Attached files
file | filename |
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EX-5.1 - OPINION - VIASPACE Green Energy Inc. | viaspace_s1a-ex0501.htm |
EX-10.12 - AMENDMENT TO SECURITIES PURCHASE AGREEMENT - VIASPACE Green Energy Inc. | viaspace_s1a-ex1012.htm |
EX-3.1 - AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE REGISTRANT - VIASPACE Green Energy Inc. | viaspace_s1a6-ex0301.htm |
EX-10.11 - AMENDMENT #4 TO SPA - VIASPACE Green Energy Inc. | viaspace_s1a6-ex1011.htm |
EX-23.2 - CONSENT - VIASPACE Green Energy Inc. | viaspace_s1a6-ex2302.htm |
EX-23.1 - CONSENT - VIASPACE Green Energy Inc. | viaspace_s1a6-ex2301.htm |
As
filed with the Securities and Exchange Commission on November 25 , 2009
Registration
No. 333-159717
Washington,
D.C. 20549
AMENDMENT
NO. 6 TO REGISTRATION
STATEMENT
ON
FORM S-1/A
UNDER
THE
SECURITIES ACT OF 1933
VIASPACE
GREEN ENERGY INC.
(Exact
name of registrant as specified in its charter)
British
Virgin Islands
|
7330
|
Not
Applicable
|
||
(State
or other jurisdiction of
Incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
Carl
Kukkonen
Chief
Executive Officer
VIASPACE
Green Energy Inc.
2102
Business Center Dr., Suite 130
Irvine,
CA 92612
(626)
768-3360
|
Carl
Kukkonen
Chief
Executive Officer
VIASPACE
Green Energy Inc.
2102
Business Center Dr., Suite 130
Irvine,
CA 92612
(626)
768-3360
|
|
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
|
(Name,
address, including zip code, and telephone
number,
including area code, of agent for
service)
|
Copies
to:
Ryan
S. Hong, Esq.
Richardson
& Patel LLP
10900
Wilshire Blvd., Suite 500
Los
Angeles, California 90211
(310)
208-1182- Telephone
(310)
208-1154 - Facsimile
Approximate date of commencement of
proposed sale to the public: As soon as practicable after the effective
date of this registration statement
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earliest effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, and
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
|
¨
|
|
Accelerated filer
|
¨
|
||
Non-accelerated
filer
|
¨ (Do not check if a smaller reporting company)
|
|
Smaller reporting company
|
x
|
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
|
Amount
to be
Registered(1)
|
Proposed
Maximum
Offering
Price Per
Unit
|
Proposed
Maximum
Aggregate
Offering
Price
|
Amount
of
Registration
Fee
|
Ordinary
Shares
|
896,800(2)
|
$3.00
|
$2,690,400(2)
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$150.12
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Total
|
$2,690,400
|
$150.12
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(1)
|
In
accordance with Rule 416(a), the Registrant is also registering an
indeterminate number of additional ordinary shares that shall be issuable
pursuant to Rule 416 to prevent dilution resulting from share splits,
share dividends or similar
transactions.
|
(2)
|
The
registration fee for securities to be offered by the Registrant is based
on an estimate of the Proposed Maximum Aggregate Offering Price of the
securities, and such estimate is solely for the purpose of calculating the
registration fee pursuant to Rule
457(o).
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 25 , 2009
VIASPACE
GREEN ENERGY INC.
896,800 Ordinary Shares
This is
the initial public offering of VIASPACE Green Energy Inc., a British Virgin
Islands business company.
This
prospectus covers the resale by selling shareholders named on page 39 of up to
896,800 shares
There is
no current trading market for our securities and this offering is not being
underwritten. These securities will be offered for sale by the selling
shareholders identified in this prospectus in accordance with the methods and
terms described in the section of this prospectus titled “Plan of Distribution.”
We intend to seek and obtain quotation of our ordinary shares for trading on the
OTC Bulletin Board. We estimate that the selling shareholders will sell at a
price no greater than $3.00 per share until our shares are quoted on the OTC
Bulletin Board and thereafter at prevailing market prices or privately
negotiated prices.
AN
INVESTMENT IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK. SEE “RISK
FACTORS” BEGINNING AT PAGE 7.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
You
should rely only on the information contained in this prospectus to make your
investment decision. We have not authorized anyone to provide you with different
information. This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front page of this
prospectus.
The
following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus carefully.
The date
of this prospectus is November 25 , 2009
3
Except
where the context otherwise requires and for purposes of this prospectus
only:
·
|
The
terms “we,” “us,” “our company,” “our” and VGE collectively
refer to VIASPACE Green Energy Inc., a British Virgin Islands (“BVI”)
international business company; Inter-Pacific Arts, a BVI company; and
Guangzhou Inter Pacific Arts, a company incorporated under the
laws of the PRC.
|
·
|
“Shares”
and “ordinary shares” refer to our ordinary
shares.
|
·
|
“China”
and “PRC” refer to the People’s Republic of
China.
|
·
|
all references
to “RMB,” “Renminbi” and “Ґ” are to the legal currency of China and
all references to “USD,” “U.S. dollars,” “dollars” and “$” are to the
legal currency of the United States.
|
For
purpose of clarity, where the context requires us to differentiate between the
entities generally referred to collectively as “VGE”, and for purposes of this
prospectus only:
·
|
“VGE-BVI”
refers to VIASPACE Green Energy Inc., a BVI
company.
|
·
|
“IPA-BVI”
refers to Inter Pacific Arts Corporation, a BVI international business
company.
|
·
|
“IPA-China”
refers to Guangzhou Inter Pacific Arts, a PRC company that is a
wholly-owned foreign enterprise headquartered in Guangdong province of
China. IPA-BVI owns all equity interests of IPA
China.
|
This
prospectus contains translations of certain RMB amounts into U.S. dollar amounts
at a specified rate solely for the convenience of the reader. Unless otherwise
stated, the translations of RMB into U.S. dollars have been made at the rates of
exchange of $1.00 to RMB 6.81731, the exchange rates prevailing on December 31,
2008. We make no representation that the RMB or U.S. dollar amounts referred to
in this prospectus could have been or could be converted into U.S. dollars or
RMB, as the case may be, at any particular rate or at all. See “Risk
Factors—Fluctuation of the Renminbi could materially affect our financial
condition and results of operations.” for discussions of the effects of
fluctuating exchange rates on the value of our shares. Any discrepancies in any
table between the amounts identified as total amounts and the sum of the amounts
listed therein are due to rounding.
4
Table
of Contents
Prospectus
Summary
|
7
|
Risk
Factors
|
13
|
Forward-Looking
Statements
|
23
|
Our
Corporate Structure
|
24
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Use
of Proceeds
|
24
|
Dividend
Policy
|
24
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Exchange
Rate Information
|
24
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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Our
Business
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36
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Management
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41
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Director
and Executive Compensation
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42
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Principal
Shareholders
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45
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Dilution
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46
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Selling
Security Holders
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47
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Plan
of Distribution
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49
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Related
Party Transactions
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50
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Description
of Share Capital
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51
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Shares
Eligible for Future Sale
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56
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Taxation
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56
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Enforceability
of Civil Liabilities
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58
|
Legal
Matters
|
59
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Experts
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59
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Where
You Can Find More Information
|
59
|
Financial
Information
|
60
|
5
Dealer
Prospectus Delivery Obligation
Until
_________, 2009, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
6
PROSPECTUS
SUMMARY
This
summary highlights information that we present more fully in the rest of this
prospectus. This summary does not contain all of the information you should
consider before buying shares in this offering. This summary contains
forward-looking statements that involve risks and uncertainties, such as
statements about our plans, objectives, expectations, assumptions or future
events. In some cases, you can identify forward-looking statements by
terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “we believe,” “we intend,” “may,” “will,” “should,”
“could,” and similar expressions. These statements involve estimates,
assumptions, known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from any future results, performances
or achievements expressed or implied by the forward-looking statements. You
should read the entire prospectus carefully, including the “Risk Factors”
section and the financial statements and the notes to those
statements.
Our
Company
VIASPACE
Green Energy Inc., a British Virgin Islands company (“VGE-BVI” or the “Company”)
is the parent company of IPA BVI. IPA BVI owns all equity interests of IPA
China. IPA BVI and IPA China specialize in the manufacturing of high
quality, copyrighted, framed artwork sold in U.S. retail chain stores. IPA China
also has a sub license to grow and sell a new fast-growing hybrid grass to be
used for production of biofuels and as feed for livestock.
Our
principal executive offices are located at 2102 Business Center Dr., Suite 130,
Irvine, CA 92612. Our main office in the PRC is located at
San Sheng Road, DaLi Village, TaiHe Town, Guangzhou, China
510540. Our website address is www.viaspacegreenenergy.com. Information
contained on our website or any other website is not a part of this
prospectus.
Risks
Related to Our Business
Our
business is subject to a number of risks, which you should be aware of before
making an investment decision. These risks are discussed more fully in the
section of this prospectus titled “Risk Factors.”
Corporate
History
On
October 21, 2008, VIASPACE Inc., our parent company (“VIASPACE”), and we entered
into a Securities Purchase Agreement (the "Purchase Agreement") with Sung Hsien
Chang ("Chang"), and China Gate Technology Co., Ltd., a Brunei Darussalam
company ("Licensor"). Under the Purchase Agreement, we agreed to acquire 100% of
Inter-Pacific Arts Corp., a British Virgin Islands international business
company ("IPA BVI"), and the entire equity interest of Guangzhou Inter-Pacific
Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong
province ("IPA China") from Chang, the sole shareholder of IPA BVI and IPA
China. In exchange, VIASPACE agreed to pay $16 million in a combination of cash,
and newly-issued shares of VIASPACE and our ordinary shares. In
addition, VIASPACE issued shares of its common stock to Licensor and in exchange
Licensor sub licensed certain fast growing grass technology to IPA
China.
The
transactions under the Purchase Agreement ("Acquisition") involves two
phases. At the first closing on October 21, 2008, we issued 3,500,000
newly-issued shares to Chang and his designees. VIASPACE issued
215,384,615 shares of its common stock to Chang and 30,576,007 shares of common
stock to Licensor. Chang delivered 70% of the outstanding common
stock of IPA BVI to us. In addition, we executed employment
agreements with certain persons, including Sung Chang; Carl Kukkonen, VIASPACE’s
Chief Executive Officer; Stephen Muzi, the VIASPACE’s Chief Financial Officer;
and Maclean Wang, the sole shareholder of the Licensor. Our
shareholders also entered into an agreement with Chang regarding the rights as
our shareholders ("Shareholders Agreement") to elect directors. IPA
China became a wholly-owned subsidiary of IPA BVI (and indirectly, our
subsidiary) after the First Closing.
The
deadline for the second closing in which the remaining minority interest of 30%
of IPA BVI equity holdings would be transferred to us is December 15 , 2009 ("Second Closing"). At the Second
Closing, VIASPACE shall pay $4.8 million ("Cash Consideration") plus Interest
(as determined below) since the First Closing, in cash to Chang. Interest on the
Cash Consideration shall accrue at 6% for the first six months after the First
Closing, and then 18% until June 10, 2009, and then at an annual rate of 6%
thereafter. VIASPACE shall also issue 1.8% of its then outstanding shares
of common stock to Licensor.
The
conditions to VIASPACE’s and our obligations to consummate the second closing
included: (1) representations and warranties of Chang and Licensor remained true
at closing; (2) Chang complied with the material covenants under the agreement;
(3) the issuance of the securities to Chang and Licensor were exempt from
registration, including under Regulation D for which the issuance of
the first closing shares relied upon; (4) Chang executed certain compliance
certificates; (5) customary permits, consents and waivers were obtained; (6) books and records were delivered to
VIASPACE; (7) an officer’s certificate regarding
each target’s charter documents were delivered; (8) due diligence had been
satisfactorily completed; and (9) Chang shall have transferred his entire equity
interest in IPA China to IPA BVI. To our knowledge, all of these criteria have
been satisfied.
The
conditions to Chang’s and Licensor’s obligation to consummate the second closing
included: (1) representations and warranties of VIASPACE and us remained true at
closing; (2) VIASPACE and we complied with the material covenants under the
agreement; (3) books and records of VIASPACE were delivered or made available to
Chang and his counsel; (4) any necessary third
party consents shall have been obtained; and (5) VIASPACE shall be prepared to
deliver $4.8 million in cash to Chang. To our knowledge, all
of these criteria, other than the cash payment, have been prepared or may be
delivered shortly. Management is uncertain when it will be able to
raise the cash payment amount.
In
addition, the Licensor and Sung Chang, the seller of IPA China and IPA BVI, each
represented that at least 100 hectares of arable land in Guangdong province in
China will be available for grass farming by IPA China within 12 months after
the First Closing Date. IPA China secured 45 hectares of arable land
in the first quarter of 2009 and leased an additional 55 ha in the third quarter
of 2009. The requirement has been met so this requirement no longer
has any impact on our ability to utilize our grass license rights.
We
sublicense our intellectual property to the Giant King Grass from China Gate
which licenses the intellectual property from the original
licensor. China Gate has informed us that they have an exclusive
license to the Giant King Grass in Guangdong province and North America and have
granted us an exclusive sublicense to the same region. However, we do
not have a direct relationship with the holder of the intellectual property, any
material adverse effect to the Giant King Grass license held by our sublicensor
would affect our rights as the sublicensee.
7
On August
21, 2009, the parties entered into a second Amendment to the Purchase Agreement
that the Registrant’s shares held by Chang and others were no longer subject to
forfeiture even if the Second Closing did not occur. This amendment
also extended the Second Closing deadline from June 18, 2009 to November 21,
2009 (which has since been further extended to December 15, 2009
under a subsequent amendment to the Purchase Agreement). The Second
Closing is now scheduled for December 15, 2009, and VIASPACE is to pay
$4,800,000 plus interest to Chang. Interest on the Cash Consideration
shall accrue at 6% for the first six months after the First Closing, and then
18% until June 10, 2009, and then at an annual rate of 6% thereafter
. VIASPACE shall also issue 1.8% of its then outstanding shares of
common stock to Licensor. Chang shall deliver the remaining 30% of
the outstanding shares of IPA BVI to VGE even if the Second Closing did not
occur and the closing conditions to VIASPACE’s and us are satisfied or
waived. VIASPACE and we believe that such closing conditions have
been satisfied at November 25, 2009. Therefore, even if the Second
Closing did not occur, the remaining 30% of IPA BVI will be transferred to
VGE.
As
required by the Purchase Agreement, VGE filed a Form S-1 Registration Statement
with the Securities and Exchange Commission ("SEC") on June 3, 2009 covering the
resale of all or such maximum portion of VGE common stock issued pursuant to the
Purchase Agreement as permitted by SEC regulations. The second
Amendment extends until November 21, 2009, the date that VGE shall use its best
efforts to qualify its Common Stock for quotation on a trading
market. If VGE’s Registration Statement is declared effective by the
SEC on or before November 21, 2009, the Second Closing Deadline will be extended
until December 21, 2009.
On
November 25, 2009, we entered into another amendment to the Securities Purchase
Agreement that extended the Second Closing Deadline from November 21, 2009 to
December 15, 2009; and provided further that if the registration statement were
declared effective by the SEC on or before December 15, 2009, then the Second
Closing Deadline would be extended to January 15, 2010.
Also
pursuant to the second amendment, VIASPACE irrevocably assigned to Chang and
Licensor the VIASPACE shares issued to Chang and Licensor in the First
Closing of the Purchase Agreement. Licensor agreed to limit sales of
VIASPACE common shares issued at the First Closing to a maximum of 8,800,000
shares in any 90-day period. On October 13, 2009 the parties to the
Purchase Agreement entered into the third Amendment to the Securities Purchase
Agreement in which the parties agreed that in the event that the Second Closing
fails to occur and VIASPACE’s closing conditions to the Second Closing have been
satisfied by Chang, then (1) Chang and/or his designees shall retain
our Shares, (2) VIASPACE shall transfer all shares of our common stock it holds
to Chang, (3) Chang will deliver the remaining 30% equity interest of IPA-BVI to
us, such that we shall receive all equity securities of IPA-BVI, and (4) if
VGE’s common stock is not listed on a Trading Market as of the Second Closing
Deadline, Chang shall also receive such number of shares of VIASPACE common
stock so that Chang shall own a majority of the outstanding shares of VIASPACE
common stock as of the date of issuance. In addition, the parties
clarified that the three year non-competition clause to engage in the grass
business starting from the date of the First Closing does not apply to VGE and
Messrs. Kukkonen and Muzi, but only to VIASPACE and its other
affiliates. Further, we deleted the obligation of Licensor to assign
the grass license to VGE.
If the
Second Closing has occurred but if Registrant common stock is not listed on a
trading market by December 15 , 2009, then VIASPACE
will issue to Chang the number of shares of its common stock equivalent to
US$5,600,000.
Licensor
and Chang each represented and covenanted that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement regarding
such land use rights shall grant the land use rights to IPA China, but shall be
assignable to us at our option. The term of such agreement, including possible
renewals, shall be at least 10 years. Currently approximately 45
hectares of the 100 hectares are leased by IPA China in Guangdong province for a
term of 20 years. We expect Chang to complete the leasing of a total of 100
hectares by the deadline. We do not expect to request an assignment
of this lease since we intend to own IPA China through 100% ownership of IPA
BVI. VIASPACE and we have contractual rights to enforce this
obligation and intend to do so.
On
October 13, 2009 the parties to the Purchase Agreement entered into Amendment
No. 3 to the Securities Purchase Agreement in which the parties agreed that
Acquirer Shares would not be subject to cancellation unless the registration
statement was abandoned. If the Acquirer Shares were registered, then
such shares would no longer be subject to cancellation. In addition,
the parties clarified that the non-competition clause did not apply to us and
Messrs. Kukkonen and Muzi, but only to VIASPACE and its other
affiliates. Further, we deleted the obligation of China Gate to
assign the license to us.
As
previously stated, on November 25, 2009, we entered into another amendment to
the Purchase Agreement that extended the Second Closing Deadline to December 15,
2009.
