech and is an assignee of five patents in this technological field. It also has a cross license for another Caltech patent.
The Ionfinity system is designed to allow high sensitivity and specificity in a portable system – a rolling suitcase in the near term and a shoebox or smaller size in the future. With its projected ruggedness, low power consumption and cost, the system could be deployed in many applications where monitoring of air, water or other substances is required.
Currently, Ionfinity has two development contracts with the United States Navy and United States Air Force which made up approximately 75% of its revenues during the period ended March 31, 2006. During 2006, Ionfinity also recorded revenues from NASA/JPL in the amount of $23,000, or 25% of its revenue, related to a contract to improve a soft ionization membrane (“SIM”) device design. The goal of the Navy contract is the development and demonstration of a miniature and portable instrument to measure weapons of mass destruction and industrial chemicals in water and air. The instrument’s small size may make it suitable for future modification and integration into other Navy systems. The contract expires on July 6, 2006. There exist two additional options totaling $205,651 that could be exercised by the Navy. The goal of the Air Force contract is for Ionfinity with its partners including JPL, to develop and demonstrate an innovative nano-propulsion system that incorporates a machined electrostation ion generator that provides direct and complete ionization of propellant gas, the efficient acceleration of ions, a micromachined neutralizing mechanism that prevents spacecraft charging, a compact efficient high voltage power supply, and a micromachined multi-wafer ion engine. The Air Force contract had a base value of $175,000 and a $174,958 option by the Air Force. The option was exercised by the Air Force in March 2005 and has a period of performance through August 31, 2006.
VIASPACE Subsidiary — eCARmerce, Inc.
eCARmerce is a company that holds four patents and several patent applications in the areas of interactive radio technology. The Company is exploring possible licensing opportunities for these intellectual properties.
VIASPACE Subsidiary — Concentric Water Technology LLC
Concentric Water plans to explore water technologies that could solve the technical and cost limitations of traditional water purification methods. The company does not have active operations.
Critical accounting policies and estimates
The SEC recently issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”); suggesting 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 Company’s financial condition and results of
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operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the consolidated financial statements in the section entitled “Financial Statements”.
The preparation of the Company’s 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:
The Company recognizes revenue on government contracts when the particular milestone is met and delivered to the customer and when the Company has received acceptance notification by the government program officer. Product sales revenue are recognized upon shipment, as title passes, FOB shipping point. Management fees are recognized as received for services to third party entities.
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.
Three Months Ended March 31, 2006 Compared to March 31, 2005
Results From Operations
Revenues
Revenues were $113,000 and $47,000 for the three months ended March 31, 2006 and 2005, respectively. The increase in revenues is primarily due to additional billings by Ionfinity to the Navy and Air Force on two Phase II SBIR contracts as compared with the same period in the prior year, as well as contract billings to Caltech/Jet Propulsion Laboratory during 2006. In addition, DMFCC recorded revenues of $21,000 during 2006 and zero in 2005 related to a contract with a customer to supply fuel cell cartridges.
Cost of Revenues
Cost of revenues was $105,000 and $45,000 for the three months ended March 31, 2006 and 2005, respectively. The increase in cost of revenues is primarily due to additional payroll costs and subcontractor and consultant costs being incurred on Ionfinity’s Air Force and Navy contracts during 2006 as compared with the same period in 2005.
Research and Development
Research and development expenses were $182,000 and $45,000 for the three months ended March 31, 2006 and 2005, respectively. The increase of $137,000 in research and development expenses results primarily from increases in consulting and subcontract expenses incurred by DMFCC and Arroyo. We expect research and development expenses will continue to increase in the future at DMFCC and Arroyo as these companies develop a commercialized product. Furthermore, as additional technologies are acquired and developed by the Company, we anticipate that research and development expenses will increase as commercialization of these technologies begins to take place.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,241,000 and $226,000 for the three months ended March 31, 2006 and 2005, respectively. The increase of $1,015,000 is primarily due to stock compensation expense, payroll related expenses, consulting fees, higher legal and professional expenses and travel expenses. We expect selling, general and administrative expenses will increase in the future as we expand our business.
