SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019
or
☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to ___________
Commission File Number 333-110680
VIASPACE INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 76-0742386 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) |
344 Pine Street, Santa Cruz, CA, 95062
(Address of principal executive offices)
(Former Address)
(626) 768-3360
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock | | VSPC | | OTC Pink |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,701,689,582 shares of $0.0001 par value common stock issued and outstanding as of June 7, 2019.
VIASPACE INC.
INDEX
FISCAL QUARTER ENDED MARCH 31, 2019
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIASPACE INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| | March 31, 2019 (Unaudited) | | | December 31, 2018 (Audited) | |
ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | $ | 14,000 | | | $ | 5,000 | |
Accounts Receivable | | | 22,000 | | | | — | |
Accounts Receivable - Related Parties | | | — | | | | 2,000 | |
Inventory | | | 341,000 | | | | — | |
Prepaid expenses | | | 15,000 | | | | 11,000 | |
TOTAL CURRENT ASSETS | | | 392,000 | | | | 18,000 | |
OTHER ASSETS: | | | | | | | | |
Note Receivable - Related Parties | | | 15,000 | | | | — | |
Other assets | | | 1,000 | | | | 1,000 | |
TOTAL OTHER ASSETS | | | 16,000 | | | | 1,000 | |
TOTAL ASSETS | | $ | 408,000 | | | $ | 19,000 | |
LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 145,000 | | | $ | 89,000 | |
Accounts Payable - Related Party | | | 26,000 | | | | 33,000 | |
Accrued expenses | | | 58,000 | | | | 18,000 | |
Unearned revenue | | | 111,000 | | | | 55,000 | |
Related party payables | | | 749,000 | | | | 749,000 | |
TOTAL CURRENT LIABILITIES | | | 1,089,000 | | | | 944,000 | |
COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | | | |
SHAREHOLDERS’ DEFICIT: | | | | | | | | |
Preferred stock, $0.0001 par value in 2019 and 2018, 10,000,000 shares authorized, one share of Series A preferred stock issued and outstanding as of March 31, 2019 and December 31, 2018 | | | — | | | | — | |
Common stock, $0.0001 par value in 2019 and 2018, 8,000,000,000 shares authorized, 4,732,073,007 shares issued and 4,632,073,007 shares outstanding as of March 31, 2019, and 3,926,744,551 shares issued and 3,826,744,551 shares outstanding as of December 31, 2018 | | | 463,000 | | | | 383,000 | |
Additional paid in capital | | | 55,624,000 | | | | 53,783,000 | |
Accumulated deficit | | | (56,768,000 | ) | | | (55,091,000 | ) |
Total shareholders’ deficit | | | (681,000 | ) | | | (925,000 | ) |
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | | $ | 408,000 | | | $ | 19,000 | |
The accompanying notes are an integral part of these financial statements.
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VIASPACE INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | For the Three Months Ended March 31, | |
| | 2019 | | | 2018 | |
REVENUES | | $ | 50,000 | | | $ | 15,000 | |
REVENUES, RELATED PARTY | | | 25,000 | | | | — | |
TOTAL REVENUES | | | 75,000 | | | | 15,000 | |
COST OF REVENUES | | | 38,000 | | | | 7,000 | |
GROSS PROFIT | | | 37,000 | | | | 8,000 | |
| | | | | | | | |
OPERATING EXPENSES | | | | | | | | |
Operations | | | 6,000 | | | | 16,000 | |
Selling, general and administrative | | | 128,000 | | | | 32,000 | |
Total operating expenses | | | 134,000 | | | | 48,000 | |
LOSS FROM OPERATIONS | | | (97,000 | ) | | | (40,000 | ) |
| | | | | | | | |
OTHER EXPENSE | | | | | | | | |
Interest expense | | | (3,000 | ) | | | (28,000 | ) |
Other Expense, net | | | (1,577,000 | ) | | | (3,000 | ) |
Total Other Expense | | | (1,580,000 | ) | | | (31,000 | ) |
| | | | | | | | |
LOSS BEFORE INCOME TAXES | | | (1,677,000 | ) | | | (71,000 | ) |
INCOME TAXES | | | — | | | | — | |
NET LOSS | | $ | (1,677,000 | ) | | $ | (71,000 | ) |
| | | | | | | | |
LOSS PER SHARE OF COMMON STOCK – Basic and diluted | | $ | 0.00 | | | $ | 0.00 | |
WEIGHTED AVERAGE SHARES OUTSTANDING – Basic and diluted | | | 4,178,685,161 | | | | 3,485,613,929 | |
The accompanying notes are an integral part of these financial statements.