Currently,
we control 70% of IPA BVI. Accordingly, we consolidate their results,
assets and liabilities in our financial statements.
Our
Business
Grass Business
Division
Through
our acquisition of IPA BVI and IPA China we indirectly obtained a worldwide
sublicense to cultivate and sell “Giant King Grass,” a natural hybrid,
non-genetically modified, fast-growing, perennial grass originally developed for
livestock feed. Giant King Grass may also be used to produce
non-food crop liquid biofuels, and as a replacement for coal in electricity
generating power plants. This perennial grass can grow up to 12 feet in height
in 60 days. It can be harvested four or more times a year in tropical
and semitropical areas with a yield of up to 375 metric tons per hectare
(freshly cut, referred to as wet yield). This is four to seven times
higher mass yield than for corn. Note that one hectare (ha) is 10,000
square meters and equal to 2.47 US acres or approximately the size of two US
football fields.
Giant
King Grass has immediate use as animal feed for cattle, sheep, horses, rabbits,
pigs, poultry and fish. The $40 billion Chinese animal feed market, according to
the January 2008 Feed International report, has grown 15% annually for the last
ten years.
Giant
King Grass can also be used as a feedstock to make cellulosic biofuels such as
ethanol, methanol and green gasoline. British Petroleum recently
announced plans to build a cellulosic ethanol plant in Florida using grass as a
feedstock, and in the March 23, 2009 issue of Time magazine, a Toyota
advertising section stated that the carbon footprint for its plug-in hybrid can
be reduced by fueling the engine with cellulosic ethanol. Liquid biofuels are
one of the potential uses for our grass.
8
The July
2009 issue of Scientific American has a cover story entitled “Grassoline” which
discusses renewable low carbon, non-food, liquid biofuels made from grass and
other feedstock. The Scientific American article only covers grass
grown in the U.S.
We are
growing Giant King Grass, a different and more productive grass compared to
those considered in the Scientific American article, in Guangdong Province China
and is exploring opportunities in other semitropical and tropical parts of China
and other areas such as India, Indonesia, Malaysia, the Philippines, and
Tanzania as well as Central and South America.
Another
application of Giant King Grass is as a replacement for coal in electricity
generating power plants. Reports by the U.S. Department of Energy
state that 15% to 20% of coal may be replaced by burning grass in a power plant
with only minor modifications. This process is called co-firing. In addition
there is a growing trend towards small dedicated power plants (10-30
megawatts) that are fueled exclusively by biomass such as grass and agricultural
waste. For example, since its founding in 2004, Dragon Power in China
has built and is operating 19 power plants powered by 100%
biomass. China’s A-Power Energy Generation Systems Ltd. (Nasdaq:APWR)
announced in April, May and June 2009 that it has received three contracts to
build a total of five biomass fueled electricity generation plants in China by
the end of 2010.
On
September 2, 2009 our parent company VIASPACE and we signed a non-binding
Memorandum of Understanding (“MOU”) with DP Cleantech Co. Ltd. of
Beijing China, a subsidiary of Dragon Power. Pursuant to the
Memorandum of Understanding, the parties agreed to (i) review the potential of
running DP’s power plants solely with Giant King Grass or in combination with
agricultural waste; (ii) investigate of suitable areas to grow Giant King Grass
and co-locate a new power plant; (iii) and burn significant quantities of Giant
King Grass in an existing DP Cleantech power plant. As part of
their due diligence, DP Cleantech commissioned an independent analysis of Giant
King Grass by the China National Center for Quality Supervision and Test of Coal
which confirmed that Giant King Grass has an energy content of 18.4 megajouels
(MJ) per dry kilogram (4402 kilocalories (kcal) per kilogram). DP Cleantech
declared Giant King Grass suitable as a renewable feedstock for generating
electric power in their power plants.
Our
strategy is to build up our grass production capabilities and initially sell our
grass into the animal feed market and to ship it to existing biomass power
plants in China. Our long-term focus is on biofuels — both liquid and
solid with long-term supply contracts.
We
initially planted 1.2 million seedlings on land on and adjacent to the framed
art factory in Guangzhou, Guangdong province, China. We obtained a 20 year
lease on 45 ha (112 acres) north of Guangzhou. Approximately 3 million
seedlings generated from the Guangzhou land have been planted here. We are
negotiating to lease additional land in China. We plan to expand
our grass business into other areas of the world. An example is that on May 15
we signed a Memorandum of Understanding with Auro Infra to develop a project to
grow grass in Tanzania, Africa to feed cattle and sheep, and explore the
opportunity for biomass fueled power plants. We have also received
inquiries from Indonesia and Brazil. The Company has the right to grow and sell
the grass anywhere in the world. In addition, China Gate has agreed not to
sell more than a de minimis amount of seedlings to customers in Guangdong
province China and North America other than to us. To our knowledge, the
Company is the only large-scale commercial source of Giant King Grass in the
world. However, we do not have exclusivity of Giant King Grass other
than the arrangement set forth in Guangdong province and North
America.
We
believe Giant King Grass supports three of China’s top national initiatives:
improved agriculture to feed its people; alternative energy and a cleaner
environment. These priorities are documented in China's five-year
plan, and by the Chinese Reform and Development Commission.
Transportation
applications requiring liquid fuels and biofuels have great
potential. Most biofuels are made from plants which are a renewable
resource, and use of some biofuels can significantly reduce carbon
emissions. Growing grass or any plant matter absorbs carbon dioxide
from the atmosphere during photosynthesis and stores it in the plant
tissue. Subsequent burning the grass does emit carbon dioxide into
the atmosphere; however the next crop of grass 60 days later absorbs the carbon
dioxide. If the process of growing, fertilizing, harvesting and transporting the
grass can be done with minimal use of fossil fuels, a grass-based fuel can be a
carbon neutral or low carbon process. Burning coal, oil, or natural
gas emits carbon dioxide and there is no mechanism to remove this carbon dioxide
from the atmosphere.
Ethanol,
which is the same alcohol in beer, wine or liquor, is the most well-known
biofuel. Ethanol is blended with gasoline and burned in conventional automobile
engines that have minor modifications. In the U.S. today almost all
ethanol is made from corn. Government subsidies for ethanol have made
ethanol price competitive with gasoline and much of the US corn crop now goes
toward ethanol production. These subsidies have led to an increased demand
for corn for ethanol production. According to the Money Morning Corn Price
Report (quoting the US Department of Agriculture), one third of U.S. corn is
devoted to ethanol production, and this is expected to increase in the
future. Corn prices have risen from about $2.00 per bushel at the
beginning of 2006 to a peak of $7.65 in mid-2008. Corn is currently
$3.66 per bushel. More land in the U.S. is devoted to corn production
at the expense of other crops and the prices of these other crops have risen as
well.
9
Higher
food prices have led to food shortages around the globe and it has been argued
that people are starving so we can make the fuel to drive our cars.
This argument has resonated with many world leaders and resulted in
a global effort to derive biofuels from plants that are not in the human food
chain. These are called cellulosic biofuels.
Cellulosic
biofuels are based on nonfood plants including grass, shrubs and
trees. These plants do not have a lot of sugar and cannot be
fermented directly like corn. They do have a lot of cellulose in
their leaves, stalks and branches which contain carbon and hydrogen which can be
converted into ethanol which is called cellulosic ethanol.
A growing
trend and a recent business opportunity is to simply burn the grass in a power
plant to generate electricity. More than 20 new power plants fueled entirely by
biomass are operating in China. These power plants currently use agricultural
waste such as corn straw, wheat straw and wood chips as the fuel. Agricultural
waste is seasonal and supply can be erratic with varying quality and price. As
stated in the MOU, Dragon Power has informed us that they would like to
have the plant fueled completely by a dedicated energy crop or at least 50% by
agricultural waste and 50% by a dedicated energy crop such as Giant King
Grass.
We are
seeking long-term supply contracts for Giant King Grass with biofuel producers
and power plants, as well as animal feed. We are in discussions with these
parties, but as of this date, we have not entered into any such
contracts. We have no customers for our grass crops at this
time. However the Memorandum of Understanding with DP Cleantech, a
subsidiary of Dragon Power the largest builder, owner and operator of biomass
power plants in China, may lead to their becoming a customer of the
Registrant.
Currently
we grow Giant King Grass on 45 hectares of land leased by it for 20 years in
Guangdong province in China. This grass can be harvested and sold directly to
customers, and it can be used to provide new seedlings for expanded
growing. A single plant can generate 20 to 35 seedlings from its
stalk and shoots (tillers) in addition to allowing the harvest and sale of the
leaves. The current 45 hectares can provide enough seedlings for
900-1575 hectares, and each year the production capability can increase by a
factor of 20 to 35. We are aggressively pursuing additional land to support
long-term supply contracts. We believe we will have access to sufficient capital
to lease additional land to support such contracts. The Company
is also pursuing partnership discussions with parties that have access to land
in China and other countries.
We are
working to produce enough seedlings and obtain enough land to have at least 1000
to 2000 hectares under cultivation in 2010. Dragon Power analyzed the
energy content of Giant King Grass and indicated in the MOU that their 30 MW
power plant fueled 100% by Giant King Grass would consume 600 tons of biomass
per day. At an 80% utilization factor this is 175,200 tons per year. At
25% moisture content, which is suitable for a power plant, Giant King Grass has
an effective yield of 125 to 180 tons per hectare per year, and the land
requirement would be 973-1402 hectares. Thus, a 30 MW electricity
generating power plant may potentially be fueled 100% by grass, or by a
combination of grass and agricultural waste. Dragon Power has said in the
MOU that they prefer to have a dedicated energy crop to provide a reliable and
consistent fuel source for at least 50% of their power generation needs. We are
in discussions with biomass power plant suppliers and operators, and with
parties that have access to significant amounts of land.
We leased
land in Guangdong province in southern China at favorable rates, and contract
with local farmers to provide the labor for growing grass at favorable rates.
Management believes sufficient land to meet our initial objectives in Guangdong
province can be acquired and financed within our current capital resources. The
land required to grow Giant King Grass to supply a power plant does not
necessarily need to be contiguous, but can consist of several parcels all within
a 50 km radius of the power plant. Parcels up to 666 ha can be leased with only
local or provincial approval. We are also pursuing other
opportunities for significant expansion that may require joint ventures or
raising capital.
We
currently seek long-term supply contracts for grass for animal feed, electrical
power production and for liquid biofuels such as cellulosic ethanol. We are
offer Giant King Grass for sale to customers. We do not sell seedlings to third
parties, but will provide seedlings and grass growing expertise to joint venture
partners where we can benefit from the recurring revenue stream of grass
sales. Based on our discussions with Dragon Power, the largest
biomass power plant builder and operator in China, Dragon Power has considered
the possibility of entering into a 20 year grass supply contract for
Giant King Grass with several additional 10 year options. The lifetime of their
power plant is up to 50 years, and they need an assured, reliable source of
biomass fuel. While these durations have been discussed,
there is no assurance nor guarantee that Dragon Power will enter into any
agreement. Even if they enter into an agreement with us, there is no
assurance it will be for 20 years or so.
10
VIASPACE
Green Energy has two distinct revenue models for Giant King Grass: integrated
grass/fuel supply under company control, and contract support/
licensing with a joint venture partner.
In the
integrated grass /fuel supply model we will own or lease land and employ
labor and management to grow Giant King Grass that will be used to supply
domestic animal feed and biomass energy markets, or exported, likely in
pelletized form, to energy markets globally. We will manage and
control the supply chain from initial land preparation through the FOB source
shipment point for the feed or energy market. We may pursue this model
using only our own capital resources, or we may elect to use joint
ventures with domestic landowners, energy equipment manufacturers, power plant
owner/operators and/or capital providers like energy investment
funds. The terms of these joint ventures will be negotiated on a
case-by-case basis.
Under a
contract/licensing model, the joint venture partner would provide the land,
labor and management and be responsible for growing Giant King Grass. We will
provide initial seedlings, crop management services and knowledge transfer for a
negotiated price. In addition, there would be an ongoing fee based on
grass production.
VIASPACE
Green Energy leased land and directly employs workers where Giant King Grass is
grown today in Guangdong province in southern China. This is under the
integrated grass/fuel supply model. We are also in discussions with potential
joint venture partners that have land and the ability to grow the grass in other
regions of China and in other countries in Asia, Africa, India and South
America.
Management
believes both models will be important contributors to our revenue
streams. Initial revenues will be 100% from the integrated grass/fuel supply
model. Rapid global expansion requires local joint venture partners that have
land and labor, but lack the energy crop and the expertise to grow it. The
contract/licensing model with joint venture partners will be used for these
remote projects.
Framed Art Business
Division
Our
subsidiaries, IPA BVI and IPA China (collectively “IPA”) manufacture high
quality, copyrighted, framed artwork in its factory in Guangzhou China, and sell
the art to large U.S. retailers through its sales organization in Atlanta,
Georgia. IPA is a manufacturer and wholesaler of framed art.
The IPA
framed art unit has five people in the U.S. and 84 in China. The
factory is on 1.6 hectares of land in China including two manufacturing
buildings and one employee dorm and a dining facility. This factory may be
utilized for our other future manufacturing requirements. IPA, with its
framed art business, has an established and stable production facility in China
and a sales and distribution network in the United States.
The
acquisition of IPA was a strategic move to acquire its revenue and profit from
its current framed art business, as well as the grass business. With the
profits from the framed art business, we believe we can aggressively build the
grass business even during these difficult economic times. We plan to
continue and grow the framed art business. Based on our grass business
goals discussed above, we believe that the grass business will as large as the
framed art business in 2010 or 2011 and much larger thereafter.
IPA art
designers work with buyers from retail chains to choose prints and other art
forms from catalogs of copyrighted and licensed work. We only purchase prints
from reputable publishing companies with whom we have long-standing
relationships, and such companies have guaranteed to us that there
are no counterfeits and that all royalties have been paid. IPA
designers then mockup mattes and frames for the customer. Once the
customer decides on a print, matte and frame combination, we ship the print to
our factory in Guangzhou, China. The mattes, frame moldings and glass
are sourced in China. A typical order is 1,400 units of a specific
design and a customer usually orders several different designs which are packed
in several containers and shipped directly to the customer in the
U.S. We provide prints, frames and packaging that are all of high
quality. An example of quality packaging is our use of protective
clear plastic covers on the corners of the frame. The covers provide
protection during shipping and handling, but are transparent and do not obscure
the artwork on the display shelf as conventional cardboard corner protectors
do. Our framed artwork typically retails for $50-$300.
11
The
Offering
We are
registering 896,800 ordinary shares (of 8,600,000 shares outstanding) for sale
by the selling shareholders identified in the section of this prospectus titled
“Selling Security Holders.”
We will
not receive any proceeds from the sale of these shares. We will pay all expenses
incurred in connection with the offering described in this prospectus, with the
exception of the brokerage expenses, fees, discounts and commissions which will
all be paid by the selling shareholders. Information regarding our ordinary
shares is included in the section of this prospectus entitled “Description of
Securities.”
Summary
Financial Information
In the
table below, we provide historical selected financial data for the period from
inception (July 1, 2008) through December 31, 2008 and the three and nine-month
periods ended September 30, 2009. This information is derived from
our consolidated financial statements included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results that may be
expected for any future period. When you read this historical selected financial
data, it is important that you read it along with the historical financial
statements and related notes and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
prospectus.
For
the Period
from
inception
(July
1, 2008)
through
December
31,
2008
|
Three
Months
Ended
September
30,
2009
(unaudited)
|
Nine
Months
Ended
September
30,
2009
(unaudited)
|
||||||||||
Total
Revenues
|
$
|
866,000
|
$
|
1,064,000
|
$
|
2,935,000
|
||||||
Income
(Loss) from Operations
|
101,000
|
30,000
|
(100,000
|
)
|
||||||||
Other
Income (Expense)
|
―
|
―
|
1,000
|
|||||||||
Net
Income (Loss)
|
91,000
|
32,000
|
(99,000
|
)
|
||||||||
Basic
Earnings (Loss) per Share
|
0.03
|
0.00
|
(0.01
|
)
|
||||||||
Diluted
Earnings (Loss) per Share
|
0.03
|
0.00
|
(0.01
|
)
|
At
December
31,
2008
|
At
September
30,
2009
(unaudited)
|
|||||||
Total
Assets
|
$
|
18,197,000
|
$
|
17,952,000
|
||||
Total
Current Liabilities
|
699,000
|
573,000
|
||||||
Shareholders’
Equity
|
17,498,000
|
17,379,000
|
||||||
Total
liabilities and shareholders’ equity
|
18,197,000
|
17,952,000
|
Corporate
Information
Our
principal executive offices are located at 2102 Business Center Dr., Suite 130,
Irvine, California, 92612 which is where our parent corporation, VIASPACE Inc.
is also located. Our telephone number at this address is 626-768-3360
and our fax number is 626-578-9063. Our registered office in the British Virgin
Islands is c/o CCS Management Limited, Sea Meadow House, Blackburne Highway,
Road Town, Tortola, British Virgin Islands.
Investor
inquiries should be directed to us at the address and telephone number of our
principal executive offices set forth above. Our website is www.viaspacegreenenergy.com. The
information contained on our website does not constitute a part of this
prospectus. Our agent for service of process in the United States is Carl
Kukkonen, 2102 Business Center Dr., Suite 130, Irvine, California,
92612.
12
RISK
FACTORS
Investment
in our securities involves a high degree of risk. You should carefully consider
the risks described below together with all of the other information included in
this prospectus before making an investment decision. The risks and
uncertainties described below are not the only ones we face, but represent the
material risks to our business. If any of the following risks actually occurs,
our business, financial condition or results of operations could suffer. In that
case, you may lose all or part of your investment. You should not invest in this
offering unless you can afford to lose your entire investment.