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Other Income (Expense), Net
Other income (expense), net was $19,000 and $17,000 for the three months ended March 31, 2006 and 2005, a difference of $2,000. During the period ended March 31, 2006, the Company recorded increased interest income of approximately $12,000 due to the Company maintaining higher cash balances than the same period in the prior year. In addition, interest and other expenses increased approximately $10,000.
Liquidity and Capital Resources
Net cash used in operating activities was $834,000 for the three months ended March 31, 2006. During the three months ended March 31, 2006, the Company incurred a net loss of $1,387,000 related to higher research and development costs in payroll related costs, consultant expenses and subcontractor costs in order to create, expand and develop the Company’s products. In addition we have incurred higher selling, general and administrative expenses in stock compensation expenses, payroll related expenses, consulting fees, legal and professional expenses and travel expenses.
Net cash provided by financing activities during 2006 was positive $1,994,000. On February 21, 2006, SNK Capital Trust (“SNK”) made an investment of $999,980 in the Company for the purpose of exercising a stock option to buy shares of common stock in the Company. However, the investment was received after the scheduled payment date of February 15, 2006. The Board of Directors of the Company approved acceptance of this investment on March 21, 2006, and 3,571,357 of additional shares of common stock of the Company were issued to SNK effective March 21, 2006. On March 30, 2006, SNK made an investment of $1,000,020 in the Company for the purpose of exercising an additional stock option to buy 3,571,499 shares of common stock in the Company. As of March 31, 2006, the SNK stock option has been fully exercised and no additional shares are subject to the option.
We have incurred substantial losses during the three months ended March 31, 2006; however we have adequate financial resources for the next nine months of operations through December 31, 2006. There is no assurance that the Company will be able to raise any other additional capital, if needed through the issuance of additional equity through private or public offerings.
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.
Other Matters
We were contacted informally by the Pacific Regional Office of the Securities Exchange Commission (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 inquiry should not be construed as an indication by the SEC or its staff that any violations of the law have occurred, nor should it be considered a reflection upon any entity, security or person. We intend to cooperate fully with this inquiry.
Risk Factors Which May Affect Future Results
In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company wishes to caution that the following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company.
Risks Related To Our Business
We have incurred losses and anticipate continued losses.
Our net loss for the three months ended March 31, 2006 was $1,387,000. We have not yet achieved profitability and expect to continue to incur net losses until we recognize sufficient revenues from licensing activities, customer contracts 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
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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.
We operate in a changing and unpredictable regulatory environment.
As our technologies develop, we will be subject to current and future state, federal and international regulation, including safety codes and transportation regulations related to the methanol fuel cells and cartridges being developed by our subsidiary, DMFCC. All fuel cells and cartridges are currently prohibited on-board commercial air flights. In 2005, the International Civil Aviation Organization’s Dangerous Goods Panel (“ICAO DGP”) voted to allow passengers to carry and use micro fuel cells and methanol fuel cartridges on-board airplanes to power their laptop computers and other consumer electronic devices. The ICAO DGP action has been submitted for comment to all ICAO members and will be considered for final adoption by the 36-member ICAO Council. If formally adopted, the regulation will go into effect on January 1, 2007, with publication of ICAO’S Technical Instructions for the Safe Transport of Dangerous Goods by Air. ICAO, a United Nations organization, establishes International Standards, Recommended Practices and Procedures for aviation. In addition to their participation in ICAO, some countries such as the U.S. have additional national aviation authorities. In the U.S., this is the Federal Aviation Administration or FAA. These national authorities must approve the ICAO Technical Instructions as well. If the regulation is eventually not adopted, this could negatively impact our business, results of operation and financial condition.
Our success depends upon market acceptance of our technologies and product development.