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VIASPACE INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(Unaudited)
For the three months ended March 31, 2018 | |
| | Common Stock | | | Additional Paid in | | | Accumulated | | | Total Shareholders’ | |
| | Shares | | | Amount | | | Capital | | | Deficit | | | Deficit | |
BALANCE, December 31, 2017 | | | 3,302,514,447 | | | $ | 330,000 | | | $ | 53,136,000 | | | $ | (54,319,000 | ) | | $ | (853,000 | ) |
Shares issued for consulting services | | | 1,600,000 | | | | — | | | | 1,000 | | | | — | | | | 1,000 | |
Beneficial conversion feature of convertible debt | | | — | | | | — | | | | 28,000 | | | | — | | | | 28,000 | |
Stock issued upon conversion of related party notes payable | | | 181,038,818 | | | | 19,000 | | | | 10,000 | | | | — | | | | 29,000 | |
Net loss | | | — | | | | — | | | | — | | | | (71,000 | ) | | | (71,000 | ) |
BALANCE, March 31, 2018 | | | 3,485,153,265 | | | $ | 349,000 | | | $ | 53,175,000 | | | $ | (54,390,000 | ) | | $ | (866,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2019 | |
| | Common Stock | | | Additional Paid in | | | Accumulated | | | Total Shareholders’ | |
| | Shares | | | Amount | | | Capital | | | Deficit | | | Deficit | |
BALANCE, December 31, 2018 | | | 3,826,744,551 | | | $ | 383,000 | | | $ | 53,783,000 | | | $ | (55,091,000 | ) | | $ | (925,000 | ) |
Shares issued for consulting services | | | 3,200,000 | | | | — | | | | 1,000 | | | | — | | | | 1,000 | |
Beneficial conversion feature of convertible debt | | | — | | | | — | | | | 2,000 | | | | — | | | | 2,000 | |
Stock issued upon conversion of related party notes payable | | | 26,143,791 | | | | 3,000 | | | | (1,000 | ) | | | — | | | | 2,000 | |
Stock issued for acquisition of Elite Therapeutics | | | 775,984,665 | | | | 77,000 | | | | 1,785,000 | | | | | | | | 1,862,000 | |
Non cash compensation related to stock options | | | — | | | | — | | | | 54,000 | | | | — | | | | 54,000 | |
Net loss | | | — | | | | — | | | | — | | | | (1,677,000 | ) | | | (1,677,000 | ) |
BALANCE, March 31, 2019 | | | 4,632,073,007 | | | $ | 463,000 | | | $ | 55,624,000 | | | $ | (56,768,000 | ) | | $ | (681,000 | ) |
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VIASPACE INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Three Months Ended | |
| | March 31, | |
| | 2019 | | | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net loss | | $ | (1,677,000 | ) | | $ | (71,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Loss on Acquisition of a Business | | | 1,581,000 | | | | — | |
Stock option and stock compensation | | | 54,000 | | | | — | |
Stock issued for consulting expense | | | 1,000 | | | | 1,000 | |
Amortization of discounts on notes payable, related party | | | 2,000 | | | | 28,000 | |
Loss on minority investment in AEG | | | — | | | | 3,000 | |
(Increase) decrease in operating assets: | | | | | | | | |
Accounts receivable | | | (1,000 | ) | | | — | |
Accounts receivable - Related Party | | | 2,000 | | | | — | |
Inventory | | | 19,000 | | | | — | |
Prepaid expenses and other assets | | | (4,000 | ) | | | (1,000 | ) |
Increase (decrease) in operating liabilities: | | | | | | | | |
Accounts payable | | | (10,000 | ) | | | 5,000 | |
Accounts Payable - Related Party | | | (7,000 | ) | | | 3,000 | |
Unearned Revenue | | | 56,000 | | | | — | |
Accrued Expenses | | | 6,000 | | | | — | |
Net cash used in operating activities | | | 22,000 | | | | (32,000 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Notes Receivable - Related Party | | | (15,000 | ) | | | — | |
Net cash provided by (used in) investing activities: | | | (15,000 | ) | | | — | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Proceeds from convertible notes payable- related party | | | 2,000 | | | | 28,000 | |
Net cash provided by financing activities | | | 2,000 | | | | 28,000 | |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 9,000 | | | | (4,000 | ) |
CASH AND CASH EQUIVALENTS, Beginning of period | | | 5,000 | | | | 4,000 | |
CASH AND CASH EQUIVALENTS, End of period | | $ | 14,000 | | | $ | — | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | — | | | $ | — | |
Income taxes | | $ | — | | | $ | — | |
Supplemental Disclosure of Non-Cash Activities for 2019:
| • | The Company recorded a discount on loans from Dr. Schewe of $2,000 as a result of a beneficial conversion feature. During 2019, Dr. Schewe converted loans of $2,000 to equity. |
| • | The Company recorded a loss $1,581,000 on the Elite Therapeutics acquisition, and 1,862,000 is the total value of the shares issued for acquisition. The allocation of the purchase price was $22,000 of Accounts Receivable, $360,000 of Inventory, $1,581,000 of loss, $65,000 of Accounts Payable, and $36,000 for Accrued Expenses. |
| • | The Company issued 100,000,000 shares of the Company’s common stock for future funding source but was not recorded to prepaid expenses since the shares were not cleared at March 31, 2019. |
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Supplemental Disclosure of Non-Cash Activities for 2018:
| • | The Company issued 100,000,000 shares of the Company’s common stock for future funding source but was not recorded to prepaid expenses since the shares were not cleared at March 31, 2018. |
| • | The Company recorded a discount on loans from Kevin Schewe and Haris Basit of $67,500 as a result of a beneficial conversion feature. During 2018, Kevin Schewe and Haris Basit converted loans of $67,500 to equity. |
The accompanying notes are an integral part of these financial statements.
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VIASPACE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business – VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) was founded in July 1998. Its business involves renewable energy and is based on biomass, in particular our license to a dedicated energy crop with the trademark “Giant King® Grass” (“GKG”). Through a license for GKG we obtained from Guangzhou Inter-Pacific Arts Corp., a Chinese wholly-owned foreign enterprise registered in Guangdong province ("IPA China") which is owned by VIASPACE Green Energy Inc. (“VGE”), we are able to commercialize GKG throughout the world, except for the People’s Republic of China (“China”) and the Republic of China (“Taiwan”).
GKG can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use corn or other food sources as feedstock. GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and so this process is carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy. GKG has been independently tested by customers and been shown to have excellent energy content, high bio methane production, and the cellulosic sugar content needed for biofuels and biochemicals.
The Company acquired Bad Love Cosmetics Company, LLC, dba Elite Therapeutics on March 6, 2019. Elite Therapeutics was founded in 2007 as Bad Love Cosmetics Company, LLC and began doing business as Elite Therapeutics with high quality, results-driven, medical grade cosmetics in late 2010. Elite Therapeutics has a full line of luxury products for personal use and high-end hotel amenities. This past year, the company has developed a new, ultralux, hemp-derived "CBD Recovery Crème". This product was launched on February 4, 2019 and can now be found on the Elite Therapeutics website. It uses a highly purified, hemp-derived, CBD isolate which is THC-free and is of the same high quality as the entire, physician-designed Elite Therapeutics product line.
Going Concern – We have incurred significant losses from operations, resulting in an accumulated deficit of $56,768,000. We expect such losses to continue. However, we entered into a new Loan Agreement with Dr. Schewe on May 24, 2018 whereby he agreed to fund us $100,000 over a two-year period. We expect loans from Mr. Basit and Dr. Schewe and revenue generated from future contracts using the license we have for Giant King Grass to fund operations for the foreseeable future. However, no assurance can be given that Mr. Basit or Dr. Schewe will continue to fund us or that sales contracts will be obtained in the future, or if they are obtained, that they will be profitable. Accordingly, there continues to be substantial doubt as to our ability to continue as a going concern. The financial statements do not include any other adjustments that might result from the outcome of these uncertainties.
Basis of Presentation – The unaudited interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with our financial statements for the year ended December 31, 2018 and notes thereto included in our annual report on Form 10-K. We follow the same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual results.