Risks
Related to Our Business
Risks
Relating to Our Entire Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We have a
limited operating history. Our consolidated affiliated entities, IPA BVI and IPA
China, each commenced operations in the artwork business in 2003 and although we
have profit from our artwork business, we have yet to achieve profitability from
our grass business. Accordingly, you should consider our future
prospects in light of the risks and uncertainties experienced by early stage
companies in the manufacturing and agricultural industries in China. Some of
these risks and uncertainties relate to our ability to:
●
|
maintain
or establish a competitive position in China and compete in each of our
business segments with Chinese and international companies, many of which
have longer operating histories and greater financial resources than we
do, and thus making it difficult to compete;
|
|
●
|
continue
to offer commercially successful products to attract and retain a larger
base of customers of both of our artwork and grass business goods and
products;
|
|
●
|
retain
access to the crop land we currently use for production of our products
and obtain access to additional crop land for
expansion;
|
|
●
|
maintain
effective control of our costs and expenses in the grass business due to
our early start-up nature and inexperience in managing growth;
and
|
|
●
|
retain
our management, including our Chief Executive Officer Carl Kukkonen and
our President Sung Chang, and skilled technical staff and recruit
additional key employees.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business,
financial condition and results of operations may be materially and adversely
affected.
Our
senior management team has worked together for a short period of time, which may
make it difficult for you to evaluate their effectiveness and ability to address
challenges.
Due to
our recent restructuring and additions to our corporate management team, our
senior management has worked together at our company for a short
period. As a result, it may be difficult for you to evaluate the
effectiveness of our senior management and their ability to address future
challenges to our business. In addition, we may not be able to successfully
execute our plan to recruit qualified candidates with substantial experience in
the global agricultural industry to join our senior management team in the
future. Even if we recruit qualified senior management personnel, such new
senior management personnel may not be able to work with our existing management
to effectively execute our growth strategy and address future challenges to our
business.
In
addition, VIASPACE, Carl Kukkonen and Stephen Muzi have agreed to
non-competition covenants with our grass and framed art businesses
upon a failure to close the Second Closing unless otherwise waived by Mr.
Chang. Upon such event, we would lose two of our key executives and
our connection with our current parent company, VIASPACE.
Our
future growth prospects may be affected if we are unable to obtain additional
capital.
While we
believe we have sufficient cash for the next 12 months, we may require
additional cash to grow our grass business. The sale or issuance of
additional equity securities could result in dilution to our shareholders. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations. We may not be able to obtain financing in amounts or on terms
acceptable to us, if at all. We may also not be able to secure or repay debt
incurred to fund operations. As a result, our operating results and financial
condition may be materially and adversely affected.
13
Failure
to achieve and maintain effective internal controls could have a material and
adverse effect on the trading price of our securities.
We will
become subject to reporting obligations under the U.S. securities laws. The
Securities and Exchange Commission, as required under Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring
public companies to include a report of management on the effectiveness of such
companies’ internal control over financial reporting in their annual reports. In
addition, an independent registered public accounting firm for a public company
must report the effectiveness of our Company’s internal control over financial
reporting. These requirements will first apply to our annual report on Form 10-K
for the fiscal year ending December 31, 2010. Management may conclude our
internal control over financial reporting is not effective. Moreover, even if
our management concludes our internal control over financial reporting is
effective, our independent registered public accounting firm may issue a report
that is qualified if such firm is not satisfied with our internal control over
financial reporting or the level at which our controls are documented, designed,
operated or reviewed, or if such firm interprets the relevant requirements
differently from us. In addition, during the course of such evaluation,
documentation and testing, we may identify deficiencies which we may not be able
to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for
compliance with the requirements of Section 404.
We have
been a private company with limited accounting personnel and other resources to
address our internal controls and procedures. As a result, we will likely have a
number of internal control deficiencies. If we fail to implement measures to
remediate these material weaknesses and other control deficiencies in time to
meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act, we may not
be able to conclude, on an ongoing basis, that we have effective internal
control over financial reporting in accordance with the Sarbanes-Oxley Act.
Moreover, effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, any failure to achieve and
maintain effective internal control over financial reporting could result in our
inability to conclude we have effective internal control over financial
reporting in accordance with the Sarbanes-Oxley Act, causing the loss of
investor confidence in the reliability of our financial statements, which in
turn could negatively impact the trading price of our securities. Furthermore,
we may need to incur significant costs and use significant management and other
resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and
other requirements.
Our
anticipated and any other employee share options, restricted shares or other
share incentives in the future, will adversely affect our net
income.
We
adopted a 2009 share incentive plan and granted 1,400,000 share options under
the plan in June 2009. We intend to issue options to purchase
ordinary shares, and ordinary shares under the plan. We are required
to account for share-based compensation in accordance with Financial Accounting
Standards Board Statement No. 123(R), Share-Based Payment, which requires a
company to recognize, as an expense, the fair value of share options and other
share-based compensation to employees based on the fair value of equity awards
on the date of the grant (taking into account the prices payable by the award
recipients), with the compensation expense recognized over the period in which
the recipient is required to provide service in exchange for the equity
award. We have agreed to grant Messrs. Chang and Wang approximately
688,000 options upon the Second Closing. We will have approximately
712,000 options remaining and reserved for issuance under the 2009 plan after
such grant.
If we
grant any options, restricted shares or other equity incentives in the future,
we could incur significant compensation charges equal to the fair value of the
additional options, restricted shares and other equity incentives (taking into
account the prices payable by the award recipients) and our net income could be
adversely affected.
14
We
are substantially dependent upon our key personnel, particularly Dr. Carl
Kukkonen, our Chief Executive Officer, Mr. Sung Chang, our President and
Mr. Stephen Muzi, our Chief Financial Officer.
Our
performance is substantially dependent on the performance of our executive
officers and key employees. In particular, the services of:
·
|
Dr. Carl
Kukkonen, Chief Executive Officer.
|
·
|
Mr. Sung
Chang, President.
|
·
|
Mr. Stephen
Muzi, Chief Financial Officer.
|
would be
difficult to replace. We do not have “key person” life insurance policies on any
of our employees. The loss of the services of any of our executive officers or
other key employees could substantially impair our ability to successfully
implement our business plan.
We rely
on our management’s experience in product development, business operations, and
sales and marketing, and on their relationships with distributors and relevant
government authorities. If one or more of our key management personnel are
unable or unwilling to continue in their present positions, we may not be able
to replace them easily or at all. The loss of the services of our key management
personnel, in the absence of suitable replacements, could have a material
adverse effect on our operations and financial condition, and we may incur
additional expenses to recruit and train personnel. Each member of our
management team has entered into an employment agreement with us.
If we do not
complete the second closing, we may lose the services of our U.S.-based
officers and directors
Under the
terms of the Purchase Agreement, as amended, if we do not complete the second
closing of the acquisition of IPA BVI (and indirectly IPA China), and if the
parties do not make other arrangements, then Mr. Kukkonen and Mr. Muzi, our CEO
and CFO may be terminated from our Company as officers and
directors. We cannot assure you that we would find suitable
replacements.
If
we complete the second closing, there is a risk that our parent company,
VIASPACE, may compete against us.
Under the
terms of the Purchase Agreement, as amended, if we do not complete the second
closing of the acquisition of IPA BVI (and indirectly IPA China), and if the
parties do not make other arrangements, then VIASPACE and Messrs. Kukkonen and
Muzi are prohibited from engaging in the grass growing business. No
such non-competition clause exists if the second closing is
consummated. There are disincentives for VIASPACE to compete against
us. VIASPACE will hold a significant amount of our common stock and
they will have helped us raise $4.8 million in order to consummate the second
closing. VIASPACE also does not have a grass license relationship
with China Gate or the original licensor. However, there can be no
assurance that VIASPACE will not compete against us in the future. If
VIASPACE were to compete against us in the grass business, it could have a
material adverse effect on our revenues. It could force us to expend
more resources in marketing efforts, thereby affecting our
earnings.
We
may not pay dividends.
We have
not previously paid any cash dividends, and we do not anticipate paying any
dividends on our ordinary shares. Dividend policy is subject to the discretion
of our Board of Directors and will depend on, among other things, our earnings,
financial condition, capital requirements and other factors. Under BVI law, we
may only pay dividends from profits or credit from the share premium account
(the amount paid over par value), and we must be solvent before and after the
dividend payment. If we determine to pay dividends on any of our ordinary shares
in the future, as a holding company, we will be dependent on receipt of funds
from our operating subsidiary. See “Dividend Policy.”
Risks
related to our Grass Business
We
currently have no customers for our grass business. If we are unable
to attract any customers, our grass business will fail.
We
commenced our grass business in October 2008 and currently lack any
customers. While we believe we will be able to attract customers and
achieve revenues in 2010, we cannot assure you we will. If we fail to attract a
sufficient number of customers that purchase a sufficient amount of grass, our
grass business will fail.
We may not have
sufficient land, seedlings and other resources to enter into long-term supply
contracts with customers.
We
recently signed a Memorandum of Understanding with DP Cleantech, a subsidiary of
Dragon Power, the largest biomass power plant builder and operator in China.
Dragon has independently tested Giant King Grass and found it suitable for their
power plants. A Dragon 30 MW power plant burning 50% Giant King Grass
and 50% agricultural waste would require 487-701 hectares of land. Currently we
have 45 hectares under cultivation and are actively seeking more
land. If we are unable to secure this additional land, a biomass
power plant operator may not enter into a long-term supply contract with
us. The Giant King Grass growing on the 45 hectares is being used for
propagation. A single Giant King Grass plant can generate 20 to 35 new seedlings
each year. Therefore the current land is able to supply seedlings for 900- 1575
hectares. Grass production capability can increase by a minimum of 20
times each year. We believe we have sufficient financial resources to
lease this much land but there are no assurances we will be able to do
so. If we are unable to secure sufficient amounts of land, seedlings
and other resources, we may be unable to attract customers and our business
model may fail.
15
We
could be subject to intellectual property rights claims regarding the
seedlings.
We are
subject to the risk that the seedlings we license infringe or will infringe upon
patents, copyrights, trademarks or other intellectual property rights held by
third parties. We acquired rights to grow Giant King Grass from a
seller which we believe holds such rights. If that party does not hold
such rights, we may be subject to legal proceedings and claims relating to the
intellectual property of others. If any such claim arises in the
future, litigation or other dispute resolution proceedings may be necessary to
retain our ability to offer our current and future products, which could result
in substantial costs and diversion of our management resources and attention
even if we prevail in contesting such claims. If we are found to have violated
the intellectual property rights of others, we may be enjoined from using such
intellectual property rights, incur additional costs to license or develop
alternative products and be forced to pay fines and damages, any of which could
materially and adversely affect our business and results of operations, or
terminate our grass business entirely.
We
have a sublicense relationship with respect to the Giant King Grass
license. If the license from our sublicensor is cancelled, terminated
or otherwise is adversely affected, our sublicense may be materially affected.
We
sublicense our intellectual property to the Giant King Grass from China Gate
which licenses the intellectual property from the original
licensor. The term of this license is not specified. China
Gate has informed us that they have an exclusive license to the Giant King Grass
in Guangdong province and North America and have granted us an exclusive
sublicense to the same region. However, because we do not have
a direct relationship with the holder of the intellectual property, any material
adverse effect to the Giant King Grass license held by our sublicensor would
affect our rights as the sublicensee. The original licensor is aware
of our sublicense and has consented to it. For instance, if our
sublicensor fails to perform its obligations under its license with the original
licensor, we would have no recourse against the original licensor and our rights
with respect to the sublicense may be materially affected.
Natural
or man-made disasters could damage our crop production, which would cause us to
suffer losses of production and a material reduction of revenues.
We
produce Giant King Grass in the Guangdong province of China. This
grass is subject to the risks associated with growing crops, including natural
disasters such as drought, pestilence, plant diseases and insect infestations,
and man-made disasters such as environmental contamination. Other man-made
incidents may damage our products, such as arson or other acts that may
adversely affect our grass inventory in the winter storage
season. Furthermore, natural or man-made disasters may cause farmers
to migrate from the farmland, which would decrease the number of end users of
our products. We are particularly susceptible to disasters or other incidents in
the Guangdong province, where we have the greatest concentration of our
operations. In the event of a widespread failure of our grass, we could likely
sustain substantial loss of revenues and suffer substantial operating losses. We
do not have insurance to protect against such a risk and we are not aware of the
availability of any such insurance in China.
Our
growth prospects may be materially and adversely affected if we are unable to
develop or acquire new products or to produce our existing products in
sufficient quantities.
We
believe the future growth of our Company will depend on the value of our grass
business for biofuel, power plant, or animal feed purposes. The
ability to develop orders from customers, if at all, is uncertain due to several
factors, many of which are beyond our control. These include changing customer
preferences, competitive price pressures, the failure to adapt products to meet
the evolving demands of customers in China, the development of higher-quality
products by our competitors, and general economic conditions. If we are unable
to develop or acquire additional products that meet the demands of our
customers, if our competitors develop products that are favored by our customers
in China, or if we are unable to produce our existing products in sufficient
quantities, our growth prospects may be materially and adversely affected and
our revenues and profitability may decline.
Our
plans to increase production capacity in the grass business and expand into new
markets may not be successful, which could adversely affect our operating
results.
Our plans
to develop our grass business and its production capacity has placed and will
continue to place, substantial demands on our managerial, operational,
technological and other resources. We are addressing three markets for Giant
King Grass: feedstock for low-carbon liquid biofuels for transportation; fuel to
burn in electricity generating power plants; and animal feed. We are also
reviewing opportunities to grow grass in other areas of China, India, Indonesia,
other areas of Southeast Asia and South America. These represent
great opportunities for the company, but also represent a potential risk in
losing focus and diluting management attention. If we fail to establish and
manage the growth of our product offerings, operations and distribution channels
effectively and efficiently in such business, we could suffer a material and
adverse effect on our operations and our ability to capitalize on new business
opportunities, either of which could materially and adversely affect our
operating results.
We will
need to develop new sales channels into the biofuel, electric power plant, and
animal feed markets. Expansion into new markets may present operating and
marketing challenges. If we are unable to anticipate the changing demands that
expanding operations will impose on our production systems and distribution
channels, or if we fail to develop our production systems and distribution
channels to meet the demand, we could experience an increase in expenses and our
results of operations could be adversely affected.
Our
financial results are sensitive to fluctuations in market prices of the products
that we offer.
The
profitability of our operations is affected by the selling prices of our
products. We intend to benchmark the prices of our grass against the prevailing
domestic market prices of grass of similar quality and attributes, and set the
prices accordingly. Historically, prices of grass and other
agricultural products in China have been volatile, primarily due to fluctuations
in supply and demand. If the prices for such products decline in the
future, and we are unable sell more products and/or reduce our cost of sales,
our revenues will decrease and our profitability will be adversely
affected.
16
We
have limited insurance coverage in China.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited insurance products. Other than automobile
insurance on certain vehicles and property and casualty insurance on some of our
assets, we do not have insurance coverage on our other assets or inventories and
do not have insurance to cover our business or interruption of our business,
litigation or product liability. We determined the costs of insuring these risks
and the difficulties associated with acquiring such insurance on commercially
reasonable terms make it impractical for us to have such insurance. Any
uninsured occurrence of loss or damage to property, litigation or business
disruption may result in our incurring substantial costs and the diversion of
resources, which could have an adverse effect on our operating results and
financial condition.
The
Chinese agricultural market is highly competitive and our growth and results of
operations may be adversely affected if we are unable to compete
effectively.
The
agricultural market in China is highly fragmented, largely regional and
competitive and we expect competition to increase and intensify within the
sector. We face significant competition in our grass business. Many
of our competitors have greater financial, research and development and other
resources than we have. Competition may also develop from consolidation or other
market forces within the grass industry in China. Because our
licensor has no restrictions outside of Guangdong province and North America, we
have no means to restrict our licensor from selling Giant King Grass to third
parties throughout the rest of the world. Although we believe we are
the only business that will grow a significant amount of Giant King Grass
sufficient to support biomass related power plants in China, we have no
assurance this is the case. Other growers of Giant King Grass could
potentially compete with us. In addition, our competitors may develop
other types of grasses that are superior to Giant King Grass and more favored by
our potential customers. Our business could be materially and
adversely affected by such competition.
Our
competitors may be better able to take advantage of industry consolidation and
acquisition opportunities than we are. The reform and restructuring of
state-owned equity in agricultural enterprises could likely lead to the
reallocation of market share in the grass industry, and our competitors may
increase their market share by participating in the restructuring of the
state-owned seed companies. Such privatization would likely mean that these
producers will need to develop more efficient and commercially viable business
models in order to survive. In addition, the PRC government currently restricts
foreign ownership of any domestic agricultural development and production
business to no more than 50% unless otherwise approved by the PRC government.
When and if such restrictions are lifted, multinational corporations engaged in
the seed business may expand into the agricultural market in China. These
companies have significantly greater financial, technological and other
resources than us and may become our major competitors in China. As competition
intensifies, our margins may be compressed by more competitive pricing in the
short term and may continue to be compressed in the long term and we may lose
our market share and experience a reduction in our revenues and
profit.
If
we are unable to estimate customers’ future needs accurately and to match our
production to the demand of our direct customers, our business, financial
condition and results of operations may be materially and adversely
affected.
Due to
the nature of the grass industry, we normally grow according to our production
plan before we sell and deliver grass to distributors and our direct customers.
The potential end users of our grass, such as biofuel providers and livestock
owners, generally make purchasing decisions for our products based on market
prices, economic and weather conditions and other factors that we may not
be able to anticipate accurately in advance. If we fail to accurately estimate
the volume and types of products sought by our customers, we may produce more
grass that is in demand by our distributors resulting in aged crops. In the
event we decide not to sell the crop due to our concerns about the quality, the
aged inventory could eventually be sold at greatly reduced prices. Aged
inventory could result in asset impairment, in which case we would suffer a loss
and incur an increase in our operating expenses. On the other hand, if we
underestimate demand, we may not able to satisfy our customers’ demand for
grass, and thus damage our customer relations and end-user loyalty. Our failure
to estimate our customers’ future needs and to match our production to the
demand of our direct customers may materially and adversely affect our business,
financial condition and results of operations.
Grass
prices and sales volumes may decrease in any given year with a corresponding
reduction in sales, margins and profitability.