The markets for our technologies are either new or non-existent at the present time including direct methanol fuel cell cartridges. Our success will depend upon the market acceptance of our various products and services. This acceptance may require in certain instances a modification to the culture and behavior of customers to be more accepting of technology and automation. Potential customers may be reluctant or slow to adopt changes or new ways of performing processes. There is no assurance that our current or future products or services will gain widespread acceptance or that we will generate sufficient revenues to allow us to ever achieve profitability.
In addition, our products require continuing improvement and development. Some of our products, whether in the market or in development, may not succeed or may not succeed as intended. As a result, we may need to change our product offerings, discontinue certain products and services or pursue alternative product strategies. There is no assurance that we will be able to successfully improve our current products or that we will continue to develop or market some of our products and services.
We operate in a competitive market
Our subsidiary, DMFCC faces two types of competition. First, from competitors in the cartridge business and second, from competitors that could also provide intellectual property protection to the DMFCC industry. The overall direct methanol fuel cell industry faces competition from other types of fuel cells. BIC Corporation in France and the US and Tokai Corporation in Japan have demonstrated cartridges for direct methanol fuel cells, and are direct competitors. Other companies may enter the cartridge business. Therefore, DMFCC is potentially in competition with every company making direct methanol fuel cells. These could include large computer and consumer electronics companies, such as NEC, Toshiba, Samsung, Hitachi, Sanyo, LG, Sony, Matshusita, Fujitsu, NTT DoCoMo and their subsidiaries or affiliates. Additionally, Caltech has licensed part of its direct methanol fuel cell intellectual properties to two additional parties: DTI Energy, Inc. based in Los Angeles, CA was licensed in 1993 and Ballard Power Systems, Inc. based in Vancouver British Columbia, Canada was licensed in 1999. These entities could potentially compete with DMFCC in its core strategy. Further, the overall direct methanol fuel cell industry faces competition from other technologies such as potentially improved batteries and fuel cells using other fuels such as hydrogen, borohydrides, ethanol, biofuels, formic acid and butane. Hydrogen and borohydride fuels were not approved for use in the passenger compartment of airplanes by the ICAO Dangerous Goods Panel in 2005, ethanol fuel cells have limited efficiency, and biofuels are not yet ready for commercial application. At least one company, Tekion, Inc. is pursuing a formic acid fuel cell. The Caltech patents also cover formic acid. Another company, Lillipution Systems Inc., is pursuing a butane fuel cell that operates at temperatures in excess of 700° C. Medis Technologies Ltd. is believed to be pursuing fuel cells powered by borohydrides that decompose into hydrogen.
Arroyo Sciences competes with companies such as Gensym Corporation and other traditional expert system vendors along with other potential niche solution suppliers who develop special purpose hardware for sensor fusion in defense and security applications. We believe that Arroyo differentiates itself by being a software-based solution that can be used on standard microprocessors and also embedded into microcontrollers and similar microelectronics. Large defense and security system integrators with greater resources than the Company, such as L3 Communications Systems, Northrop-Grumman, General Dynamics, and Lockheed-Martin may compete with the Company.
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The competing technologies to the Ionfinity soft ionization membrane approach are the standard ionization techniques such as electron filament ionization, electrospray, and other approaches.
Our markets are highly competitive and many of our competitors have greater resources and better name recognition than we do. These resources could allow those competitors to develop and market products more effectively than the Company, which could adversely affect our future revenues and business.
Due to uncertainties in our business, the capital on hand may not be sufficient to fund our operations until we achieve positive cash flow.
We have expended and will continue to expend substantial amounts of money for research and development, capital expenditures, working capital needs and manufacturing and marketing of our products and services. Our future research and development efforts, in particular, are expected to include development of additional products and services, which will require additional funds. We anticipate that expenditures on research and development will increase as we continue to develop and commercialize our technologies.