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Accounts Receivable
Accounts receivable consist of uncollateralized amounts due from wholesale customers that have bought skin creams and Elite products for retail resale. Accounts receivable are due within 30 days and are stated at amounts net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering the length of time accounts receivable are past due, the Company’s previous loss history, and the client’s current ability to pay its obligations. Therefore, if the financial condition of the Company’s clients were to deteriorate beyond the estimates, the Company may have to increase the allowance for doubtful accounts which could have a negative impact on earnings. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
Inventory
Inventory is valued at the lower of the inventory's cost (weighted average basis) or net realizable value. Management compares the cost of inventory with its market value and an allowance is made to write down inventory to net realizable value, if lower. Inventory is segregated into two areas, raw materials, and finished goods. Below is a breakdown of how much inventory was in each area as of March 31, 2019 (unaudited), and December 31, 2018 (unaudited):
| March 31, 2019 | | | December 31, 2018 | |
| (Unaudited) | | | (Unaudited) | |
Raw Materials | $ | 144,000 | | | $ | 125,000 | |
Finished Goods | | 197,000 | | | | 173,000 | |
| $ | 341,000 | | | $ | 298,000 | |
Recent Accounting Standards – The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expands the scope of Accounting Standards Codification (ASC) 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity’s own operations and supersedes the guidance in ASC 505-50.
The FASB launched the project in response to requests it received in its post-implementation review of Statement No. 123(R), Share-Based Payment. The ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. The key changes from ASC 505-50 are:
• | Equity-classified nonemployee awards are measured on the grant date, rather than on the earlier of (1) the performance commitment date or (2) the date at which the nonemployee’s performance is complete. |
• | Awards to nonemployees are measured by estimating the fair value of the equity instruments to be issued, rather than the fair value of the goods or services received or the fair value of the equity instruments issued, whichever can be measured more reliably. |
• | During the vesting period, nonemployee awards that contain a performance condition that affects the quantity or other terms (e.g., exercise price) of the award are measured based on the outcome that is probable. This differs from the guidance in ASC 505-50 that requires these types of awards to be measured at the lowest aggregate fair value within a range of possible outcomes. |
• | Entities may use the expected term to measure nonemployee awards or elect to use the contractual term as the expected term, on an award-by-award basis. This differs from the guidance in ASC 505-50 that requires the use of the contractual term. |
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Public entities must adopt the new standard in the fiscal year beginning on 12/15/2018. Companies can early adopt the new standard but are required to adopt ASC Topic 606 alongside their adoption of ASU 2018-07. We adopted the standard utilizing the modified retrospective adoption method. The adoption of this guidance does not have a material impact on our financial statements.
Revenue Recognition - In May 2014, FASB and the International Accounting Standards Board jointly issued a new revenue recognition standard that is designed to improve financial reporting by creating common recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance issued under Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("Topic 606", "ASU 2014-09") provides a more robust framework for addressing revenue issues, improves the comparability of revenue recognition practices across industries, provides more useful information to users of financial statements through improved disclosure requirements and simplifies the presentation of financial statements. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance permits the use of either of the following transition methods: (i) a full retrospective method reflecting the application of the standard in each prior reporting period with the option to elect certain practical expediencies, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption, with additional footnote disclosures. The original effective date of the new standard was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued an ASU that deferred by one year the effective date of this new revenue recognition standard. As a result, the new standard was effective for annual reporting periods beginning after December 15, 2017, although companies could have adopted the standard as early as the original effective date. Early application prior to the original effective date was not permitted. In the first quarter of 2018, we adopted the standard utilizing the modified retrospective adoption method in order to provide for comparative results in all periods presented. The adoption of this guidance does not have a material impact on our financial statements.
Leases - In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). This update requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. It also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company does not have any leases with terms of more than 12 months as of March 31, 2019.
NOTE 2 – PREPAID EXPENSES
We had previously entered into agreements with certain consultants and vendors whereby we issued unregistered shares of common stock in exchange for financial services to be provided to us. The agreements have been cancelled. As of March 31, 2019 and December 31, 2018, included in prepaid expenses for this third-party provider is $11,000 and $11,000, respectively, for shares of stock issued to the provider in excess of amounts paid on our behalf.
Other prepaid expenses (non-stock related) were $4,000 and $0 at March 31, 2019 and December 31, 2018, respectively.
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Note 3 – Investments
On April 13, 2015, the Company entered into a Giant King Grass supply contract with Almaden Energy Group, LLC. (“AEG”). AEG is developing an animal feed project in the United States for the domestic and global market. The Company granted AEG a license to grow Giant King Grass only for animal feed, nursery and research purposes anywhere within the 48 contiguous United States. AEG is permitted to sell Giant King Grass anywhere in the world with the exception of the State of Hawaii. Haris Basit, the CEO of AEG, was also the previously the CEO of the Company. For the year ended December 31, 2018 and 2017, the Company recorded $0 and $0, respectively, in revenues from AEG.
On June 1, 2017, we acquired a 2.91% interest in Clean Energy Solutions, LLC’s (“CES”) outstanding membership interest units. We have accounted for this investment by the cost method because the membership interest units of that company are unlisted and the criteria for using the equity method of accounting are not satisfied as we are not able to exercise significant influence over CES. CES is a customer of the Company who is in discussion for future GKG contracts. At March 31, 2019, and December 31, 2018, our interest in CES is recorded at $0.
We also own an 11.57% interest in Viaspace California, Inc (“VSCA”), a company formed on March 1, 2018. VSCA is developing a business related to Cannabidiol (“CBD”), a cannabis compound that has significant medical benefits. The method of accounting for the investment is the equity method because a shareholder and controlling shareholder, both directors of Viaspace, along with the company collectively, control 46.25% of Viaspace California. At March 31, 2019 the Company recorded $0 as Investment in VSCA.
On July 16, 2018 CMAC Agriculture, LLC, a Utah Limited Company (“CMAC”) entered into an agreement with the members of AEG to acquire the majority of the assets of AEG, which included the license agreement with our Company. In return for the assets AEG members would receive ownership interest in CMAC. Due to this agreement our 18.75% ownership interest in AEG was transferred to a 3.375% ownership interest in CMAC. As of December 31, 2018 the Company no longer has equity ownership in AEG. At March 31, 2019, and December 31, 2018, the Company recorded $0 as Investment in CMAC using the cost method of accounting because the cost basis is zero.
As of March 31, 2019 the total balance of all investments is valued at $0.