There may
be periods of instability during which commodity prices and sales volumes may
fluctuate greatly. Commodities can be affected by general economic conditions,
weather, disease outbreaks and factors affecting demand, such as availability of
financing and competition. Our attempts to differentiate our products from those
of other grass producers have not prevented the grass market from having the
characteristics of a commodity market. As a result, the price we are able to
demand for our grass is dependent on the size of the supply of our grass and the
grass of other producers. Therefore, the potential exists for fluctuation in
supply, and consequently in price, in our own markets, even in the absence of
significant external events that might cause volatility. As a result, the amount
of revenue that we receive in any given year is subject to change. As production
levels are determined prior to the time that the volume and the market price for
orders is known, we may have too much or too little product available, which may
materially and adversely affect our revenues, margins and
profitability.
17
Risks
related to our framed art business
We
are heavily dependent on one major customer for our revenues
For the
nine months ended September 30, 2009, sales to one customer, Hobby Lobby Stores,
comprised 75% of our total revenues. We believe this concentration of sales to a
small number of customers will continue in the near future. We do not have a
long-term contract with Hobby Lobby Stores. A loss of Hobby Lobby Stores as a
customer or even a dramatic reduction in sales to Hobby Lobby Stores could
significantly reduce our future revenues.
We
may not be able to compete with existing or potential competitors in our framed
art business
The
visual content and art framing businesses are highly competitive. We believe
competitive factors include quality of images, branding, reputation, service,
breadth of content, depth of content, technology, pricing, and sales and
marketing. Overall, many of our competitors are significantly larger,
have far greater resources, a notably larger customer base, a far greater
content provider base, significantly more technology infrastructure, and more
well-recognized names in the marketplace than we do, all of which may make it
difficult for us to compete effectively.
We
rely on outside content providers, therefore our revenues will be materially and
adversely affected without adequate supply of content
We rely
on outside sources to provide us with visual content for our artwork, which we
aggregate and make available to our customers. Although we work with entities we
believe are reputable vendors, we cannot assure you such outside content
provider will have the resources or personnel to provides us with content and
artwork that is attractive to potential customers. If we are not able to acquire
quality content in sufficient quantities that are favored by our customers, our
revenue will be materially and adversely affected.
We
may be subject to intellectual property rights claims or other claims in the
future which could result in substantial costs and diversion of our financial
and management resources away from our business.
We are
subject to the risk that the products, technology and processes we license
infringe or will infringe upon patents, copyrights, trademarks or other
intellectual property rights held by third parties. We purchase
copyrighted artwork prints from reputable publishers that have
license agreements with the copyright holders. These publishers will
indemnify us in the event that an infringement action occurs. We may
be subject to legal proceedings and claims relating to the intellectual property
of others. If any such claim arises in the future, litigation or other dispute
resolution proceedings may be necessary to retain our ability to offer our
current and future products, which could result in substantial costs and
diversion of our management resources and attention even if we prevail in
contesting such claims. If we are found to have violated the intellectual
property rights of others, we may be enjoined from using such intellectual
property rights, incur additional costs to license or develop alternative
products and be forced to pay fines and damages, any of which could materially
and adversely affect our business and results of operations, or terminate our
grass business entirely.
Our
failure to protect our intellectual property rights may undermine our
competitive position, and legal action to protect our intellectual property
rights may be costly and divert our management resources.
We rely
primarily on trademark law, and other contractual restrictions to protect our
intellectual property. We also rely on Licensor and its licensor to
protect our licensed intellectual properties. These afford only
limited protection and the actions we take to protect our intellectual property
rights may not be adequate. Third parties may infringe or misappropriate our
licensed proprietary technologies or other intellectual property rights, which
could have a material adverse effect on our business, financial condition or
operating results. Preventing unauthorized use of proprietary technology can be
difficult and expensive. Also, litigation may be necessary to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others. There is a risk the
outcome of such potential litigation will not be in our favor. Such litigation
may be costly and may divert management attention as well as expend other
resources which could otherwise have been devoted to our business. An adverse
determination in any such litigation will impair our intellectual property
rights and may harm our business, prospects and reputation. In addition, we have
no insurance coverage against litigation costs and would have to bear all costs
arising from such litigation to the extent we are unable to recover them from
other parties. The occurrence of any of the foregoing may have a material
adverse effect on our business, results of operations and financial
condition.
Historically,
implementation of PRC intellectual property-related laws has been lacking,
primarily because of ambiguities in the PRC laws and difficulties in
enforcement. Accordingly, intellectual property rights and confidentiality
protections in China may not be as effective as in the United States or other
countries, which increases the risk that we may not be able to adequately
protect our intellectual property.
18
We
may not possess all the licenses required to operate our business, or may fail
to maintain the licenses we currently hold. This could subject us to fines and
other penalties, which could have a material adverse effect on our results of
operations.
We are
required to hold a variety of permits and licenses to conduct our framed art and
grass businesses in China. To our knowledge, we hold all the permits and
licenses required for each of our business segments, however we cannot assure
you we possess all the permits and licenses required for each of our business
segments. In addition, there may be circumstances under which the approvals,
permits or licenses granted by the governmental agencies are subject to change
without substantial advance notice, and it is possible we could fail to obtain
the approvals, permits or licenses required to expand our business as we intend.
If we fail to obtain or to maintain such permits or licenses or renewals are
granted with onerous conditions, we could be subject to fines and other
penalties and be limited in the number or the quality of the products that we
would be able to offer. As a result, our business, result of operations and
financial condition could be materially and adversely affected.
We
may be subject to product quality or liability claims, which may cause us to
incur litigation expenses and to devote significant management time to defending
such claims and, if determined adversely to us, could require us to pay
significant damage awards.
Although
we are not subject to any claims now, we may be subject to legal proceedings and
claims from time to time relating to our products in the future. The
defense of these proceedings and claims could be costly and time-consuming and
significantly divert the efforts and resources of our management personnel. An
adverse determination in any such proceedings could subject us to significant
liability. In addition, any such proceeding, even if ultimately determined in
our favor, could damage our market reputation and prevent us from maintaining or
increasing sales and market share. Protracted litigation could also result in
our customers or potential customers deferring or limiting their purchase of our
products.
Risks
Related to Doing Business in China
PRC
laws and regulations governing our businesses are uncertain. If we are found to
be in violation, we could be subject to sanctions. In addition, changes in such
PRC laws and regulations may materially and adversely affect our
business.
The PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses. We
cannot assure you our current ownership and operating structure would not be
found in violation of any current or future PRC laws or regulations. As a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
Adverse
changes in political and economic policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially adversely affect our
competitive position.
We
conduct substantially all of our operations and generate most of our revenues in
China. Accordingly, our business, financial condition, results of operations and
prospects are affected significantly by economic, political and legal
developments in China. The PRC economy differs from the economies of most
developed countries in many respects, including:
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the
higher level of government
involvement;
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the
early stage of development of the market-oriented sector of the
economy;
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the
rapid growth rate;
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the
higher level of control over foreign exchange;
and
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the
allocation of resources.
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While the
PRC economy has grown significantly since the late 1970s, the growth has been
uneven, both geographically and among various sectors of the economy. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures benefit the overall
PRC economy, but may also have a negative effect on our business. For example,
our financial condition and results of operations may be adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us.
19
The PRC
economy has been transitioning from a planned to a more market-oriented economy.
Although the PRC government has in recent years implemented measures emphasizing
the utilization of market forces for economic reform, the PRC government
continues to exercise significant control over economic growth in China through
the allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that impact
particular industries or companies in different ways.
Uncertainties
with respect to the PRC legal system could limit the legal protections available
to you and us.
We
conduct substantially all of our business through our operating subsidiary in
the PRC, IPA China, which is a wholly foreign owned enterprise in China. IPA
China is generally subject to laws and regulations applicable to foreign
investment in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited precedential value. Since
1979, a series of new PRC laws and regulations has significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
since these laws and regulations are relatively new and the PRC legal system
continues to rapidly evolve, the interpretations of many laws, regulations and
rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties, which may limit legal protections available to you
and us. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management
attention.
A
slowdown in the Chinese economy may slow down our growth and
profitability.
The
Chinese economy has grown at an approximately 9 percent average annual rate for
more than 25 years, making it the fastest growing major economy in recorded
history. However, it has begun to slow down. In 2007,
China’s economy grew by 10.7%, the fastest pace in 11 years. In 2008,
this growth rate slowed to 9.0%.
We cannot
assure you growth of the Chinese economy will be steady or that any slowdown
will not have a negative effect on our business. Several years ago, the Chinese
economy experienced deflation, which may recur in the foreseeable future. More
recently, the Chinese government announced its intention to use macroeconomic
tools and regulations to slow the rate of growth of the Chinese economy, the
results of which are difficult to predict. Adverse changes in the Chinese
economy will likely impact the financial performance of the manufacturing and
agricultural industries in China which could, in turn, reduce the demand for our
products.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Most of
our revenues and expenses are denominated in Renminbi. Under PRC law, the
Renminbi is currently convertible under the “current account,” which includes
dividends and trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, IPA China may purchase foreign currencies for settlement of current
account transactions, including payments of dividends to us, without the
approval of the State Administration of Foreign Exchange, or SAFE, by complying
with certain procedural requirements. However, the relevant PRC government
authorities may limit or eliminate our ability to purchase foreign currencies in
the future. Since a significant amount of our future revenues will be
denominated in Renminbi, any existing and future restrictions on currency
exchange may limit our ability to utilize revenues generated in Renminbi to fund
our business activities outside China that are denominated in foreign
currencies.
Foreign
exchange transactions by IPA China under the capital account continue to be
subject to significant foreign exchange controls and require the approval of or
need to register with PRC government authorities, including SAFE. In particular,
if IPA China borrows foreign currency through loans from us or other foreign
lenders, these loans must be registered with SAFE, and if we finance IPA China
by means of additional capital contributions, these capital contributions must
be approved by certain government authorities, including the National
Development and Reform Commission, or the NDRC, the Ministry of Commerce, or
MOFCOM, or their respective local counterparts. These limitations could affect
IPA China’s ability to obtain foreign exchange through debt or equity
financing.
Recent
PRC regulations relating to the establishment of offshore special purpose
vehicles by PRC residents, if applied to us, may subject the PRC resident
shareholders of us or our parent company to personal liability and limit our
ability to acquire PRC companies or to inject capital into our PRC subsidiary,
limit our PRC subsidiaries’ ability to distribute profits to us or otherwise
materially adversely affect us.
In
October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the
Foreign Exchange Control over Financing and Return Investment Through Special
Purpose Companies by Residents Inside China, or the SAFE notice, which requires
PRC residents, including both legal persons and natural persons, to register
with the competent local SAFE branch before establishing or controlling any
company outside of China, referred to as an “offshore special purpose company,”
for the purpose of overseas equity financing involving onshore assets or equity
interests held by them. In addition, any PRC resident that is the shareholder of
an offshore special purpose company is required to amend its SAFE registration
with the local SAFE branch with respect to that offshore special purpose company
in connection with any increase or decrease of capital, transfer of shares,
merger, division, equity investment or creation of any security interest over
any assets located in China. Moreover, if the offshore special purpose company
was established and owned the onshore assets or equity interests before the
implementation date of the SAFE notice, a retroactive SAFE registration is
required to have been completed before March 31, 2006. If any PRC
shareholder of any offshore special purpose company fails to make the required
SAFE registration and amendment, the PRC subsidiaries of that offshore special
purpose company may be prohibited from distributing their profits and the
proceeds from any reduction in capital, share transfer or liquidation to the
offshore special purpose company. Moreover, failure to comply with the SAFE
registration and amendment requirements described above could result in
liability under PRC laws for evasion of applicable foreign exchange
restrictions.
20
Due to
lack of official interpretation, some of the terms and provisions in the SAFE
notice remain unclear and implementation by central SAFE and local SAFE branches
of the SAFE notice has been inconsistent since its adoption. Because of
uncertainty over how the SAFE notice will be interpreted and implemented, we
cannot predict how it will affect our business operations or future strategies.
For example, our present and prospective PRC subsidiaries’ ability to conduct
foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with the SAFE
notice by our or our parent company’s PRC resident beneficial holders. In
addition, such PRC residents may not always be able to complete the necessary
registration procedures required by the SAFE notice. We also have little control
over either our present or prospective direct or indirect shareholders or the
outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident shareholders to comply with the SAFE
notice, if SAFE requires it, could subject us to fines or legal sanctions,
restrict our overseas or cross-border investment activities, limit our
subsidiary’s ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
The
Chinese government could change its policies toward private enterprise or even
nationalize or expropriate private enterprises, which could result in the total
loss of our investment in that country.
Our
business is subject to significant political and economic uncertainties and may
be adversely affected by political, economic and social developments in China.
Over the past several years, the Chinese government has pursued economic reform
policies including the encouragement of private economic activity and greater
economic decentralization. The Chinese government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice.
Changes
in policies, laws and regulations or in their interpretation or the imposition
of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to stockholders, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business. Nationalization or expropriation could
even result in the total loss of our investment in China and in the total loss
of your investment in us.
We
face risks related to health epidemics and other outbreaks.
Adverse
public health epidemics or pandemics could disrupt business and the economies of
the PRC and other countries where we do business. From December 2002 to June
2003, China and other countries experienced an outbreak of a highly contagious
form of atypical pneumonia now known as severe acute respiratory syndrome, or
SARS. On July 5, 2003, the World Health Organization declared that the SARS
outbreak had been contained. However, a number of isolated new cases of SARS
were subsequently reported, most recently in central China in April
2004. During May and June of 2003, many businesses in China were
closed by the PRC government to prevent transmission of SARS. Moreover, some
Asian countries, including China, have recently encountered swine flu influenza.
We are unable to predict the effect, if any, that avian or swine influenza may
have on our business. In particular, any future outbreak of SARS, influenza or
other similar adverse public developments may, among other things, significantly
disrupt our business and force us to temporarily close our businesses.
Furthermore, an outbreak may severely restrict the level of economic activity in
affected areas, which may in turn materially adversely affect our financial
condition and results of operations. We have not adopted any written preventive
measures or contingency plans to combat any future outbreak of health related
epidemics.
Shareholder
rights under British Virgin Islands law may differ materially from shareholder
rights in the United States, which could adversely affect the ability of us and
our shareholders to protect our and their interests.
Our
corporate affairs are governed by our amended and restated memorandum and
articles of association, by the Business Companies Act (No 16 of 2004) and the
common law of the British Virgin Islands. The rights of shareholders to take
action against the directors, actions by minority shareholders, and the
fiduciary responsibilities of our directors to us under British Virgin Islands
law are to a large extent governed by the common law of the British Virgin
Islands. The common law in the British Virgin Islands is derived in part from
comparatively limited judicial precedent in the British Virgin Islands as well
as from English common law, the decisions of whose courts are of persuasive
authority but are not binding on a court in the British Virgin Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors
under British Virgin Islands law in this area may not be as clearly established
as they would be under statutes or judicial precedent in existence in some
jurisdictions in the United States. In particular, the British Virgin Islands
has a less developed body of securities laws as compared to the United States,
and some states, such as Delaware, have more fully developed and judicially
interpreted bodies of corporate laws. Moreover, our company could be involved in
a corporate combination in which dissenting shareholders would have no rights
comparable to appraisal rights which would otherwise ordinarily be available to
dissenting shareholders of United States corporations. Also, we are not aware of
a significant number of reported class actions or derivative actions having been
brought in British Virgin Islands courts. Such actions are ordinarily available
in respect of United States corporations in U.S. courts. Finally, British Virgin
Islands companies may not have standing to initiate shareholder derivative
action before the federal courts of the United States. As a result, our public
shareholders may face different considerations in protecting their interests in
actions against the management, directors or our controlling shareholders than
would shareholders of a corporation incorporated in a jurisdiction in the United
States, and our ability to protect our interests may be limited if we are harmed
in a manner that would otherwise enable us to sue in a United States federal
court.
21
As
we are a British Virgin Islands company and most of our assets are outside the
United States, it will be extremely difficult to acquire jurisdiction and
enforce liabilities against us and our officers, directors and assets based in
China.
We are a
British Virgin Islands international business company, and our corporate affairs
are governed by our Memorandum and Articles of Association and by the BVI
Business Companies Act (No 16 of 2004) and other applicable British Virgin
Islands laws. Certain of our directors and officers primarily reside outside of
the United States. In addition, the Company’s assets will be located outside the
United States although we do sell our products into the United States. As a
result, it may be difficult or impossible to effect service of process within
the United States upon our directors or officers and our subsidiaries, or
enforce against any of them court judgments obtained in United States’ courts,
including judgments relating to United States federal securities laws. In
addition, there is uncertainty as to whether the courts of the British Virgin
Islands and of other offshore jurisdictions would recognize or enforce judgments
of United States’ courts obtained against us predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof, or
be competent to hear original actions brought in the British Virgin Islands or
other offshore jurisdictions predicated upon the securities laws of the United
States or any state thereof. Furthermore, because the majority of our assets are
located in China, it would also be extremely difficult to access those assets to
satisfy an award entered against us in United States court.
The
laws of the British Virgin Islands provide little protection for minority
shareholders, so minority shareholders will have little or no recourse if the
shareholders are dissatisfied with the conduct of the affairs of our
company.
Under the
laws of the British Virgin Islands, there is some statutory law for the
protection of minority shareholders under the Act. The principal protection
under statutory law is that shareholders may bring an action to enforce our
Amended and Restated Memorandum and Articles of Association. The Act sets forth
the procedure to bring such a claim. Shareholders are entitled to have the
affairs of the company conducted in accordance with the general law and the
Amended and Restated Memorandum and Amended and Restated Articles of
Association. Companies are not obligated to appoint an independent auditor and
shareholders are not entitled to receive the audited financial statements of the
company.