The exact timing and amount of spending required cannot be accurately determined and will depend on several factors, including:
• | progress of our research and development efforts; | |
• | competing technological and market developments; | |
• | commercialization of products currently under development by us and our competitors; and | |
• | market acceptance and demand for our products and services. |
The cost of developing our technologies may require financial resources greater than we currently have available. Therefore, in order to successfully complete development of our technologies, we may be required to obtain additional financing. We cannot assure you that additional financing will be available if needed or on terms acceptable to us. If adequate and acceptable financing is not available, we may have to delay development or commercialization of certain of our products and services or eliminate some or all of our development activities. We may also reduce our marketing or other resources devoted to our products and services. Any of these options could reduce our sales growth and result in continued net losses.
If we lose key personnel or are unable to hire additional qualified personnel, it could impact our ability to grow our business.
We believe our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial, sales and marketing, finance and operations personnel. We face intense competition for all such personnel, and we may not be able to attract and retain these individuals. Our failure to do so could delay product development, affect the quality of our products and services, and/or prevent us from sustaining or growing our business. In addition, employees may leave our company and subsequently compete against us. Our key personnel include Dr. Carl Kukkonen, Chief Executive Officer and Amjad Abdallat, Vice President/COO.
We have taken steps to retain our key employees and we have entered into employment agreements with some of our key employees. The loss of key personnel, especially if without advanced notice; could harm our ability to maintain and build our business operations. Furthermore, we have no key man life insurance on any of our key employees.
Our products and services could infringe on the intellectual property rights of others, which may lead to costly litigation, lead to payment of substantial damages or royalties and/or prevent us from manufacturing and selling our current and future products and services.
If third parties assert that our products and services or technologies infringe their intellectual property rights, our reputation and ability to license or sell our products and services could be harmed. Whether or not a claim has merit, it could be time consuming and expensive for us and divert the attention of our technical and management personnel from other work. In addition, these types of claims could be costly to defend and result in our loss of significant intellectual property rights.
A determination that we are infringing the proprietary rights of others could have a material adverse effect on our products and services, revenues and income. In the event of any infringement by us, we cannot assure you that we will be able to successfully
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redesign our products and services or processes to avoid infringement. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling our products and services and could require us to pay substantial damages and royalties.
Risks Related To the Industry
If we fail to successfully introduce new products and services, our future growth may suffer. Our areas of future growth are certain products and services at an early stage of development.
As part of our strategy, we intend to develop and introduce a number of new products and services. Such products and services are currently in research and development. We have generated no revenues from such potential products and services and may never generate revenues. A substantial portion of our resources have been and for the foreseeable future will continue to be dedicated to our research programs and the development of products and services. If we do not introduce these new products and services on a timely basis, or if they are not well accepted by the market, our business and the future growth of our business may suffer. There is no assurance that we will be able to develop a commercial product from these projects. Our competitors may succeed in developing technologies or products and services that are more effective than ours.
If we do not update and enhance our technologies, they will become obsolete or noncompetitive. Our competitors may succeed in developing products and services faster than us.
We operate in a highly competitive industry and competition is likely to intensify. Emerging technologies, extensive research and new product introductions characterize the market for our products and services. We believe that our future success will depend in large part upon our ability to conduct successful research in our fields of expertise, to discover new technologies as a result of that research, to develop products and services based on our technologies, and to commercialize those products and services. If we fail to stay at the forefront of technological development, we will be unable to compete effectively.
Certain of our existing and potential competitors possess substantial financial and technical resources and production and marketing capabilities greater than ours. We cannot assure you that we will be able to compete effectively with existing or potential competitors or that these competitors will not succeed in developing technologies and products and services that would render our technology and products and services obsolete and noncompetitive. Our position in the market could be eroded rapidly by our competitors’ product advances.
Our success depends, in part, on attracting customers who will embrace the new technologies offered by our products and services.