Note 4 – STOCK OPTIONS
The fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for United States Treasury debt securities at a maturity near the term remaining on the option. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The expected life of an option grant is based on management’s estimate as no options have been exercised in the Plan to date. The Company calculated a forfeiture rate for employees and directors based on historical information. A forfeiture rate of 0% is used for options granted to consultants. The fair value of each option grant to employees, directors and consultants is calculated by the Black-Scholes method and is recognized as compensation expense on a straight-line basis over the vesting period of each stock option award. The risk-free interest rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
| | 2019 |
Dividends | | 0% |
Volatility factor | | 156% |
Expected life | | 10 years |
Annual forfeiture rate | | 0% |
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The following is a summary of the Company’s stock option activity for the nine months ended at March 31, 2019:
| | Number of Shares | | | Weighted- Average Exercise Price Per Share | | | Weighted- Average Remaining Contractual Term In Years | | | Aggregate Intrinsic Value | |
Outstanding at December 31, 2018 | | | 1,904,480,000 | | | $ | 0.0012 | | | | 8.81 | | | | | |
Granted | | | — | | | | — | | | | — | | | | | |
Exercised | | | — | | | | — | | | | | | | | | |
Cancelled and forfeited | | | — | | | | — | | | | | | | | | |
Outstanding at March 31, 2019 | | | 1,904,480,000 | | | $ | 0.0012 | | | | 8.82 | | | $ | — | |
Exercisable at March 31, 2019 | | | 1,419,480,441 | | | $ | 0.0014 | | | | 8.61 | | | $ | — | |
No stock options were granted during the three months ended March 31, 2019. The Plan recorded $54,000 of compensation expense for employees and director stock options in the three months ended March 31, 2019. At March 31, 2019, there was $287,000 of unrecognized compensation costs related to non-vested share-based compensation arrangements under the Plan that is expected to be recognized over a weighted average period of approximately two year. There were no options exercised during the three months ended March 31, 2019.
NOTE 5 – CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES
Loan Agreement with Kevin Schewe
Effective May 24, 2018, we entered into a new Loan Agreement with CEO Kevin Schewe whereby Dr. Schewe agreed to loan up to $100,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Dr. Schewe’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. This Loan Agreement also states that Dr. Schewe will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.
During the three months ended March 31, 2019, Dr. Schewe made loans of $2,000 to us. We recorded a discount on the loans of $2,000 as a result of a beneficial conversion feature, which will be amortized over the term of the note on a straight-line basis, which approximates the effective interest method. During the three months ended March 31, 2019, Dr. Schewe converted loans totalling $2,000 into 26,143,791 common shares of the Company. At the time of the conversions, we recorded the discount as additional interest expense. There are $0 loans outstanding at March 31, 2019. As of March 31, 2019, we had $58,000 remaining availability under the note.
Loan Agreement with Carl Kukkonen
Effective July 25, 2017, we entered into a Loan Agreement with former CTO and Director Carl Kukkonen whereby Dr. Kukkonen agreed to loan up to $25,000 to us over a two-year period based on requests from the Company. Each individual loan will accrue interest at 8% per annum. Each note would mature on the first anniversary of the issuance date of such note. Each note is convertible at Dr. Kukkonen’s request, into a fixed number of shares of our common stock based on the closing price of our common stock for the twenty trading days prior to the issuance of the loan, less an 80% discount. The Loan Agreement states that Dr. Kukkonen will not convert any loan into a number of shares that would exceed the number of available authorized common shares calculated as of the date of the conversion. As a result, the conversion feature is not deemed to be a derivative instrument subject to bifurcation.
During the three months ended March 31, 2019, Dr. Kukkonen made loans of $0 to the Company and there are $0 loans outstanding at March 31, 2019. As of March 31, 2019, the Company had remaining availability under the note of $13,500.
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NOTE 6 – STOCKHOLDERS’ EQUITY
Preferred Stock
At March 31, 2019 and December 31, 2018, the number of authorized shares of our preferred stock was 10,000,000. The par value of the preferred stock is $0.0001.
At March 31, 2019 and December 31, 2018, there is one share of Series A Preferred Stock outstanding.
Common Stock
As of March 31, 2019, the number of authorized shares of our common stock was 8,000,000,000. The par value of the common stock is $0.0001.
As of March 31, 2019, we issued 3,200,000 shares of common stock to a consultant of the Company. The shares were issued at fair market value of approximately $1,000 on the date of the issuance.
As of March 31, 2019, we issued 26,143,791 shares of common stock to CEO Kevin Schewe as he converted loans into shares of common stock as allowed under an agreement he has with us as discussed in Note 5.
As of March 31, 2019 we issued 775,984,665 shares of common stock to CEO Kevin Schewe for the purchase of Elite Therapeutics.
As of March 31, 2019, there were 4,732,073,007 shares of common stock issued and 4,632,073,007 shares of common stock outstanding.
NOTE 7 – NET LOSS PER SHARE
We compute net loss per share in accordance with FASB ASC Topic 260. Under its provisions, basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings would customarily include, if dilutive, potential shares of common stock issuable upon the exercise of stock options and warrants. The dilutive effect of outstanding stock options and warrants is reflected in earnings per share in accordance with FASB ASC Topic 260 by application of the treasury stock method. For the periods presented, the computation of diluted loss per share was equal to basic loss per share as the inclusion of any dilutive instruments would have had an antidilutive effect on the earnings per share calculation in the periods presented.
The following table sets forth common stock equivalents (potential common stock) at March 31, 2019 and 2018 that are not included in the loss per share calculation since their effect would be anti-dilutive for the periods indicated:
| | March 31, 2019 | | | December 31, 2018 | |
Stock Options | | | 1,904,480,000 | | | | 1,904,480,000 | |
The following table sets forth the computation of basic and diluted net loss per share for 2018 and 2017, respectively:
| | For the Three Months Ended March 31, | |
| | 2019 | | | 2018 | |
Basic and diluted net loss per share: | | | | | | | | |
Numerator: | | | | | | | | |
Net loss attributable to common stock | | $ | (1,677,000 | ) | | $ | (71,000 | ) |
Denominator: | | | | | | | | |
Weighted average shares of common stock outstanding | | | 4,178,685,161 | | | | 3,485,613,929 | |
Net loss per share of common stock, basic and diluted | | $ | 0.00 | | | $ | 0.00 | |
NOTE 8 – RELATED PARTY TRANSACTIONS
Included in our balance sheets at March 31, 2019 and December 31, 2018 are Related Party Payables of $749,000 and $749,000, respectively. We have a payable of $689,000 and $689,000, at March 31, 2019 and
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December 31, 2018 owed to Dr. Carl Kukkonen, CTO. Of the amount owed to Dr. Kukkonen, there is a cash component totalling $185,000 and a common stock component totalling $504,000. Dr. Kukkonen deferred a portion of his 2009, 2010 and 2011 stock awards and is entitled to the following unregistered shares of our common stock at March 31, 2019: 11,195,707 shares for deferred 2009 compensation; 8,467,939 shares for deferred 2010 compensation; and 24,730,678 shares for deferred 2011 compensation. We also owe Director Haris Basit $60,000 at March 31, 2019, and December 31, 2018, representing salary earned but not paid.