There are
common law rights for the protection of shareholders that may be invoked (such
rights have also now been given statutory footing under the Act), largely
dependent on English company law, since the common law of the British Virgin
Islands for business companies is limited. Under the general rule pursuant to
English company law known as the rule in Foss v. Harbottle, a court will
generally refuse to interfere with the management of a company at the insistence
of a minority of its shareholders who express dissatisfaction with the conduct
of the company’s affairs by the majority or the board of directors. However,
every shareholder is entitled to have the affairs of the company conducted
properly according to law and the constituent documents of the corporation. As
such, if those who control the company have persistently disregarded the
requirements of company law or the provisions of the company’s memorandum or
articles of association, then the courts will grant relief. Generally, the areas
in which the courts will intervene are the following: (i) an act complained of
which is outside the scope of the authorized business or is illegal or not
capable of ratification by the majority, (ii) acts that constitute fraud on the
minority where the wrongdoers control the company, (iii) acts that infringe on
the personal rights of the shareholders, such as the right to vote, and (iv)
where the company has not complied with provisions requiring approval of a
special or extraordinary majority of shareholders, which are more limited than
the rights afforded minority shareholders under the laws of many states in the
U.S.
Risks
Associated with this Offering
There
may not be an active, liquid trading market for our ordinary
shares.
Prior to
this offering, there was no public market for our ordinary shares. An active
trading market for our ordinary shares may not develop or be sustained following
this offering. You may not be able to sell your shares at the market price, if
at all, if trading in our ordinary shares is not active. The initial public
offering price was determined by unilaterally by the Company. The initial public
offering price may not be indicative of prices that will prevail in the trading
market.
The
market price for our ordinary shares may be volatile, which could result in
substantial losses to investors.
The
market price for our ordinary shares is likely to be volatile and subject to
wide fluctuations in response to factors including the following:
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in the Chinese energy and livestock industries;
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changes
in the Chinese economy;
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announcements
by our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
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additions
or departures of key personnel; or
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potential
litigation.
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In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. As a result, to the extent shareholders sell our
ordinary shares in negative market fluctuation, they may not receive a price per
share that is based solely upon our business performance. We cannot guarantee
that shareholders will not lose some of their entire investment in our ordinary
shares.
Future
sales of our ordinary shares may depress our share price.
The
market price of our ordinary shares could decline as a result of sales of
substantial amounts of our ordinary shares in the public market, or the
perception that these sales could occur. In addition, these factors could make
it more difficult for us to raise funds through future offerings of ordinary
shares. There will be an aggregate of 8,600,000 ordinary shares outstanding
before the consummation of this offering. All of the ordinary shares sold in the
offering will be freely transferable without restriction or further registration
under the Securities Act, except for any shares purchased by our “affiliates,”
as defined in Rule 144 of the Securities Act. The remaining ordinary shares will
be “restricted securities” as defined in Rule 144. These shares may be sold in
the future without registration under the Securities Act to the extent permitted
by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible
for Future Sale.”
Our
major shareholders, directors and officers will control a majority of our
ordinary shares, decreasing your influence on shareholder
decisions.
Our major
shareholders, officers and directors will, in the aggregate, beneficially own
7,896,000 ordinary shares or approximately 91.8% of our outstanding
shares. If the Second Closing does not occur, we will be controlled by
Mr. Sung Chang rather than our current parent company, VIASPACE Inc.
As a
result, our officers and directors will possess substantial ability to impact
our management and affairs and the outcome of matters submitted to shareholders
for approval. These shareholders, acting individually or as a group, could exert
control and substantial influence over matters such as electing directors and
approving mergers or other business combination transactions. This concentration
of ownership and voting power may also discourage, delay or prevent a change in
control of our company, which could deprive our shareholders of an opportunity
to receive a premium for their shares as part of a sale of our company and might
reduce the price of our ordinary shares. These actions may be taken even if they
are opposed by our other shareholders, including those who purchase shares in
this offering. See “Principal Shareholders.”
FORWARD-LOOKING
STATEMENTS
We made
statements in this prospectus, including under “Prospectus Summary,” “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” “Our Business” and elsewhere that constitute
forward-looking statements. Forward-looking statements involve risks and
uncertainties, such as statements about our plans, objectives, expectations,
assumptions or future events. In some cases, you can identify forward-looking
statements by terminology such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “will,”
“should,” “could” and similar expressions. These statements involve estimates,
assumptions, known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially from any future results, performances
or achievements expressed or implied by the forward-looking
statements.
Examples
of forward-looking statements include:
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projections
of revenue, earnings, capital structure and other financial
items;
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statements
of our plans and objectives;
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statements
regarding the capabilities and capacities of our business
operations;
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statements
of expected future economic performance; and
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assumptions
underlying statements regarding us or our
business.
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23
The
ultimate correctness of these forward-looking statements depends upon a number
of known and unknown risks and events. We discuss many of these risks under the
heading “Risk Factors” above. Many factors could cause our actual results to
differ materially from those expressed or implied in our forward-looking
statements. Consequently, you should not place undue reliance on these
forward-looking statements.
The
forward-looking statements speak only as of the date on which they are made,
and, except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events.
In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
OUR
CORPORATE STRUCTURE
On July
1, 2008 our Company was incorporated as an international business company in the
British Virgin Islands and we were wholly-owned by VIASPACE Inc. On October 21,
2008, we acquired 70% of the equity securities of IPA BVI, which owns 100% of
IPA China. We intend to acquire the other 30% of IPA BVI at the
Second Closing or if the Second Closing does not occur, then upon such time that
the closing conditions for VIASPACE and us under the Purchase Agreement have
been satisfied.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares by the selling
shareholders. All proceeds from the sale of the shares offered hereby will be
for the accounts of the selling shareholders, as described below in the sections
entitled “Selling Security Holders” and “Plan of Distribution.” With the
exception of any brokerage fees and commissions which are the obligation of the
selling shareholders, we are responsible for the fees, costs and expenses of
this offering which are estimated to be approximately $100,000, inclusive of our
legal and accounting fees, printing costs and filing and other miscellaneous
fees and expenses.
DIVIDEND
POLICY
We have
never declared or paid any cash dividends on our ordinary shares. We anticipate
we will retain any earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
in the foreseeable future. Any future determination relating to our dividend
policy will be made at the discretion of our Board of Directors and will depend
on a number of factors, including future earnings, capital requirements,
financial conditions and future prospects and other factors the Board of
Directors may deem relevant. Payments of dividends by our subsidiary in China to
our company are subject to restrictions including primarily the restriction that
foreign invested enterprises may only buy, sell and/or remit foreign currencies
at those banks authorized to conduct foreign exchange business after providing
valid commercial documents. There are no such similar foreign exchange
restrictions in the British Virgin Islands.
EXCHANGE
RATE INFORMATION
Our
business is primarily conducted in China and the U.S. but all of our revenues
are denominated in RMB. However, periodic reports made to shareholders will
include current period amounts translated into U.S. dollars using the then
current exchange rates, for the convenience of the readers. The conversion of
RMB into U.S. dollars in this prospectus is based on the noon buying rate in The
City of New York for cable transfers of RMB as certified for customs purposes by
the Federal Reserve Bank of New York. Unless otherwise noted, all translations
from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were
made at a rate of RMB 6.81731 to $1.00, the noon buying rate in effect as of
December 31, 2008. We make no representation that any RMB or U.S. dollar amounts
could have been, or could be, converted into U.S. dollars or RMB, as the case
may be, at any particular rate, or at all. The PRC government imposes control
over its foreign currency reserves in part through direct regulation of the
conversion of RMB into foreign exchange and through restrictions on foreign
trade. The Company does not currently engage in currency hedging
transactions.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with our audited
historical consolidated financial statements and our unaudited pro forma
condensed consolidated financial statements, together with the respective notes
thereto, included elsewhere in this prospectus. Our audited historical
consolidated financial statements have been prepared in accordance with U.S.
GAAP. Our unaudited pro forma financial information has been derived from our
audited historical consolidated financial statements.
24
Overview
Our
Company
VIASPACE
Green Energy Inc., a British Virgin Islands company (“VGE-BVI” or the “Company”)
is the parent company of IPA BVI. IPA BVI owns all equity interests of IPA
China. IPA BVI and IPA China specialize in the manufacturing of high
quality, copyrighted, framed artwork sold in U.S. retail chain stores. IPA China
also has a sublicense to grow and sell a new fast-growing hybrid grass to be
used for production of crops that may be as feedstock for biofuels and fuel for
electricity generation. It may also be used as feed for
livestock.
Our
principal executive offices are located at 2102 Business Center Dr., Suite 130,
Irvine, California, 92612. Our main office in the PRC is located at
San Sheng Road, DaLi Village, TaiHe Town, Guangzhou, China
510540. Our website address is
www.viaspacegreenenergy.com. Information contained on our website or
any other website is not a part of this prospectus.
Corporate
History
On
October 21, 2008, VIASPACE Inc., our parent company (“VIASPACE”), and we entered
into a Securities Purchase Agreement (the "Purchase Agreement") with Sung Hsien
Chang ("Chang"), and China Gate Technology Co., Ltd., a Brunei Darussalam
company ("Licensor"). Under the Purchase Agreement, we agreed to acquire 100% of
Inter-Pacific Arts Corp., a British Virgin Islands international business
company ("IPA BVI"), and the entire equity interest of Guangzhou Inter-Pacific
Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong
province ("IPA China") from Chang, the sole shareholder of IPA BVI and IPA
China. In exchange, VIASPACE agreed to pay approximately $16 million in a
combination of cash, and newly-issued shares of VIASPACE and VGE
stock. In addition, VIASPACE issued shares of its common stock to
Licensor and in exchange Licensor sublicensed certain fast growing grass
technology to IPA China.
The
transactions under the Purchase Agreement (“Acquisition”) involve two
phases. At the first closing on October 21, 2008, we issued 3,500,000
newly-issued shares to Chang and his designees. VIASPACE issued
215,384,615 shares of its common stock to Chang and 30,576,007 shares of common
stock to Licensor. Chang delivered 70% of the outstanding common
stock of IPA BVI to us. In addition, we executed employment
agreements with certain persons, including Sung Chang; Carl Kukkonen, the
VIASPACE’s Chief Executive Officer; Stephen Muzi, the VIASPACE’s Chief Financial
Officer; and Maclean Wang, the sole shareholder of the Licensor. Our
shareholders also entered into an agreement with Chang regarding the rights as
our shareholders ("Shareholders Agreement") to elect directors. IPA
China became a wholly-owned subsidiary of IPA BVI (and indirectly, our
subsidiary) after the First Closing.
The
second closing in which the remaining minority interest of 30% of IPA BVI equity
holdings would be transferred to us will be held on or
before December 15 , 2009 ("Second Closing"). At the Second Closing,
VIASPACE shall pay $4.8 million ("Cash Consideration") plus Interest (as
determined below) since the First Closing, in cash to Chang. Interest on the
Cash Consideration shall accrue at 6% for the first six months after the First
Closing, and then 18% until June 10, 2009, and then at an annual rate of 6% .
VIASPACE shall also issue 1.8% of its then outstanding shares of common stock to
Licensor.
VIASPACE’s
and our obligations to consummate the Second Closing are conditioned upon, among
other things, the execution of the assignment of the right to grow and harvest
fast-growing grasses from China Gate to IPA China so that we have a direct
license from the original licensor rather than a sublicense through China
Gate. In the event that the Second Closing does not occur before December 15, 2009 , the Purchase Agreement, each
Employment Agreement and the Shareholders Agreement shall automatically
terminate and all stock certificates delivered at First Closing shall be
returned unless the parties decide otherwise, except that Chang shall transfer
the remaining 30% of IPA BVI even if the Second Closing does not
occur. If the Second Closing does not occur and our ordinary
shares are listed on a trading market, then VIASPACE shall transfer to
Chang all of our shares that it holds. If our ordinary shares are not listed on
a trading market, then Chang may retain VIASPACE Shares instead of returning
them to VIASPACE. We intend to register the shares listed in this
registration statement regardless of whether the second closing
occurs.
IPA China
has obtained a Certificate of Approval for Establishment of Enterprises with
Foreign Investment in the People’s Republic of China (“Certificate”) and an
Approval Statement from Administration Foreign Trade of Bai Yun District,
Guangzhou, Guangdong Province, People’s Republic of China. The Certificate is
dated June 24, 2009 and the Approval Statement is dated June 19, 2009. The
Certificate and Approval Statement dictate that IPA China was approved as a
foreign invested enterprise solely owned by Inter-Pacific Arts Corp., an
enterprise registered in British Virginia Island, with a
capital contribution of US$450,000. IPA China has a total investment of
US$600,000 and a registered capital of US $450,000. IPA China’s duration of
operation is 30 years. The Approval Statement further states that it is approved
that, pursuant to the Share Transfer Agreement entered into by and between Sung
Hsien Chang and IPA BVI on June 2, 2009, Mr. Chang transferred 100% of his
ownership of IPA China to IPA BVI and IPA BVI contributes US$450,000 to IPA
China, which counts as 100% of IPA China’s registered capital.
In
addition, the Licensor and Sung Chang, the seller of IPA China and IPA BVI, each
represented that at least 100 hectares of arable land in Guangdong province in
China will be available for grass farming by IPA China within 12 months after
the First Closing Date. IPA China secured 45 hectares of arable land
in the first quarter of 2009 and leased an additional 55 ha in the third quarter
of 2009. The requirement has been met so this requirement no longer
has any impact on our ability to utilize our grass license rights.
We
sublicense our intellectual property to the Giant King Grass from China Gate
which licenses the intellectual property from the original
licensor. China Gate has informed us that they have an exclusive
license to the Giant King Grass in Guangdong province and North America and have
granted us an exclusive sublicense to the same region. However, we do
not have a direct relationship with the holder of the intellectual property, any
material adverse effect to the Giant King Grass license held by our sublicensor
would affect our rights as the sublicensee.
25
On August
21, 2009, the parties entered into a second Amendment to the Purchase Agreement
that the Registrant’s shares held by Chang and others were no longer subject to
forfeiture even if the Second Closing did not occur. This amendment
also extended the Second Closing to November 21, 2009. The second
closing will be held within 396 days after the first closing ("Second
Closing"). The Second Closing is scheduled for November 21, 2009, and
VIASPACE is to pay $4,800,000 plus interest to Chang. Interest on the
Cash Consideration shall accrue at 6% for the first six months after the First
Closing, and then 18% until June 10, 2009, and then at an annual rate of
6% thereafter. VIASPACE shall also issue 1.8% of its then outstanding
shares of common stock to Licensor. Chang shall deliver the remaining
30% of the outstanding shares of IPA BVI to VGE even if the Second Closing did
not occur.
As
required by the Purchase Agreement, VGE filed a Form S-1 Registration Statement
with the Securities and Exchange Commission ("SEC") on June 3, 2009 covering the
resale of all or such maximum portion of VGE common stock issued pursuant to the
Purchase Agreement as permitted by SEC regulations. The second
Amendment extends until November 21, 2009, the date that VGE shall use its best
efforts to qualify its Common Stock for quotation on a trading
market. If VGE’s Registration Statement is declared effective by the
SEC on or before November 21, 2009, the Second Closing Deadline will be extended
until December 21, 2009.
On
November 25, 2009, we entered into another amendment to the Securities Purchase
Agreement that extended the Second Closing Deadline from November 21, 2009 to
December 15, 2009; and provided further that if the registration statement were
declared effective by the SEC on or before December 15, 2009, then the Second
Closing Deadline would be extended to January 15,
2010.
Also
pursuant to the second amendment, VIASPACE irrevocably assigned to Chang and
Licensor the VIASPACE shares issued to Chang and Licensor in the
First Closing of the Purchase Agreement. Licensor agreed to limit
sales of VIASPACE common shares issued at the First Closing to a maximum of
8,800,000 shares in any 90-day period. On October 13, 2009 the
parties to the Purchase Agreement entered into the third Amendment to the
Securities Purchase Agreement in which the parties agreed that in the event that
the Second Closing fails to occur and VIASPACE’s closing conditions to the
Second Closing have been satisfied by Chang, then (1) Chang and/or his designees
shall retain our Shares, (2) VIASPACE shall transfer all shares of our common
stock it holds to Chang, (3) Chang will deliver the remaining 30% equity
interest of IPA-BVI to us, such that we shall receive all equity securities of
IPA-BVI, and (4) if VGE’s common stock is not listed on a Trading Market as of
the Second Closing Deadline, Chang shall also receive such number of shares of
VIASPACE common stock so that Chang shall own a majority of the outstanding
shares of VIASPACE common stock as of the date of issuance. In
addition, the parties clarified that the three year non-competition clause to
engage in the grass business starting from the date of the First Closing does
not apply to VGE and Messrs. Kukkonen and Muzi, but only to VIASPACE and its
other affiliates. Further, we deleted the obligation of Licensor to
assign the grass license to VGE.
If the
Second Closing has occurred but if Registrant common stock is not listed on a
trading market by November 21, 2009, then VIASPACE will issue to Chang the
number of shares of its common stock equivalent to US$5,600,000.
Licensor
and Chang each represented and covenanted that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement regarding
such land use rights shall grant the land use rights to IPA China, but shall be
assignable to us at our option. The term of such agreement, including possible
renewals, shall be at least 10 years. In March 2009, approximately 45
hectares of the 100 hectares were leased by IPA China in Guangdong province for
a term of 20 years. In the third quarter of 2009, VGE signed a lease for
approximately 55 hectares of land in Guangdong province. The lease
begins October 1, 2009 with a lease life of about 29 years. This land
is being used to grow Giant King grass. We do not expect to request
an assignment of the IPA China lease since we intend to own IPA China through
100% ownership of IPA BVI. VIASPACE and we have contractual rights to
enforce this obligation and intend to do so.
In the
event that the Second Closing fails to occur, neither VIASPACE or its affiliates
(but excluding us), or any of their directors or officers (but excluding our
CEO, Carl Kukkonen, and our CFO, Stephen Muzi), shall engage in the grass
business in China for a period of three years after the First Closing Date, or
October 21, 2011. Our management does not believe that this clause
would negatively impact our operations, liquidity and capital resources if a
Second Closing does not occur. This clause protects us from
competition by VIASPACE or its affiliates (excluding us), including its
U.S.-based officers and directors if the Second Closing fails to
occur.