It is vital to our long-term growth that we establish customer awareness and persuade the market to embrace the new technologies offered by our products and services. This may require in certain instances a modification to the culture and behavior of customers to be more accepting of technology and automation. Organizations may be reluctant or slow to adopt changes or new ways of performing processes and instead may prefer to resort to habitual behavior within the organization. Our marketing plan must overcome this obstacle, invalidate deeply entrenched assumptions and reluctance to behavioral change and induce customers to utilize our products and services rather than the familiar options and processes they currently use. If we fail to attract additional customers at this early stage, our business and the future growth of our business may suffer.
If we fail to comply with our obligations in our intellectual property licenses with Caltech and USC, we could lose license rights that are important to our business.
We are a party to a number of license agreements that are material to our business. We may enter into additional technology licenses in the future. Our existing licenses impose and future licenses may impose various minimum royalty commitments, other royalties and other obligations on us. If we fail to comply with these obligations, the licensors may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensors. We cannot assure you that we will be able to obtain new licenses, or renew existing licenses, on commercially reasonable terms, if at all. Termination of the licenses could have a material adverse effect on our business, operating results and financial condition.
Our success depends, in part, on our ability to protect our intellectual property rights.
Our success is heavily dependent upon the development and protection of proprietary technology. We rely on patents, trade secrets, copyrights, know-how, trademarks, license agreements and contractual provisions to establish our intellectual property rights and
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protect our products and services. These legal means, however, afford only limited protection and may not adequately protect our rights. Litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and management attention.
We cannot assure you that competitors or other parties have not filed or in the future will not file applications for, or have not received or in the future will not receive, patents or obtain additional proprietary rights relating to products and services or processes used or proposed to be used by us. In that case, our competitive position could be harmed and we may be required to obtain licenses to patents or proprietary rights of others.
In addition, the laws of some of the countries in which our products and services are or may be sold may not protect our products and services and intellectual property to the same extent as U.S. laws, if at all. We may be unable to protect our rights in proprietary technology in these countries.
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 400,000,000 authorized shares of common stock, of which 291,649,286 were issued and outstanding as of March 31, 2006. Of these issued and outstanding shares, 206,100,477 shares (70.7% of the total issued and outstanding shares) are currently held by our executive officers, directors and principal shareholders. Of these shares, 61,204,286 common shares are held by SNK at March 31, 2006, and on April 10, 2006 SNK agreed to a lock-up of its shares until April 9, 2011. In addition, four other shareholders holding a collective 27 million shares have voluntarily agreed to lock-up their shares for five years until April 9, 2011. Also, 176,445,000 common shares held by officers, directors, and founders of ViaSpace LLC are currently restricted, but will become available for sale in the future, subject to volume and manner of sale restrictions under Rule 144 of the Securities Act of 1933. Some of the restrictions associated with these shares will expire June 22, 2006.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares currently held by management and principal shareholders), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
Our stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our stock is likely to be highly volatile because there has been a relatively thin trading market for our stock, which causes trades of small blocks of stock to have a significant impact on our stock price. You may not be able to resell our common stock following periods of volatility because of the market’s adverse reaction to volatility.
Other factors that could cause such volatility may include, among other things:
• | actual or anticipated fluctuations in our operating results; | |
• | announcements concerning our business or those of our competitors or customers; | |
• | changes in financial estimates by securities analysts or our failure to perform as anticipated by the analysts; | |
• | announcements of technological innovations; | |
• | conditions or trends in the industry; |
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• | introduction or withdrawal of products and services; | |
• | variation in quarterly results due to the fact our revenues are generated by sales to a limited number of customers which may vary from period to period; | |
• | litigation; | |
• | patents or proprietary rights; | |
• | departure of key personnel; | |
• | failure to hire key personnel; and | |
• | general market conditions. |
Our executive officers, directors and principal shareholders own 70.7% of our voting stock, which may allow them to control substantially all matters requiring shareholder approval, and their interests may not align with the interests of our other stockholders.