In addition, at March 31, 2019 there are Other Related Party Payables owed to Dr. Kukkonen, in the amount of $2,000, to Mr. Basit, in the amount of $20,000 and to Mr. Nicholas Stoll, in the amount of $4,000.
At December 31, 2018 Other Related Party Payables owed to Dr. Kukkonen, Mr. Basit and Mr. Stoll were $6,000, $18,000 and $9,000, respectively.
During 2018 the Company granted Dr. Kevin Schewe, Dr. Carl Kukkonen, Mr. Nick Stoll, Mr. Haris Basit and Ms. Angelina Galiteva 350,000,000, 150,000,000, 100,000,000, 500,000,000 and 10,000,000 options, respectively. See Note 4 for valuations of the stock options.
We have a loan agreement with CEO Dr. Kevin Schewe and former CTO Carl Kukkonen which is described in Note 5.
NOTE 9 – BUSINESS COMBINATIONS
Bad Love Cosmetics, LLC DBA Elite Therapeutics
Effective March 6, 2019, the Company purchased 100% of the outstanding interests of Bad Love Cosmetics, LLC DBA Elite Therapeutics ("Elite").
The consideration paid was $1,862,363 and was made through an all stock purchase of 775,984,665 shares at a price of $0.0024.
A summary of the purchase price allocation at fair value is below.
| Purchase Allocation | |
Accounts receivable, net | | 22,000 | |
Inventory | | 360,000 | |
Accounts Payable | | (65,000 | ) |
Liabilities | | (36,000 | ) |
Retained Earnings Loss | | 1,581,000 | |
Total Consideration | $ | 1,862,000 | |
Pro forma Information
The following is the unaudited Pro forma information assuming the business acquisition occurred on January 1, 2019:
| | For the Three Months ended March 31 | |
| | 2019 | | | 2018 | |
| | | | | | | | |
REVENUES | | $ | 101,000 | | | $ | 58,000 | |
| | | | | | | | |
Net Loss Attributable to Common Stockholders | | $ | (1,678,000 | ) | | $ | (109,000 | ) |
| | | | | | | | |
LOSS PER SHARE OF COMMON STOCK – Basic and diluted | | $ | 0.00 | | | $ | 0.00 | |
| | | | | | | | |
WEIGHTED AVERAGE SHARES OUTSTANDING – Basic and diluted | | | 4,178,685,161 | | | | 3,485,613,929 | |
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NOTE 10 – COMMITMENTS AND CONTINGENCIES
Leases
We currently have no long term office lease.
Collaborative Agreements
We are a party to certain collaborative agreements with various entities for the joint operation of test plots to establish that GKG grows well in the area and optimal agronomic practices are developed. These agreements are in the form of development collaborations and licensing agreements. Under these agreements, we have granted rights to grow and use of GKG. In return, we are entitled to receive certain payments for the operations of the test plots and license fees on the harvesting of GKG should it ultimately be commercialized.
All of our collaborative agreements are subject to termination by either party, without significant financial penalty. Under the terms of these agreements, upon a termination we are entitled to reacquire all rights in our technology at no cost and are free to re-license the technology to other collaborative partners.
Revenue earned from collaborative agreements is comprised of negotiated payments for the establishment, evaluation and operations of GKG test plots. Deferred revenue represents customer payments received which are related to future performance. Generally, for collaborative agreements establishing test plots, we recognize revenue only after the Giant King Grass is planted in the customer’s location. Until that time any money received is recorded as deferred revenue. During the three months ended March 31, 2019 and 2018, we received $75,000 and $0 payments under these collaborative agreements. We recognized $34,000 and $0 revenue from these collaborative agreements for the three months ended March 31, 2019 and 2018.
Global Supply, License, and Commercialization Agreement
Executed on April 4, 2016 and effective as of March 28, 2016, the Company, VGE and Guangzhou Inter-Pacific Arts Corp., a Chinese wholly-owned foreign enterprise registered in Guangdong province ("IPA") owned by VGE, entered into the Global Supply, License, and Commercialization Agreement (the "New Agreement").
Prior to the New Agreement, IPA and VGE had entered into a certain Supply and Commercialization Agreement dated September 30, 2012 regarding a license and supply arrangement between IPA and VGE regarding Giant King Grass ("IPA-VGE Agreement"). In turn, VGE and the Company also entered into a certain Supply and Commercialization Agreement dated September 30, 2012 regarding a license and supply arrangement between VGE and the Company regarding Giant King Grass ("VGE-VIASPACE Agreement").
Under the New Agreement, VGE and the Company terminated the VGE-VIASPACE Agreement and IPA directly granted the Company an exclusive, perpetual license to commercialize its intellectual property rights to three (3) types of high yield, non-genetically modified grasses ("Three GK Grasses") throughout the world except Cambodia, People’s Republic of China, Taiwan, Thailand, Myanmar, Malaysia, Laos, Vietnam and Singapore ("VIASPACE Territory"). It and VGE agreed to subordinate the terms of the IPA-VGE Agreement to the terms of the New Agreement. IPA also granted the right to use and market the name "Giant King Grass" and other related names.
The Company would owe royalty payments on the Net Sales of the Three GK Grasses. This license would be sublicenseable in the VIASPACE Territory. IPA held all rights of ownership to the Three GK Grasses. The Company would own any grasses resulting from any modifications or improvements to the Three GK Grasses. IPA would use commercially reasonable efforts to maintain its intellectual property rights. The Company would use commercially reasonable efforts to commercialize the Three GK Grasses throughout the VIASPACE Territory.
Litigation
The Company is not party to any material legal proceedings at the present time.
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NOTE 11 – SUBSEQUENT EVENTS
On April 22, 2019, Dr. Kevin Schewe, CEO of the Company, advanced $7,000 pursuant to a convertible loan agreement and immediately converted the $7,000 loan into 12,939,002 shares of Company common stock at a conversion price of $0.000541 per common share.
On April 24, 2019, we issued 396,231 shares or our common stock to a consultant. The shares were issued at fair market value of approximately $1,000 on the date of the issuance.