Currently,
we control 70% of IPA BVI. Accordingly, we consolidate their results,
assets and liabilities in our financial statements.
The
Company’s web site is www.viaspacegreenenergy.com.
Material Trends and
Uncertainties
Government Regulations and
Incentives
The trend
toward reducing carbon emissions is the result of international treaties, and
government policies and regulations. These policies and regulations
led to incentives for the use of renewable, low carbon biofuels in
transportation and electricity generation applications. These applications, we
believe, in turn have led to increased demand for feedstocks such as Giant King
Grass.
26
The
market for biofuels is critically dependent on foreign regulations that mandate
energy security, renewable energy sources and limitations on carbon emissions,
including regulations in China. These Chinese regulations manifest
themselves in terms of government policies such as guaranteed markets for
renewable electricity in China, subsidized pricing, and favorable treatment in
permitting and land-use. Currently these regulations strongly favor electricity
generated from burning biomass such as Giant King Grass, or liquid biofuels made
from biomass. However, if these favorable regulations were retracted, it would
have a major negative impact on the renewable energy business including
ours. We have no reason to believe that these policies toward carbon
emissions will be curtailed, reversed or eliminated.
Regulations
in individual countries may require us to obtain government approval before we
can grow Giant King Grass. Based on our experience in China, we believe that we
will be able to comply with these local regulations. We do not anticipate any
new regulatory issues with our framed art business.
Plans to Develop the Grass
Business and Expand into New Markets
Based on
discussions with companies operating or considering biomass derived biofuels and
electricity generation, we believe that one of their major business risks is
having a reliable and consistent source of feedstock. Dedicated
nonfood energy crops such as Giant King Grass are welcomed by these potential
customers. We believe that the company is well positioned to address
this market in China, Southeast Asia, India and other tropical and subtropical
areas of the world. Palm oil is grown commercially primarily in
Indonesia and Malaysia. Palm oil and emerging energy crops such as
Jatropha can be used to make bio-diesel fuel for diesel powered
vehicles. Giant King Grass is a candidate crop for biomass gasoline
replacements collectively known as Grassoline for spark ignited engines. In
addition, Giant King Grass can be burned directly in a power plant to generate
electricity.
A major
uncertainty is the ability to acquire enough land to deliver Giant King Grass to
a power plant or biofuel plant. It is estimated that 1000 to 2000 hectares are
needed within a 50 km radius to deliver enough fuel for a 30 MW power plant. We
are working aggressively to acquire land and to work with strategic partners
that have the land. We believe that the renewable low carbon energy demand is
large, and that we will be able to produce large amounts of grass to supply many
power and biofuel production plants.
We are
addressing three markets for Giant King Grass: feedstock for low-carbon liquid
biofuels for transportation; fuel to burn in electricity generating power
plants; and animal feed. We are also reviewing opportunities to grow grass in
other areas of China, India, Indonesia, other areas of Southeast Asia and South
America. These represent great opportunities for us, but also
represent a potential risk in losing focus and diluting management
attention.
Lack of Customers for the
Grass Business and Potential Over-Reliance on a Single Customer for the Framed
Art Business
We
entered the grass business in October 2008. We have concentrated on
growing grass and generating enough seedlings to accommodate major expansion. In
parallel, we have been meeting with potential customers for large quantities of
grass for animal feed, to burn in power plants and as a feedstock for liquid
biofuels. We do not yet have a customer for the grass business, but our feedback
has been very positive and we expect customer relationships to develop
quickly. We have signed an Memorandum of Understanding to develop a
project for animal feed in Tanzania, Africa, and a potential energy customer has
tested our grass. A professor from the China Agricultural University has agreed
to serve on our advisory board, and he is assisting us with technical issues and
helping identify customers for the grass.
We have
had an excellent relationship with our largest framed art customer, Hobby
Lobby-- a national US retail chain for more than five years. This customer
knows our products, quality control, management, and visited our factory. We are
extremely happy to have them as a customer. We have other national
customers and are seeking new customers as well. We supply Hobby Lobby with
unique high-quality products we believe give them an advantage over their
competitors.
Long-Term Prospects for the
Framed Art Business
The
framed art business is important to our financial strategy. Sung
Chang the original owner of framed art business will continue to run this
business unit for VIASPACE Green Energy. We are working to grow framed art sales
and profits which can help fund expansion of the grass business. IPA China has
the facilities to accommodate significant expansion, and additional workers can
be hired to meet increased demand. We believe that our quality and
price will allow long-term steady growth in the framed art
business.
27
Decrease in Revenue
Experienced in the Third Quarter of 2009 and Year to Date
2009
Sales of
framed artwork were down 46% for the three months ended September 30, 2009 and
down 42% for the nine months ended September 30, 2009 versus the comparable
period s of 2008. We expect 2009 framed artwork revenue to be lower than 2008
due to the global economic conditions which have resulted in lower consumer
spending.
Change from Private to
Public Company
Management
understands that changing from a private to a public company will require
additional legal, accounting and other public company costs not required for a
private company including the costs of Sarbanes-Oxley 404
requirements. We estimate these additional public company costs will
be approximately $400,000 per year. Management expects that cash on
hand and operating profits from existing business lines will reduce the burden
of these costs on a going forward basis. We have signed employment
agreements with a CEO and CFO who are experienced in public reporting
companies.
Sarbanes-Oxley
404 Requirements
We are
currently interviewing consultants with expertise in SOX 404 rules and
applications to assist management in its preparations of SOX
compliance. The consultants being interviewed have established the
necessary documentation and performed the required testing for other public
companies and we will draw on this experience. Our CFO will be the
main contact with the SOX 404 consultant in the assessment, documentation and
establishing of internal controls. We expect to engage a consultant
in the next few months. We are aware our internal controls will be
tested and subject to an external auditors’ opinion in 2010.
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 to be 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 consolidated 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:
In
accordance with the SEC’s SAB No. 104, IPA BVI and IPA China recognize product
revenue provided: (1) persuasive evidence of an arrangement exists, (2) delivery
to the customer has occurred, (3) the selling price is fixed or determinable and
(4) collection is reasonably assured. Delivery is considered to have
occurred when title and risk of loss have transferred to the customer. The price
is considered fixed or determinable when it is not subject to refund or
adjustments. Our standard shipping terms are free on board shipping
point. Some of the Company’s products are sold in the PRC and are
subject to Chinese value-added tax. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. Revenue is recorded net of VAT
taxes.
The
Company accounts for equity instruments issued to consultants and vendors in
exchange for goods and services in accordance with EITF Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling Goods or Services”, and EITF Issue No.
00-18, “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 EITF Issue No. 00-18, 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 consolidated balance sheet.
28
The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. There is no assurance that actual results will not differ
from these estimates.
See
footnotes in the accompanying financial statements regarding recent financial
accounting developments.
Results
of Operations
The
following table presents the results of our operations for the periods
indicated. Our historical reporting results are not necessarily indicative of
the results to be expected for any future period.
For
the Period
from
inception
(July
1, 2008) through
December
31,
2008
|
Three
Months
Ended
September
30,
2009
|
Nine
Months
Ended
September
30,
2009
|
||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
Revenues
|
$
|
866,000
|
$
|
1,064,000
|
$
|
2,935,000
|
||||||
Cost
of revenues
|
249,000
|
609,000
|
1,643,000
|
|||||||||
Gross
Profit
|
617,000
|
455,000
|
1,292,000
|
|||||||||
Operating
expenses
|
||||||||||||
Selling,
general and administrative expenses
|
516,000
|
425,000
|
1,392,000
|
|||||||||
Total
operating expenses
|
516,000
|
425,000
|
1,392,000
|
|||||||||
Income(loss)
from operations
|
101,000
|
30,000
|
(100,000
|
)
|
||||||||
Non-operating
income
|
1,000
|
―
|
6,000
|
|||||||||
Non-operating
expenses
|
(1,000
|
)
|
―
|
―
|
||||||||
Interest
expense
|
―
|
|
―
|
(5,000
|
)
|
|||||||
Income(loss)
before income taxes and minority interest
|
101,000
|
30,000
|
(99,000
|
)
|
||||||||
Provision
for income taxes
|
10,000
|
(2,000
|
)
|
―
|
||||||||
Minority
interest, net of tax
|
―
|
―
|
―
|
|||||||||
Net
income (loss)
|
$
|
91,000
|
$
|
32,000
|
$
|
(99,000
|
)
|
|||||
Basic
and diluted earnings (loss) per ordinary share
|
$
|
0.03
|
$
|
0.00
|
$
|
(0.01
|
)
|
|||||
Weighted
average ordinary shares outstanding
|
3,365,223
|
8,600,000
|
8,600,000
|
Three
Month Period Ended September 30, 2009 Compared to Three Month Period Ended
September 30, 2008
Note: The
acquisition of IPA BVI and IPA China occurred on October 21,
2008. The following discussion reflects a comparison of actual
financial results for the three month period ended September 30, 2009 versus
actual results incurred by IPA BVI and IPA China for the three month period
ended September 30, 2008 .
Revenues
Revenues
were $1,064,000 and $1,964,000 for 2009 and 2008, respectively, a decrease of
$900,000 or 46%. Sales of framed artwork were down by 46% during the
quarter as compared with the prior year as customer filled orders were
lower. All of the revenues recorded during 2009 and 2008 are from the
Company’s framed artwork segment. There were no grass segment
revenues recorded during 2009 and 2008.
Cost
of Revenues
Costs of
revenues were $609,000 and $1,354,000 for 2009 and 2008, respectively, a
decrease of $745,000 or 55%. Framed artwork costs of revenues
were lower as expected due to a decrease in revenues. All of the cost
of revenues recorded during 2009 and 2008 are from the Company’s framed artwork
segment. There were no grass segment cost of revenues recorded during
2009 and 2008.
Gross
Profit
The
resulting effect on these changes in revenues and cost of revenues from 2008 to
2009 was a decrease in gross profits from $610,000 in 2008 to $455,000 in 2009,
a decrease of $155,000 or 25%.
29
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $425,000 and $368,000 for 2009 and
2008, respectively, an increase of $57,000 or 15%.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had selling, general and
administrative expenses of $269,000 and $368,000 for 2009 and 2008,
respectively, a decrease of $99,000, primarily due to a decrease in commissions
expense.
Grass
Segment
Of the
total amounts, the grass segment related to growing Giant King Grass in the PRC
had selling, general and administrative expenses of $156,000 and zero for 2009
and 2008, respectively, an increase of $156,000. This segment had no
corresponding costs incurred in the third quarter of 2008, as this segment
commenced operations in the fourth quarter of 2008. Included in the
costs of $156,000 were professional accounting fees of $9,000, payroll and
benefits of $85,000, legal fees of $25,000 and other expenses of
$37,000.
Income
(Loss) from Operations
The
resulting effect on these changes in gross profits, selling, general and
administrative expense was that the Company had a decrease in income from
operations of $212,000 from 2008 to 2009.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had decreased income from operations
of $56,000 from 2008 to 2009.
Grass
Segment
Of the
total amounts, the grass segment had a loss from operations of $156,000 for the
three months ended September 30, 2009. There were no results of
operations for the three months ended September 30, 2008 as the segment
commenced operations in the fourth quarter of 2008.
Other
Income (Expense), Net
Other
income (expense), net decrease $1,000 from 2008 to 2009.
Nine
Month Period Ended September 30, 2009 Compared to Nine Month Period Ended
September 30, 2008
Note: The
acquisition of IPA BVI and IPA China occurred on October 21, 2008.
The following discussion reflects a comparison of actual financial results for
the nine month period ended September 30, 2009 versus actual results incurred by
IPA BVI and IPA China for the nine month period ended September 30, 2008.
Revenues
Revenues
were $2,935,000 and $5,066,000 for 2009 and 2008, respectively, a decrease of
$2,131,000 or 42%. Sales of framed artwork were down by 42% during
2009 as compared with the prior year as customer filled orders were lower.
All of the revenues recorded during 2009 and 2008 are from the
Company’s framed artwork segment. There were no grass segment
revenues recorded during 2009 and 2008.
Cost
of Revenues
Costs of
revenues were $1,643,000 and $3,264,000 for 2009 and 2008, respectively, a
decrease of $1,621,000 or 50%. Framed artwork costs of revenues were lower
as expected due to a decrease in revenues. All of the cost of
revenues recorded during 2009 and 2008 are from the Company’s framed artwork
segment. There were no grass segment cost of revenues recorded during
2009 and 2008.
30
Gross
Profit
The
resulting effect on these changes in revenues and cost of revenues from 2008 to
2009 was a decrease in gross profits from $1,802,000 in 2008 to $1,292,000 in
2009, a decrease of $510,000 or 39%.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $1,392,000 and $799,000 for 2009 and
2008, respectively, an increase of $593,000 or 74%.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had selling, general and
administrative expenses of $716,000 and $799,000 for 2009 and 2008,
respectively, a decrease of $83,000 due to lower commissions on framed arwort
sales.
Grass
Segment
Of the
total amounts, the grass segment related to growing Giant King Grass in the PRC
had selling, general and administrative expenses of $676,000 and zero for 2009
and 2008, respectively, an increase of $520,000. This segment did not
have any corresponding costs incurred in the first nine months of 2008, as this
segment commenced operations in the fourth quarter of 2008. Included
in the costs of $676,000 were professional accounting fees of $153,000, payroll
and benefits of $370,000, legal expenses of $60,000 and other expenses of
$93,000.
Income
(Loss) from Operations
The
resulting effect on these changes in gross profits, selling, general and
administrative expense was an decrease in income from operations of $1,103,000
from 2008 to 2009.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had decreased income from operations
of $427,000 from 2008 to 2009.
Grass
Segment
Of the
total amounts, the grass segment had a loss from operations of $676,000 in
2009. There were no results of operations for the first nine months
of 2008 as the grass segment commenced operations in the fourth quarter of
2008.
Period
from Inception (July 1, 2008) through December 31, 2008 (Audited) Compared to
Period from October 21, 2007 through December 31, 2007
Note:
The acquisition of IPA BVI and IPA China occurred on October 21,
2008. Our company was inactive from July 1, 2008 through
October 20, 2008. The following discussion reflects a comparison of actual
financial results versus actual results incurred by IPA BVI and IPA China for
the same period presented.
Revenues
Revenues
were $866,000 and $816,000 for the periods ending December 31, 2008 and 2007,
respectively, an increase of $50,000, or 6%. Sales of framed artwork were
up by 6% during the period as compared with the prior year period as more
customer orders were filled. All of the revenues recorded during
2008 and 2007 are from the Company’s framed artwork segment. There
were no grass segment revenues recorded during 2008 and 2007.
31
Cost
of Revenues
Costs of
revenues were $249,000 and $869,000 for the periods ending December 31, 2008 and
2007, respectively, a decrease of $620,000, or 71%. Additional cost of
goods sold expenses related to artwork inventory adjustments were recorded for
2007, and no such adjustments were necessary for the period ending December 31,
2008. These adjustments contributed to the lower costs of revenues for
2008. All of the cost of revenues recorded during 2008 and 2007 are from
the Company’s framed artwork segment. There were no grass segment cost of
revenues recorded during 2008 and 2007.
Gross
Profit
The
resulting effect on these changes in revenues and cost of revenues from 2007 to
2008 was an increase in gross profits from a loss of $53,000 in 2007 to income
of $617,000 in 2008, an improvement of $670,000, or 1,264%.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were $516,000 and $101,000 for the periods
ending December 31, 2008 and 2007, respectively, an increase of $415,000, or
411%.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had selling, general and
administrative expenses of $334,000 and $101,000 for 2008 and 2007,
respectively, an increase of $233,000. This increase was primarily due to
higher commissions, salaries, frame sample expense, depreciation and
amortization expense in 2008 over the same period of 2007.
Grass
Segment
Of the
total amounts, the grass segment related to growing Giant King Grass in the PRC
had selling, general and administrative expenses of $182,000 and zero for 2008
and 2007, respectively, an increase of $182,000. This segment did not have
any corresponding costs incurred in 2007, as this segment commenced operations
in the fourth quarter of 2008. Included in the costs of $182,000 were
professional accounting fees of $95,000, consulting fees of $62,000, public
relations fees of $15,000 and other expenses of $10,000.
Income
(Loss) from Operations
The
resulting effect on these changes in gross profits, selling, general and
administrative expense was that the Company had a income from operations of
$101,000 for the period ending December 31, 2008 and a loss from operations of
$154,000 for the period ending December 31, 2007, an improvement of
$255,000.
Framed Artwork
Segment
Of the
total amounts, the framed artwork segment had an increased income from
operations of $437,000 from 2007 to 2008.
Grass
Segment
Of the
total amounts, the grass segment had a loss from operations of $182,000 in
2008. There were no results of operations for 2007 as the segment
commenced operations in the fourth quarter of 2008.
Other
Income (Expense), Net
Other
income (expense) was a loss of $17,000 in 2007 and zero in 2008.
Liquidity and Capital
Resources
Period
from inception (July 1, 2008) through December 31, 2008
Net cash
provided by operating activities was $927,000 for the period ending December 31,
2008. The Company’s net income was $91,000 in
2008. Non-cash expenses totaled $33,000 for the period ending
December 31, 2008, composed of depreciation of fixed assets and amortization of
land leases. General working capital provided $715,000 in cash for
the period. Related party, net, provided $88,000 in
cash.
Net cash
used in investing activities was $9,000 related to the cash balance on hand in
IPA BVI when IPA BVI was acquired by the Company.
In
December 2008, the Company received $1,580,000 from Mr. Sung Chang as a
condition of the purchase agreement between the Company and Mr. Chang that
required IPA BVI and IPA China to have $3 million in cash equivalents on their
balance sheet at the time of acquisition by the Company on October 21,
2008.
The
Company expects cash on hand as of December 31, 2008 and future operating cash
flow to fund operations for a minimum of the next twelve months, and as such,
the Company has no immediate need for additional outside financing.