Our executive officers, directors and principal shareholders hold, in the aggregate, 70.7% of our outstanding shares. Accordingly, in the event that all or some of these shareholders decide to act in concert, they can control us through their ability to determine the election of our directors, to amend our certificate of incorporation and bylaws and to take other actions requiring the vote or consent of shareholders, including mergers, going private transactions and extraordinary transactions, and the terms of these transactions.
Because our common stock is considered a “penny stock” any investment in our common stock is considered to be a high-risk investment and is subject to restrictions on marketability.
Our common stock is currently traded on the Over-The-Counter Bulletin Board (“OTC Bulletin Board”) and is considered a “penny stock.” The OTC Bulletin Board is generally regarded as a less efficient trading market than the NASDAQ Small Cap Market.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and any salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock.
Since our common stock is subject to the regulations applicable to penny stocks, the market liquidity for our common stock could be adversely affected because the regulations on penny stocks could limit the ability of broker-dealers to sell our common stock and thus your ability to sell our common stock in the secondary market. There is no assurance our common stock will be quoted on NASDAQ or the NYSE or listed on any exchange, even if eligible.
We have additional securities available for issuance, including preferred stock, which if issued could adversely affect the rights of the holders of our common stock.
Our articles of incorporation authorize the issuance of 400,000,000 shares of common stock and 5,000,000 shares of preferred stock. The common stock and the preferred stock can be issued by, and the terms of the preferred stock, including dividend rights, voting rights, liquidation preference and conversion rights can generally be determined by, our board of directors without stockholder approval. Any issuance of preferred stock could adversely affect the rights of the holders of common stock by, among other things, establishing preferential dividends, liquidation rights or voting powers. Accordingly, our stockholders will be dependent upon the judgment of our management in connection with the future issuance and sale of shares of our common stock and preferred stock, in the event that buyers can be found therefore. Any future issuances of common stock or preferred stock would further dilute the percentage ownership of our Company held by the public stockholders. Furthermore, the issuance of preferred stock could be used to discourage or prevent efforts to acquire control of our Company through acquisition of shares of common stock.
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ITEM 3 – 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 Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established processes.
At the end of the period covered by this report and at the end of each fiscal quarter therein, the Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective at the reasonable assurance level described above as of the end of the period covered in this report.
Changes in internal controls over financial reporting.Management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter. Based on that evaluation, management, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the period ended March 31, 2006 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 July 15, 2006. Although the Company is working to comply with these requirements, the Company has only 20 employees. The Company’s small number of employees is expected to make compliance with Section 404 — especially with segregation of duty control requirements — very difficult and cost ineffective, if not impossible. While the SEC had indicated it expects to issue supplementary regulations easing the burden of Section 404 requirements for small entities like the Company, such regulations have not yet been issued.
PART II — OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following resolution was approved on February 13, 2006 by written consent of shareholders representing 69.93% of the issued and outstanding common share capital of the Company:
a. | The 2006 Non-Employee Director Option Plan was approved and replaced the 2005 Non- Option Plan that was a part of the previously approved 2005 Stock Incentive Plan. |
The following resolution was approved on March 21, 2006 by written consent of shareholders representing 70.3% of the issued and outstanding common share capital of the Company:
b. | The Company amended the Stock Option Agreement between the Company and SNK Capital Trust entered into as of June 15, 2005, | ||
c. | The Company entered into a Stock Settlement Agreement with a majority of the former members of ViaSpace Technologies LLC and amended the Agreement and Plan of Merger by and among ViaSpace Technologies LLC, Robert Hoegler, and Global-Wide Publication Ltd. dated June 15, 2005, with regard to Held Shares. |
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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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VIASPACE Inc. (Registrant) | ||||
Date: May 11, 2006 | /s/ CARL KUKKONEN | |||
Carl Kukkonen | ||||
Chief Executive Officer | ||||
Date: May 11, 2006 | /s/ STEPHEN J. MUZI | |||
Stephen J. Muzi | ||||
Chief Financial Officer | ||||
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