On May 21, 2019, Dr. Kevin Schewe, CEO of the Company, advanced $21,000 pursuant to a convertible loan agreement and immediately converted the $21,000 loan into 45,268,377 shares of Company common stock at a conversion price of $0.0004639 per common share.
On June 4, 2019, Mr. Haris Basit, Director of the Company, advanced $5,000 pursuant to a convertible loan agreement and immediately converted the $5,000 loan into 11,039,965 shares of Company common stock at a conversion price of $0.0004529 per common share.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion contains certain statements that constitute “forward-looking statements”. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition or Plan of Operation.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Our future results may differ materially from those currently anticipated depending on a variety of factors, including those described below under “Risks Related to Our Future Operations” and our filings with the Securities and Exchange Commission. The following should be read in conjunction with the unaudited Financial Statements and notes thereto that appear elsewhere in this Report and in conjunction with our 2016 Annual Report on Form 10-K as filed with the SEC.
VIASPACE Overview
Description of Business – VIASPACE Inc. (“we”, “us”, “VIASPACE”, or the “Company”) was founded in July 1998. Its business involves renewable energy and is based on biomass, in particular our license to a dedicated energy crop with the trademark “Giant King® Grass” (“GKG”). Through a license for GKG we obtained from Guangzhou Inter-Pacific Arts Corp., a Chinese wholly-owned foreign enterprise registered in Guangdong province ("IPA China") which is owned by VIASPACE Green Energy Inc. (“VGE”), we are able to commercialize GKG throughout the world, except for the People’s Republic of China (“China”) and the Republic of China (“Taiwan”).
GKG can be burned in 100% biomass power plants to generate electricity; made into pellets that can be burned together with coal to reduce carbon emissions from existing power plants; generate bio methane through anaerobic digestion, and can be used as a feedstock for low carbon liquid biofuels for transportation, biochemicals and bio plastics. Cellulosic ethanol, bio butanol and other liquid cellulosic biofuels, do not use corn or other food sources as feedstock. GKG can also be used as animal feed. GKG and other plants absorb and store carbon dioxide from the atmosphere as they grow. When they are burned, they release the carbon dioxide back into the atmosphere, but it is the same carbon dioxide that was removed from the atmosphere, and so this process is carbon neutral. Small amounts of fossil fuel are used by the farm equipment, transportation of GKG and fertilizer, so that the overall process of growing and burning GKG probably has some net carbon dioxide emissions, but much lower emissions than burning coal or other fossil fuels directly to create the same amount of energy. GKG has been independently tested by customers and been shown to have excellent energy content, high bio methane production, and the cellulosic sugar content needed for biofuels and biochemicals.
Critical accounting policies and estimates
Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR60”) issued by the SEC, suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy critical if it is important to the Company’s financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. For a summary of the Company’s significant accounting policies, including the critical accounting policies discussed below, see the accompanying notes to the financial statements.
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions. The following accounting policies discussed below require significant management judgments and estimates.
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The Company has three revenue models for GKG: 1. contract plantation establishment, support and licensing for a customer; 2. collaborative agreements to establish a test plot in the customer’s location to determine that GKG grows sufficiently for the customer to use in their particular application; and 3. consulting agreement services for customers considering the establishment of a grass plantation in their particular country or location.
The Company must complete certain performance obligations for all three revenue models before recognizing revenue. The first is oversight and technical assistance on best practices for growing GKG at the customer’s site. Agreements with customers generally include time periods when the oversight and technical assistance is to be provided. Revenue recognition for this performance obligation is allocated during the time period the assistance is provided. The second performance obligation is providing customers with seedlings for the initial plot. Once seedlings are shipped to the customer’s location this obligation is considered complete and the revenue is recognized on shipment date. The last performance obligation is ensuring licensing rights be extended to customers to allow them to grow GKG in agreed upon regions and during certain periods. While an agreement is in place with a customer revenue earned from licensing is recognized at the time of payment. Deferred revenue represents payments received which are related to future performance. For the three months ending March 31, 2019 and 2018, the Company has recognized revenues under revenue models 2 and 3.
With regard to revenue recognition in connection with agreements that include multiple performance obligations, management reviews the relevant terms of the agreements and determines whether the Company has satisfied a performance obligation in accordance with FASB Topic 606. The revenue is recognized when or as the Company satisfies a performance obligation by transferring a promised good or service to a customer. The amount of revenue recognized is the amount allocated to the satisfied performance obligation. If it is determined that payments have been received prior to satisfying the performance obligation, the revenue will be deferred and included in deferred revenue within our balance sheet until such time that the performance obligation is satisfied at a point in time or over time. Management reviews and reevaluates such conclusions as each item in the arrangement is delivered and circumstances of the development arrangement change.
The Company accounts for equity instruments issued to consultants and vendors in exchange for goods and services in accordance with the provisions of FASB ASC Topic 505-50, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services” and “Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other than Employees”. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. In accordance with FASB ASC Topic 505-50, an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor's balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company records the fair value of the fully vested, non-forfeitable common stock issued for future consulting services as prepaid expenses in its balance sheet.
The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There is no assurance that actual results will not differ from these estimates.
Results of Consolidated Operations
Three Months Ended March 31, 2019 Compared to March 31, 2018
Revenues
Revenues were $75,000 and $15,000 for the three months ended March 31, 2019 and 2018, respectively, an increase of $60,000. The revenues relate to Viaspace collaborative agreements for the joint operation of test plots to establish whether Giant King Grass grows well in the applicable customer’s countries and optimal agronomic practices are developed. The revenues also relate to Elite product sales.
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Cost of Revenues
Costs of revenues were $38,000 and $7,000 for the three months ended March 31, 2019 and 2018, respectively, an increase of $31,000. The costs incurred by Viaspace to support the collaborative agreements and the consulting and engineering work include travel costs and external consulting costs. Viaspace sends personnel or consultants to oversee the initial plantings of Giant King Grass at the customer’s locations. Elite Cost of Revenues includes product, bottles, shipping and additional costs for development of the products.
Gross Profit
The resulting effect on these changes in revenues and cost of revenues for the three months ended March 31, 2019 compared to the same period in 2018 was an increase in gross profit from a gross profit $8,000 for the three months ended March 31, 2018 to a gross profit of $37,000 for the three months ended March 31, 2019, an increase of $29,000.