32
Period
from January 1, 2009 through September 30, 2009
Net cash
used in operating activities was $526,000 for the nine months ended September
30, 2009. The Company’s net loss was $99,000 for the nine months
ended September 30, 2009. Non-cash expenses totaled $73,000 composed
of depreciation of fixed assets and amortization of land
leases. General working capital used $159,000 in cash for the period
ending September 30, 2009. Related party, net, used $341,000 in
cash.
Net cash
used in investing activities was $64,000 related to an additional land lease
entered into in March 2009 and August 2009 related to the Company’s Giant King
grass business in the PRC and $77,000 for capital equipment spend in the
Company’s grass business
Net cash
used in financing activities was $800,000 comprised of related party
loans.
The
Company expects cash on hand as of September 30, 2009 and future operating cash
flow to fund operations for a minimum of the next twelve months, and as such,
the Company has no immediate need for additional outside financing; however if
revenue forecasts are not met or if future operating expenses or capital
requirements increase beyond our control, the Company may need to seek
additional cash resources. This could be from the sale of additional
equity securities or new debt securities. There is no guarantee that
the Company will be able to obtain needed equity or debt
financing.
Contractual
Obligations
IPA art
designers work with buyers from retail chains to choose prints and other art
forms from catalogs of licensed work. We only purchase prints from companies
with whom we have long-standing relationships, and we guarantee our customers
there are no counterfeits and that all royalties were paid. The
vendors from whom we purchase prints guarantee that all of the prints they sell
are not counterfeits and that all royalties were paid to the artist of the
prints. We then pass this guarantee on to our
customers. Since the time IPA was formed in 2003, we have not
received any legal claims challenging any of the prints we have
sold.
We entered
into four separate two-year employment agreements with each of Carl Kukkonen,
Sung Chang, Stephen Muzi and Maclean Wang. Kukkonen would serve as
Chief Executive Officer, Chang as President, Muzi as Chief Financial Officer and
Wang as Managing Director of Grass Development of IPA China. Kukkonen
and Chang would receive a salary of $240,000 per annum, Muzi receives $180,000
per annum and Wang receives $84,000 per annum. Each of them is
entitled to a bonus as determined by our Board of Directors, customary insurance
and health benefits, 15 days paid leave per year, and reimbursement for
out-of-pocket expenses in the course of his employment.
Under
Chang’s employment agreement, we will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of our total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The option shall
vest over 24 months beginning on the date of the Employment Agreement, with 1/24
of the option shares vesting on the first day of each month that Chang is
employed with us. There was no stock compensation recorded during
2009 since the options are not granted unless the Second Closing occurs as
discussed in Note 9.
Under
Wang’s employment agreement, we will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of our total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The option shall
vest over 24 months beginning on the date of the Employment Agreement, with 1/24
of the option shares vesting on the first day of each month that Wang is
employed with us. There was no stock compensation recorded during 2009 since the
options are not granted unless the Second Closing occurs as discussed in Note 9.
The
Second Closing date was extended until December 15 ,
2009, based on an amendment to the Securities Purchase Agreement on November 25 , 2009. We do not know exactly what
the fair market value of VGE common stock will be on December 15 , 2009, but we have determined a Proposed
Maximum Offering Price Per Unit of $3.00 per share in this S-1 filing for each
share of common stock. 8% of outstanding common shares will be issued
to Mr. Chang and Mr. Wang (4% of total outstanding shares to Mr. Chang and Mr.
Wang) which translates to 688,000 common shares. Assuming $3.00 per
share common stock price on December 15 , 2009, this
would result in the Company issuing these stock incentive options at a per share
price of $2.40 per share (20% discount), resulting in stock compensation expense
of approximately $412,800 to be amortized over 24 months which is the stock
option vesting period, or $17,200 per month.
In the
event that the Second Closing does not occur by December
15 , 2009, then each Employment Agreement shall automatically
terminate.
33
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.
Off-Balance Sheet
Arrangements
The
Company does not have any off-balance sheet arrangements as of September 30,
2009 .
Quantitative
and Qualitative Disclosures about Market Risk
Interest Rate Risk. Our
exposure to interest rate risk primarily relates to interest income generated by
cash invested in liquid investments with original maturities of three months or
less. Such interest-earning instruments carry a degree of interest rate risk. We
have not used any derivative financial instruments to manage our interest rate
exposure. We have not been exposed to material risks due to changes in interest
rates. However, our future interest income may be lower than expected due to
changes in market interest rates.
Foreign Exchange Risk.
Although we use U.S. dollars as our reporting currency and our artwork revenue
is denominated in U.S. dollars, our operations are carried out in RMB and we
maintain RMB denominated bank accounts. We, therefore, are subject to currency
risk. Although the conversion of the RMB is highly regulated in China, the value
of the RMB against the value of the U.S. dollar or any other currency
nonetheless may fluctuate in value within a narrow band against a basket of
certain foreign currencies. China is currently under significant international
pressures to liberalize this government currency policy, and if such
liberalization were to occur, the value of the RMB could appreciate or
depreciate against the U.S. dollar. Unfavorable changes in the exchange rate
between the RMB and the U.S. dollar may result in a material effect upon
accumulated other comprehensive income recorded as a charge in shareholders’
equity. We do not use derivative instruments to reduce our exposure to foreign
currency risk.
In
addition, the RMB is not a freely convertible currency. IPA China, our Chinese
subsidiary, is not permitted to pay outstanding current account obligations in
foreign currency, but rather must present the proper documentation to a
designated foreign exchange bank. We cannot guarantee that all future local
currency can be repatriated.
Inflation. Although China has
experienced an increasing inflation rate, inflation has not had a material
impact on our results of operations during 2007 and 2008. According to the
National Bureau of Statistics of China, the change in the consumer price index
in China was 0.46%, (0.77%), and 1.16% in 2001, 2002 and 2003, respectively.
However in connection with a 3.9% increase in 2004, the Chinese government
announced measures to restrict lending and investment in China in order to
reduce inflationary pressures in China’s economy. Following the government’s
actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006.
In 2007, the consumer price index increased to 4.8%. In response, China’s
central bank, the People’s Bank of China, announced that the bank reserve ratio
would rise half a percentage point to 15.5% in an effort to reduce inflation
pressures. China’s consumer price index growth rate reached 8.7% year-over-year
in 2008. The results of the Chinese government’s actions to combat inflation are
difficult to predict. Adverse changes in the Chinese economy, if any, will
likely impact the financial performance of a variety of industries in China that
use or would be candidates to use our services and products.
Recently
Issued Accounting Standards
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
34
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments,” which is
codified in FASB ASC Topic 320-10. This FSP modifies the requirements for
recognizing other-than-temporarily impaired debt securities and changes the
existing impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the
security, (2) more likely than not will be required to sell the security
before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The FSP further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. This FSP requires entities to initially apply the
provisions of the standard to previously other-than-temporarily impaired debt
securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. The Company adopted FSP
No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This
FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which is codified in
FASB ASC Topic 825-10-50. This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to also be required for interim period reporting. In addition, the FSP
requires certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. These
additional disclosures are required beginning with the quarter ending
June 30, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” codified in FASB ASC
Topic 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
No. 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009, and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS No. 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through the time of filing these financial
statements with the SEC on November 9, 2009.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140,” codified as FASB ASC
Topic 860, which requires entities to provide more information regarding sales
of securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. SFAS No. 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS No. 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS No. 166 will have an impact on its financial condition, results of
operations or cash flows.
35
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46(R),” codified as FASB ASC Topic 810-10, which modifies how
a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS No.
167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. SFAS No. 167 requires an
ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. SFAS No. 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. SFAS No. 167 is effective for
fiscal years beginning after November 15, 2009. The Company does not believe the
adoption of SFAS No. 167 will have an impact on its financial condition, results
of operations or cash flows.
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative US GAAP for nongovernmental entities to be only
comprised of the FASB Accounting Standards Codification™ (“Codification”) and,
for SEC registrants, guidance issued by the SEC. The Codification is
a reorganization and compilation of all then-existing authoritative US GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative US
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of US GAAP in Notes to the Consolidated Financial
Statements.
OUR BUSINESS
Our
Company
VIASPACE
Green Energy Inc., a British Virgin Islands company (“VGE-BVI” or the “Company”)
is the parent company of IPA BVI. IPA BVI owns all equity interests of IPA
China. IPA BVI and IPA China specialize in the manufacturing of high
quality, copyrighted, framed artwork sold in U.S. retail chain stores. IPA China
also has a sublicense to grow and sell a new fast-growing hybrid grass to be
used for production of biofuels and as feed for livestock.
Currently,
we control 70% of the equity interests of IPA BVI as a result of the First
Closing of the Purchase Agreement between VGE, VIASPACE Inc., Sung Hsien Chang
and China Gate Technology Co., Ltd. This is discussed in detail under
“Corporate History” in the Company’s “Management Discussion and Analysis of
Financial Condition and Results of Operation.
Grass Business
Division
Through
our acquisition of IPA BVI and IPA China we indirectly obtained a worldwide
sublicense to cultivate and sell Giant King Grass, a natural hybrid,
non-genetically modified, fast-growing, perennial grass originally developed for
livestock feed. Giant King Grass may also be used to
produce non-food crop liquid biofuels, and as a
replacement for coal in electricity generating power plants. This perennial
grass can grow up to 12 feet in height in 60 days. It can be
harvested four or more times a year in tropical and semitropical areas with a
yield of up to 375 metric tons per hectare (freshly cut, referred to as wet
yield). This is four to seven times higher mass yield than for
corn. Note that one hectare is 10,000 m² and equal to 2.47 US
acres. An area 100 m x 100 m-- about the size of two US football
fields-- is equal to 1 hectare which is abbreviated as ha.
Giant
King Grass has immediate use as animal feed for cattle, sheep, horses, rabbits,
pigs, poultry and fish. The $40 billion Chinese animal feed market, according to
the January 2008 Feed International report, has grown 15% annually for the last
ten years.
36
Giant
King Grass can also be used as a feedstock to make cellulosic biofuels such as
ethanol, methanol and green gasoline. British Petroleum recently
announced plans to build a cellulosic ethanol plant in Florida using grass as a
feedstock, and in the March 23, 2009 issue of Time magazine, a Toyota
advertising section stated that the carbon footprint for its plug-in hybrid can
be reduced by fueling the engine with cellulosic ethanol. Liquid biofuels are
one of the potential uses for our grass.
The July
2009 issue of Scientific American has a cover story entitled “Grassoline” which
discusses renewable low carbon, non-food, liquid biofuels made from grass and
other feedstock. The Scientific American article only covers the U.S.
VIASPACE is growing Giant King Grass, a different and more productive grass
compared those considered in the Scientific American article, in Guangdong
Province China and is exploring opportunities in other semitropical and tropical
parts of China and other areas such as India, Indonesia, Malaysia, the
Philippines, and Tanzania as well as Central and South America.
Another
application of Giant King Grass is as a replacement for coal in electricity
generating power plants. Reports by the U.S. Department of Energy
state that 15% to 20% of coal may be replaced by burning grass in a power plant
with only minor modifications. This process is called co-firing. In addition
there is a growing trend towards small dedicated power plants (10-30 megawatts)
that are fueled exclusively by biomass such as grass and agricultural
waste. For example, since its founding in 2004, Dragon Power in China
has built and is operating 19 power plants powered by 100%
biomass. China’s A-Power Energy Generation Systems Ltd. (Nasdaq:APWR)
announced in April, May and June 2009 that it has received three contracts to
build a total of five biomass fueled electricity generation plants in China by
the end of 2010.
The
VIASPACE Green Energy strategy is to build up our grass production capabilities
and initially sell into the animal feed market, but our long-term focus is on
biofuels-- both liquid and solid. The animal feed market means that
we are not solely dependent on the maturing of the biofuel industry before we
can sell our grass.
We
initially planted 1.2 million seedlings on land on and adjacent to the framed
art factory in Guangzhou, Guangdong province, China. We have obtained
a 20 year lease on 45 ha (112 acres) north of
Guangzhou. Approximately 3 million seedlings generated from the
Guangzhou land have been planted here. We are negotiating to lease additional
land in China. We plan to expand our grass business into other
areas of the world. An example is that on May 15 we signed a Memorandum of
Understanding with Auro Infra to develop a project to grow grass in Tanzania,
Africa to feed cattle and sheep, and explore the opportunity for biomass fueled
power plants. We have also received inquiries from Indonesia and
Brazil.
We
believe Giant King Grass supports three of China’s top national initiatives:
improved agriculture to feed its people; alternative energy and a cleaner
environment. These priorities are documented in China's five-year
plan, and by the Chinese Reform and Development Commission.
Transportation
applications requiring liquid fuels and biofuels have great
potential. Most biofuels are made from plants which are a renewable
resource, and use of some biofuels can significantly reduce carbon
emissions. Growing grass or any plant matter absorbs carbon dioxide
from the atmosphere during photosynthesis and stores it in the plant
tissue. Subsequent burning the grass does emit carbon dioxide into
the atmosphere; however the next crop of grass 60 days later absorbs the carbon
dioxide. If the process of growing, fertilizing, harvesting and transporting the
grass can be done with minimal use of fossil fuels, a grass-based fuel can be a
carbon neutral or low carbon process. Burning coal, oil, or natural
gas emits carbon dioxide and there is no mechanism to remove this carbon dioxide
from the atmosphere.
Ethanol,
which is the same alcohol in beer, wine or liquor, is the most well-known
biofuel. Ethanol is blended with gasoline and burned in conventional automobile
engines that have minor modifications. In the U.S. today almost all
ethanol is made from corn. Government subsidies for ethanol have made
ethanol price competitive with gasoline and much of the US corn crop now goes
toward ethanol production. These subsidies have led to an increased
demand for corn for ethanol production. According to the Money Morning
Corn Price Report (quoting the US Department of Agriculture), one third of U.S.
corn is devoted to ethanol production, and this is expected to increase in the
future. Corn prices have risen from about $2.00 per bushel at the
beginning of 2006 to a peak of $7.65 in mid-2008. Corn is currently
$3.66 per bushel. More land in the U.S. is devoted to corn production
at the expense of other crops and the prices of these other crops have risen as
well.
Higher
food prices have led to food shortages around the globe and it has been argued
that people are starving so that we can make the fuel to drive our
cars. This argument has resonated with many world leaders and
resulted in a global effort to derive biofuels from plants that are not in the
human food chain. These are called cellulosic biofuels.
Cellulosic
biofuels are based on nonfood plants including grass, shrubs and
trees. These plants do not have a lot of sugar and cannot be
fermented directly like corn. They do have a lot of cellulose in
their leaves, stalks and branches which contain carbon and
hydrogen which can be converted into ethanol which is called
cellulosic ethanol.
37
A growing
trend and a recent business opportunity is to simply burn the grass in a power
plant to generate electricity. More than 20 new power plants fueled entirely by
biomass are operating in China. These power plants currently use agricultural
waste such as corn straw, wheat straw and wood chips as the fuel. Agricultural
waste is seasonal and supply can be erratic with varying quality and price.
Biomass power plant operators would like to have the plant fueled 50% by
agricultural waste and 50% by a dedicated energy crops such as Giant King
Grass.
On
September 2, 2009 our parent company VIASPACE signed a Memorandum of
Understanding with DP Cleantech Co. Ltd. of Beijing China, a subsidiary of
Dragon Power. Pursuant to the Memorandum of Understanding, the
parties agreed to (i) review the potential of running DP’s power plants solely
with Giant King Grass or in combination with agricultural waste; (ii)
investigate of suitable areas to grow Giant King Grass and co-locate a new power
plant; (iii) and burn significant quantities of Giant King Grass in an existing
DP Cleantech power plant. As part of their due diligence, DP Cleantech
commissioned an independent analysis of Giant King Grass by the China National
Center for Quality Supervision and Test of Coal which confirmed that Giant King
Grass has an energy content of 18.4 megajouels (MJ) per dry kilogram (4402
kilocalories (kcal) per kilogram). DP Cleantech declared Giant King Grass
suitable as a renewable feedstock for generating electric power in their power
plants.
Existing
coal-fired power plants with minor modifications can replace 15 to 20% of coal
with biomass. Burning 15 to 20% biomass would mean that this portion
of the coal-fired power plant would be using a renewable, low carbon feedstock.
Co-firing may be one way to introduce biomass on a large scale for energy
production.
VIASPACE
Green Energy is seeking long-term supply contracts for Giant King Grass
with biofuel producers and power plants, as well as animal feed. We
are in discussions with these parties, but as of this date, we have not entered
into any such contracts. We have no current customers for our grass
crops. However, the Memorandum of Understanding with DP Cleantech, a subsidiary
of Dragon Power the largest builder, owner and operator of biomass power plants
in China, may result in a customer.
We are
working to produce enough seedlings and obtain enough land to have at least 1000
to 2000 hectares under cultivation in 2010. Dragon Power has analyzed
the energy content of Giant King Grass and reports that their 30 MW power plant
fueled 100% by Giant King Grass would consume 600 tons per day. At 80%
utilization factor this is 175,200 tons per year,. At 25%
moisture content, which is suitable for a power plant, Giant King Grass has an
effective yield of 125 to 180 tons per hectare per year, and the land
requirement would be 973-1402 hectares. The 30 MW electricity
generating power plant can fueled 100% by grass, or by a combination of grass
and agricultural waste. The grass revenue from 1000 ha would be greater than
$4.5 million and $9 million from 2000 ha based on a price of $36 US per metric
ton which is the price currently paid in China for agricultural waste. Dragon
Power has said to us that they prefer to have a dedicated energy crop to provide
a reliable and consistent fuel source for at least 50% of their power generation
needs. We are in discussions with biomass power plant suppliers and operators,
and with parties that have access to significant amounts of land.
Currently
IPA China is growing Giant King Grass on 45 hectares of land leased by it for 20
years in Guangdong province in China. This grass can be harvested and sold
directly to customers, and it can be used to provide new seedlings for expanded
growing. A single plant can generate 20 to 35 seedlings from its
stalk and shoots (tillers) in addition to allowing the harvest and sale of the
leaves. The current 45 hectares can provide the enough seedlings for
900- 1575 hectares, and each year the production capability can increase by a
factor of 20 to 35. The Company is aggressively pursuing additional land to
support long-term supply contracts. The Company has sufficient capital to lease
additional land. The Company is also pursuing partnership discussions
with parties that have access to land in China and other countries.