Operations Expenses
Operations expenses were $6,000 and $16,000 for the three months ended March 31, 2019 and March 31, 2018, a decrease of $10,000. Consulting costs were lower in 2019 due to lower costs related to our test plots in Hawaii and Florida. Operations expenses consist of plantation expenses related to the Company’s test plot in Hawaii and Florida and costs associated with agronomy support and travel for potential customers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $128,000 and $32,000 for the three months ended March 31, 2019 and 2018, respectively, an increase of $96,000. Stock option compensation expense increased $54,000 in 2019 as compared with 2018 due to new stock options granted in 2018. Consulting fees, insurance, accounting and legal fees, and other administrative expenses increased by a combined $36,000 in 2019 as compared with 2018.
Loss from Operations
The resulting effect on these changes in gross profits, operations expenses, and selling, general and administrative expenses was a loss from operations in 2019. For the three months ended March 31, 2019, the Company had a loss from operations of $97,000 compared with a loss from operations of $40,000 for the three months ended March 31, 2018, a decrease of $57,000.
Interest Expense
Interest expense was $3,000 and $28,000 for the three months ended March 31, 2019 and 2018, respectively, a decrease of $25,000. This is due to a decrease in the amount of the discount recognized in 2019 as compared to 2018, related to decreased officer convertible loans made to the Company in 2019.
Other Expenses
The Company recorded other expense of $1,577,000 for the three months ended March 31, 2019. This is related to the fair value adjustment of the share price on the day of the Elite Therapeutics acquisition. The Company did not estimate additional fair value above the aggregate consideration of $500,000 resulting in this charge for the difference. The Company also recorded $4,000 as the fair value of the Company’s minority interest in Viaspace California. The other expense resulted in a decrease of $1,574,000 for the period.
Liquidity and Capital Resources
The Company’s net loss for the three months ended March 31, 2019 was $1,677,000. Non-cash expenses totalled $1,866,000 for the three months ended March 31, 2019 due to stock compensation expense, amortization of debt discount, and the fair valuation adjustment due to the Elite acquisition. Changes in operating assets and liabilities increased cash by $61,000 in 2019. Net cash used by operating activities for operations was $22,000 for the three months ended March 31, 2019.
The Company has incurred significant losses from operations, resulting in an accumulated deficit of $56,768,000 at March 31, 2019. The Company expects such losses to continue. However, on November 30, 2016, the Company entered into a Loan Agreement with its former CEO Haris Basit whereby he agreed to fund
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the Company $100,000 over a two-year period. In addition, on February 23, 2017, the Company entered into a Loan Agreement with Director and acting CEO Kevin Schewe whereby he agreed to fund the Company $100,000 over a two-year period. On May 24, 2018, the Company entered into a new Loan Agreement with Director and acting CEO Kevin Schewe whereby he agreed to fund the Company $100,000 over a two-year period. In addition, on July 25, 2017, the Company entered into a Loan Agreement with CTO Carl Kukkonen whereby he agreed to fund the Company $25,000 over a two-year period. The Company received $2,000 from Dr. Schewe related to these Loan Agreements during the three months ended March 31, 2019.
As of March 31, 2019, the Company had $58,000 remaining availability under Dr. Schewe’s note and $13,500 remaining availability under Dr. Kukkonen’s note. The Company expects contracts related to Giant King Grass, loans from Dr. Schewe and Dr. Kukkonen, and occasional direct purchases of stock from investors to fund the operations of the Company for the foreseeable future. However, no assurance can be given that Dr. Schewe, Mr. Basit or Dr. Kukkonen will continue to fund the Company or that sales contracts will be obtained in the future, or if they are obtained, that they will be profitable. Accordingly, there continues to be substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not include any other adjustments that might result from the outcome of these uncertainties. Additionally, based upon our current policy of investing any available cash back into our operations, we do not plan to distribute any cash to our shareholders in the foreseeable future.
Contractual Obligations
There are no long-term contractual obligations.
Employment Agreements
Effective October 1, 2016, the Company entered into one-year employment agreement with Carl Kukkonen as Chief Technology Officer of the Company and received a salary of $84,000 per annum. He was also entitled to customary insurance and health benefits, and reimbursement for out-of-pocket expenses in the course of his employment. Additionally, Dr. Kukkonen would be awarded a bonus of 10% of the gross revenue generated by the Company up to a maximum of $100,000. Dr. Kukkonen resigned as CTO and Director from the Board of Directors effective as of October 9, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is not required of smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are designed for the purpose of ensuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosures.
For the period ended March 31, 2019, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In the course of this evaluation, our management considered the material weakness in our internal control over financial reporting as discussed in our Annual Report on Form 10-K for the period ended December 31, 2018. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report on Form 10-Q, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. To overcome this weakness, our principal executive and financial officers have reviewed and provided additional substantive accounting information and data in connection with the preparation of this quarterly report. Therefore, despite the weaknesses identified, our principal executive and financial officers believe that there are no material inaccuracies or omissions of material facts necessary to make the statements included in this report not misleading in light of the circumstances under which they are made.
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Changes in Internal Control over Financial Reporting
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financing reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2019 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company does not have any material legal proceedings as of March 31, 2019.
ITEM 1A. RISK FACTORS
Risk Factors Which May Affect Future Results
The Company cautions that the following important factors, among others, in some cases have affected and in the future could affect the Company’s actual results and could cause such results to differ materially from those expressed in forward-looking statements made by or on behalf of the Company.
There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, other than as set forth below:
Risks Related to our Grass Business
If we fail to comply with our obligations in our intellectual property licenses, we could lose license rights that are important to our business.
Executed on April 4, 2016 and effective as of March 28, 2016, the Company, VGE and IPA China, entered into the Global Supply, License, and Commercialization Agreement (the “New Agreement”).
Under the New Agreement, VGE and the Company terminated the VGE-VIASPACE Agreement and IPA directly granted the Company an exclusive, perpetual license to commercialize its intellectual property rights to three (3) types of high yield, non-genetically modified grasses (“Three GK Grasses”) throughout the world except Cambodia, People’s Republic of China, Taiwan, Thailand, Myanmar, Malaysia, Laos, Vietnam and Singapore (“VIASPACE Territory”). It and VGE agreed to subordinate the terms of the IPA-VGE Agreement to the terms of the New Agreement. IPA China also granted the right to use and market the name “Giant King Grass” and other related names.
The Company would owe royalty payments on the Net Sales of the Three GK Grasses. This license would be sublicenseable in the VIASPACE Territory. IPA China held all rights of ownership to the Three GK Grasses. The Company would own any grasses resulting from any modifications or improvements to the Three GK Grasses. IPA China would use commercially reasonable efforts to maintain its intellectual property rights. The Company would use commercially reasonable efforts to commercialize the Three GK Grasses throughout the VIASPACE Territory.
If the Company does not make its required royalty payments, it could lose its license.
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, key personnel may leave our company and subsequently compete against us.
Effective July 31, 2017, Mr. Haris Basit resigned as our Chief Executive Officer to work for a technology company in an industry unrelated to the Company's industry. Dr. Kevin Schewe, the Company's largest shareholder and current Chairman of the Board, became our acting Chief Executive Officer. Effective September 30, 2017, Mr. Stephen Muzi resigned as our Chief Financial Officer and was replaced by Dr. Schewe. Effective October 9, 2018, Dr. Carl Kukkonen resigned as our Chief Technology Officer, and from the Board of Directors. Dr. Kukkonen’s, Mr. Basit's and Mr. Muzi’s recent departures may impact the Company's ability to grow our business.
Key personnel include Dr. Schewe. The loss of key personnel, especially if without advanced notice, could harm our ability to maintain and build our business operations. Furthermore, we have no key man life insurance for any of our key employees.
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Risks Related To An Investment In Our Stock
We have incurred losses and anticipate continued losses for the foreseeable future.
Our net loss for the three months ended March 31, 2019 and the year ended December 31, 2018 was $1,677,000 and $71,000, respectively. We have not yet achieved profitability and expect to continue to incur net losses until we recognize higher revenues from GKG related sales. Because we do not have an operating history upon which an evaluation of our prospects can be based, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies seeking to develop new and rapidly evolving technologies. To address these risks, we must, among other things, respond to competitive factors, continue to attract, retain and motivate qualified personnel and continue to develop our technologies. We may not be successful in addressing these risks. We can give no assurance that we will achieve or sustain profitability.
Any future sale of a substantial number of shares of our common stock could depress the trading price of our common stock, lower our value and make it more difficult for us to raise capital.
Any sale of a substantial number of shares of our common stock (or the prospect of sales) may depress the price of our common stock. In particular, we will need to raise additional capital to maintain any ongoing business. We anticipate that the issuance of newly-issued shares to maintain our business will likely be very dilutive. In addition, these sales could lower our value and make it more difficult for us to raise capital. Further, the timing of the sale of the shares of our common stock may occur at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us.
The Company has 8,000,000,000 authorized shares of common stock, of which 4,732,073,007 were accounted for by our transfer agent as issued and outstanding as of March 31, 2019. Of these issued and outstanding shares, 3,273,482,973 shares (69.2%) are currently held by our executive officers, directors, and principal shareholders including related parties (including Mr. Haris Basit, former CEO and Director; Dr. Carl Kukkonen, CTO and Director; Mr. Stephen J. Muzi, former CFO; Ms. Angelina Galiteva, Director; Dr. Kevin L. Schewe, acting CEO, CFO and Director; Mr. Sung Hsien Chang, former director of the Company; Inter Pacific Arts Corporation, a former subsidiary of the Company; and Almaden Energy Group, a related party). Of the shares issued and outstanding at March 31, 2019, 3,424,629,322 are accounted by our transfer agent as restricted under Rule 144. These shares could be released in the future if requested by the holder of the shares, subject to volume and manner of sale restrictions under Rule 144. 1,307,443,685 shares of the Company’s common stock are accounted for by our transfer agent as free trading at March 31, 2019. 100,000,000 common shares are accounted for by our transfer agent as issued and outstanding, however, for accounting purposes the Company accounts for these as unissued since they are forfeitable. Outstanding common shares excluding these forfeitable shares are 4,632,073,007 at March 31, 2019.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares currently held by management and principal shareholders), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
Our executive officers, directors (including current and former) and principal shareholders own 57.9% of our common stock and one director holds a share of Series A Preferred Stock entitling it to votes of 50.1% on outstanding voting matters, which allows him to control substantially all matters requiring shareholder approval, and their interests may not align with the interests of our other shareholders.
Our executive officers, directors (including current and former) and principal shareholders hold 57.9% of our outstanding shares as of March 31, 2019. In addition, on May 14, 2010, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Series A Preferred Stock. The Certificate was approved by the Board and did not require shareholder vote. The Certificate created a new class of preferred stock known as Series A Preferred Stock. There is one share designated as Series A Preferred Stock. One share of Series A Preferred Stock is entitled to 50.1% of the outstanding votes on all shareholder voting matters. Series A Preferred Stock has no dividend rights and no rights upon a liquidation event and is subject to cancellation when certain conditions are met.
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On May 14, 2010, the Company issued one share of Series A Preferred Stock to Mr. Chang related to the acquisition of IPA by VIASPACE and VGE. This empowers Chang with supermajority voting rights even after he holds less than a majority of outstanding voting securities. Under the term sheet relating to the VGE Recapitalization, Chang gave a proxy to Director Dr. Schewe during the term of any GKG sublicense from VGE. Dr. Schewe may be willing to provide additional financing to the Company. In the event he provides such financing, his ownership in the Company will further increase.
Effective as of September 30, 2012, and pursuant to an Agreement to Grant Voting Rights and Transfer Preferred Share executed by Chang and Director Kevin Schewe, Chang granted Schewe an irrevocable proxy that permitted Schewe to vote the Preferred Share. This proxy lasts so long as the License remained exclusive to the Company. On March 31, 2018 the proxy was cancelled as the preferred Share was transferred from Chang to Schewe.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 3, 2019, the Company issued 26,143,791 unregistered shares of common stock to Kevin Schewe, CEO and Chairman of the Company. The shares that were issued related to the conversion by Dr. Schewe of one convertible note as discussed in detail in Note 5. The Company relied upon Section 4(2) of the Securities Act of 1933, as amended, for the offer and sale of its stock. It believed that Section 4(2) was available because the offer and sale was not a public offering of its securities and there was no general solicitation or general advertising involved in the offer or sale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits
* Filed herewith.
[SIGNATURES PAGE FOLLOWS]
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | VIASPACE Inc. (Registrant) |
| | | | |
Date: June 10, 2019 | | By: | | /s/ Kevin Schewe |
| | | | Kevin Schewe |
| | | | Chief Executive Officer (Principal Executive Officer) |
| | | | |
| | | | |
Date: June 10, 2019 | | By: | | /s/ Kevin Schewe |
| | | | Kevin Schewe |
| | | | Chief Financial Officer (Principal Financial and Accounting Officer) |
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