We have
been able to lease land in Guangdong province in southern China at favorable
rates, and we contract with local farmers to provide the labor for growing the
grass also at favorable rates. Management believes that sufficient land to meet
our initial objectives in Guangdong province can be acquired and financed within
our current capital resources. The land required to grow Giant King Grass to
supply a power plant does not necessarily need to be contiguous, but can consist
of several parcels all within a 50 km radius of the power plant. Parcels up to
666 ha can be leased with only local or provincial approval. The
company is also pursuing other opportunities for significant expansion that may
require joint ventures or raising capital.
We
believe we can also obtain a minimum of $36 US per metric ton in China for Giant
King Grass as animal feed. We expect to have in excess of 4000 ha under
cultivation in 2011 which should generate revenues in excess of $14
million. Production of Giant King Grass seedlings should be well
under control and allow the company to achieve many times increase in production
each year in the future. For comparison, the framed art business generated
approximately $7 million in revenue in 2008.
38
We are
currently seeking long-term supply contracts for grass for animal feed,
electrical power production and for liquid biofuels such as cellulosic ethanol.
We are offering Giant King Grass for sale to customers. We do not sell seedlings
to third parties, but are willing to provide seedlings and grass growing
expertise to joint venture partners where we can benefit from the recurring
revenue stream of grass sales. Based on our discussions with Dragon
Power, the largest biomass power plant builder and operator in China, they could
potentially enter into a 20 year grass supply contract for Giant King Grass with
several additional 10 year options. The lifetime of their power plant is up to
50 years, and they need an assured source of biomass
fuel. There are no assurances that will finalize such agreement
or if finalized, that such agreement will be for a term of 20
years.
VIASPACE
Green Energy has two distinct revenue models for Giant King Grass: integrated
grass/fuel supply under company control, and contract support/
licensing with a joint venture partner.
In the
integrated grass /fuel supply model the company will own or lease the land and
employ the labor and management to grow Giant King Grass that will then be used
to supply domestic animal feed and biomass energy markets, or will be exported,
likely in pelletized form, to energy markets globally. The company
will manage and control the supply chain from initial land preparation through
the FOB source shipment point for the feed or energy market. The company may
pursue this model using only its own capital resources, or the
company may elect to use joint ventures with domestic landowners, energy
equipment manufacturers, power plant owner/operators and/or capital providers
like energy investment funds. The terms of these joint ventures will
be negotiated on a case-by-case basis.
Under a
contract/licensing model, the joint venture partner would provide the land,
labor and management and be responsible for growing Giant King Grass. VIASPACE
Green Energy will provide initial seedlings, crop management services and
knowledge transfer for a negotiated price. In addition, there would
be an ongoing fee based on grass production.
VIASPACE
Green Energy has leased the land and directly employs the workers where Giant
King Grass is being grown today in Guangdong province in southern China. This is
under the integrated grass/fuel supply model. The company is also in discussions
with potential joint venture partners that have land and the ability to grow the
grass in other regions of China and in other countries in Asia, Africa, India
and South America.
Management
believes both models will be important contributors to the Company's revenue
streams. Initial revenues are expected to be 100% from the integrated grass/fuel
supply model. Rapid global expansion requires local joint venture partners that
have land and labor, but lack the energy crop and the expertise to grow it. The
contract/licensing model with joint venture partners will be used for these
remote projects. Management believes that approximately half the revenue will be
from joint ventures by 2012.
In the
event that the Second Closing of the acquisition of IPA BVI and China does not
occur, VGE’s Parent Company will no longer be permitted to operate in the grass
business for three years; however, VGE will continue to be permitted to operate
in the grass business.
In
addition, the Licensor and Sung Chang, the seller of IPA China and IPA BVI, each
represented that at least 100 hectares of arable land in Guangdong province in
China will be available for grass farming by IPA China within 12 months after
the First Closing Date. IPA China secured 45 hectares of arable land
in the first quarter of 2009 and leased an additional 55 ha in the third quarter
of 2009. The requirement has been met so this requirement no longer
has any impact on our ability to utilize our grass license rights.
Framed Art Business
Division
Our
subsidiaries, IPA BVI and IPA China (collectively “IPA”) manufacture high
quality, copyrighted, framed artwork in its factory in Guangzhou China, and sell
the art to large U.S. retailers through its sales organization in Atlanta,
Georgia. IPA is a manufacturer and wholesaler of framed art.
The IPA
framed art unit consists of five people in the U.S. and 84 in China. The factory
is on 1.6 hectares of land in China including two manufacturing buildings and
one employee dorm and a dining facility. This factory may be utilized for our
other future manufacturing requirements. IPA, with its framed art business,
has an established and stable production facility in China, and sales and
distribution network in the United States.
The
acquisition of IPA was a strategic move to acquire its revenue and profit, as
well as the grass business. With the IPA profits, we believe we can
aggressively build the grass business even during these difficult economic
times. We plan to continue and to grow the framed art business. Based
on our grass business goals discussed above, we believe that the grass business
will as large as the framed art business in 2010 or 2011 and much larger
thereafter.
IPA art
designers work with buyers from retail chains to choose prints and other art
forms from catalogs of copyrighted and licensed work. We only purchase prints
from companies with whom we have long-standing relationships, and we guarantee
our customers there are no counterfeits and that all royalties have been
paid. IPA designers then mockup mattes and frames for the
customer. Once the customer decides on a print, matte and frame
combination, we ship the print to our factory in Guangzhou,
China. The mattes, frame moldings and glass are sourced in
China. A typical order is 1,400 units of a specific design and a
customer usually orders several different designs which are packed in several
containers and shipped directly to the customer in the U.S. We
provide prints, frames and packaging that are all of high quality.
An example of quality packaging is our use of protective clear
plastic covers on the corners of the frame. The covers provide
protection during shipping and handling, but are transparent and do not obscure
the artwork on the display shelf as conventional cardboard corner protectors
do. Our framed art typically retails for $50-$300.
39
Competition
Framed Art Business
(Inter-Pacific arts, Inc. /IPA)
There are
many framed art companies that compete with IPA. For example, ICA
Home Decor, Crown Arts, Wendover Art, Midwest Art and many more in the U.S. and
China. IPA benefits from having its own factory in China and
concentrates on large customers that typically order framed art work by the
container load with a typical order of 1400 copies of a single
design. These customers generally have many retail stores in their
chains. IPA only manufactures art after an order is placed and has
virtually no inventory of framed art. IPA guarantees its customers
that all art is legitimate with full royalties paid, and that it will not sell
the same product to another customer. IPA sources high quality frame
moldings, mattes and glass in China, and assembles the framed art in its factory
in China. IPA is able to control its expenses through its
relationships with suppliers and control quality by assembly at its factory in
China. We believe that these processes allow IPA's products to be sold at a
favorable price in a competitive environment.
Grass Business
Division
Many
companies, universities and research laboratories worldwide are investigating
grass as a feedstock for cellulosic ethanol. Monsanto is an example
of a large company focusing on grass. Ceres is an example of a startup company
focusing on biomass and grass in particular. Much of the competition is looking
at miscanthus or switchgrass. These grasses are suitable for
temperate areas. Much of the competition also is focused on selling seeds. The
VIASPACE Green Energy Giant King Grass is a natural hybrid of pennisetum
purpureum with another grass. This hybrid is not generally available,
and to our knowledge no one else is growing Giant King Grass, as a commercial
crop. Based on publicly available data on switchgrass and miscanthus, compared
to our data on Giant King Grass, we believe that Giant King Grass has
significantly higher productivity than these and other competing
grasses. Giant King Grass is most suitable for tropical and
subtropical areas, which are the focus of the company’s
efforts. Giant King Grass is propagated by seedlings not by seeds.
VIASPACE Green Energy is not selling seedlings to third parties, but is focusing
on growing the grass and securing long-term supply contracts for biofuel
production, as a replacement for coal and electricity generation, and as animal
feed. Once we obtain long-term supply contracts, we plan to capture
these recurring revenue streams.
Other
grasses such as alfalfa are suitable for animal feed and are also
competitors.
Customers
All of
our current framed artwork customers are national U.S. retailers. For
2008, sales to one customer, Hobby Lobby Stores, comprised 57% of our total
revenues. We believe this concentration of sales made to a small
number of customers will continue in the near future. A loss of any
customer by us could significantly reduce our future revenues.
Our grass
business has not generated revenue yet. On May 15 we signed a
Memorandum of Understanding with Auro Infra to develop a project to grow grass
in Tanzania, Africa to feed cattle and sheep, and explore the opportunity for
biomass fueled power plants. We have been meeting with potential
customers in China. We have also received inquiries from Indonesia
and Brazil.
Suppliers
We
purchase raw materials such as glass panes and mattes for our picture frames
from third party vendors. We do not rely on any sole source
vendor. We believe we have a multiple source supplier base that
allows us to utilize numerous vendors and obtain reduced prices for our
supplies, components and reduce product costs.
We obtain
seedlings to the Giant King Grass from our licensor, China Gate
Ltd.
Marketing
We
typically deploy a targeted partner-customer approach intended to establish key
relationships with the appropriate decision makers of our broad market. This
approach also includes valuable participation at the appropriate related trade
industry events.
We send
e-mails to current and prospective users and partners regularly that contain
invitations to visit various pages or features on our websites. Our ongoing
effort to update our customer list is also an opportunity to build and reinforce
the personal contacts that are critical in servicing our customer’s
needs.
40
Intellectual
Properties
Grass
License
IPA China
received its sublicense authority to obtain and grow Giant King Grass from China
Gate Technology Co. Ltd., a Brunei Darussalam company ("Licensor"), in an
agreement dated November 11, 2008. IPA China purchased 1.2 million seedlings
under the agreement, which also provided that China Gate agreed to refer any of
its future sales over small quantities (20,000 seedlings) in Guangdong province
China and in North America to IPA China. China Gate also agreed to
provide IPA China with technical support to assist in planting. The agreement
does not provide any limitation on IPA China’s ability to grow, harvest and
market the grass anywhere in the world. In addition to Giant King
Grass, the license/agreement covers elephant grass and Purple King Grass. We
plan on evaluating opportunities for these grasses as well. No
term length was specified in the agreement. To our knowledge, China
Gate has not entered into such license agreements with any other
party. The agreement between China Gate and IPA China enables us to
plant our seedlings in other geographic regions outside Guangdong province and
North America.
Art
License
We
purchase the copyrighted artwork that is placed into our picture frames from
reputable publishers who pay the appropriate royalties to the
artists. These are companies we have longstanding relationships with,
and we believe the chances that such artwork copyrights have not been obtained
is minimal.
Employees
As of
September 30, 2009 we have 91 employees, 84 of whom are based in China and 7 of
whom are based in the U.S. We believe that our relations with our
employees are good. We have never had a work stoppage, and our employees are not
subject to a collective bargaining agreement.
Facilities
We
currently operate our office in Irvine, California and our facilities in China.
Our headquarters are located in Guanzhou province in the PRC. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Contractual Obligations and Commercial Commitments.”
Office
|
|
Address
|
|
Term
|
|
VIASPACE
GREEN ENERGY
|
|
2102
Business Center Dr., Suite 130, Irvine,
California,
92612
|
|
Month-to-month
rental lease
|
|
IPA
CHINA
|
|
San
Sheng Road, DaLi Village, TaiHe Town,
Guangzhou,
China 510540
|
|
Building
owned by Company; Land
leased
from PRC government
|
|
IPA
BVI
|
|
No.
10 Lane 210, Hai Pu Road, Hsin Chu, Taiwan
|
|
Month-to-month
|
|
MANAGEMENT
Executive
Officers and Directors
The
following table sets forth our executive officers and directors, their ages and
the positions held by them. None of the directors listed below are
independent directors:
Name
|
|
Age
|
|
Position
Held
|
Mr. Carl
Kukkonen
|
|
64
|
|
Chief
Executive Officer and Director
|
Mr. Sung
Chang
|
|
47
|
|
President
and Director
|
Mr. Amjad
S. Abdallat
|
|
48
|
|
Director
|
Mr. Stephen
Muzi
|
|
46
|
|
Chief
Financial Officer
|
Carl
Kukkonen. Dr. Kukkonen has been our Chief Executive
Officer and Director since October 2008. He is also the Chief
Executive Officer and Director of VIASPACE, Inc., our parent corporation since
2005. He is also the Chief Executive Officer, President, and
Director, Direct Methanol Fuel Cell Corporation, a subsidiary of
VIASPACE since 2001, and the Chief Executive Officer and Director of
VIASPACE Security Inc., a subsidiary of VSI since 2002. He was the
Co-founder and Chief Executive Officer of ViaSpace Technologies LLC (predecessor
of VIASPACE) from 1998 to 2005. Previously, Dr. Kukkonen served
as the Director of the Center for Space Microelectronics Technology and
Manager of Supercomputing at the Caltech NASA Jet Propulsion Laboratory from
1984 to 1998. From 1977 to 1984, he was the Principal Research
Engineer at Ford Motor Company. Dr. Kukkonen has a B.S. in physics
from the University of California at Davis and an M.S. and Ph.D. in physics from
Cornell University. He was also a Post-doctoral fellow at Purdue
University.
41
Sung Chang. Mr.
Chang is the President and Director of VIASPACE Green Energy since October
2008. He is also the Chief Executive Officer and founder of
Inter-Pacific Arts, Inc., our subsidiary since 2002. He worked at Jun
Jung Metal prior to 2002. He attended Taiwan Junior
College.
Amjad S.
Abdallat. Mr. Abdallat has a Director of the Company
since October 2008. He is also a Director of VIASPACE, Inc.,
our parent corporation since 2005. He is also a director of Direct
Methanol Fuel Cell Corporation, a subsidiary of VIASPACE since
2001. He is also a Director of Ionfinity LLC, a subsidiary of
VIASPACE since 2001. He was the Co-founder of ViaSpace Technologies
LLC (predecessor of VIASPACE) from 1998 to 2005. He was with
Hewlett-Packard Company as Business Development, Marketing and Program Capture
from 1989 to 1998, and was in business development at Control Data Corporation
from 1984 to 1989. He has a BS from the University of California at
Berkeley and a Master’s degree in Engineering from the University of
Missouri.
Stephen Muzi. Mr.
Muzi is our Chief Financial Officer, Treasurer and Secretary since October
2008. Since June 2005, he has also been the Chief Financial Officer,
Treasurer and Secretary of VIASPACE Inc., our parent corporation. He
was the controller for SpectraSensors, Inc., a spun-off former subsidiary of
VIASPACE from 2003 to 2005. He was also a controller for ViaLogy
Corp., a spun-off former subsidiary of the Company from 2003 to
2005. From 2004 to 2005, he also served as a consultant to Direct
Methanol Fuel Cell Corporation, VIASPACE Security Inc. and Ionfinity LLC,
subsidiaries of VIASPACE from 2004 to 2005. Mr. Muzi joined ViaSpace
Technologies LLC (predecessor of VIASPACE) in May 2000. Mr. Muzi
obtained his B.S. degree from Rochester Institute of Technology and an M.B.A.
from the State University of New York at Buffalo. He is a Certified
Public Accountant
DIRECTOR AND EXECUTIVE COMPENSATION
Executive
Compensation
The
following table shows the annual compensation paid by us to Mr. Carl
Kukkonen, our principal executive officers, for the year ended December 31, 2008
and our executive officers who were paid more than $100,000 per
annum. Other than the officers listed, no other officer had total
compensation during either of the previous two years of more than
$100,000.
Summary
Compensation Table
Name(1)
|
Year
|
Salary
|
Bonus
|
All
Other
Compensation
|
Total(1)
|
|||||||||||||
Carl
Kukkonen
|
2008
|
$
|
―
|
$
|
—
|
$
|
—
|
$
|
―
|
|||||||||
Chief
Executive Officer (Principal Executive Officer)
|
||||||||||||||||||
Sung
Chang
|
2008
|
$
|
40,000
|
$
|
―
|
$
|
―
|
$
|
40,000
|
|||||||||
President
and Chief Executive Officer of IPA BVI and IPA China
|
||||||||||||||||||
Stephen
Muzi
|
2008
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
―
|
|||||||||
Chief
Financial Officer (Principal Financial Officer)
|
__________________
(1)
|
Mr. Sung
Chang became our President and an executive officer in October
2008.
|
Stock
Incentive Plan
Our Board
of Directors and majority of shareholders adopted a stock incentive plan
that provides for stock option and stock grants for our employees,
directors and consultants. 1,400,000 ordinary shares (16.28% of outstanding
shares at the conclusion of this offering) will initially be reserved in the
stock incentive plan. The number of shares in the stock option plan
will adjust annually and remain at 16.28% of outstanding shares. The options
will vest at a rate determined by the company's directors and have an
exercise price of at least 80% of the market price of our shares on the
date the options are granted. We expect to grant options and common
shares to certain employees as of the closing of this offering; however, we have
not yet determined the number of options or the individuals to whom to grant
such options.
Board
of Directors and Board Committees
Our board
of directors currently consists of three (3) members. We expect that all
current directors will continue to serve after this offering. There are no
family relationships between any of our executive officers and
directors.
A
director may vote in respect of any contract or transaction in which he is
interested, provided, however that the nature of the interest of any director in
any such contract or transaction shall be disclosed by him at or prior to its
consideration and any vote on that matter. A general notice or disclosure to the
directors or otherwise contained in the minutes of a meeting or a written
resolution of the directors or any committee thereof that a director is a
shareholder of any specified firm or company and is to be regarded as interested
in any transaction with such firm or company shall be sufficient disclosure and
after such general notice it shall not be necessary to give special notice
relating to any particular transaction.
42
There are
no membership qualifications for directors. Further, there are no share
ownership qualifications for directors unless so fixed by us in a general
meeting.
There are
no other arrangements or understandings pursuant to which our directors are
selected or nominated.
Duties
of Directors
Under
British Virgin Islands law, our directors have a fiduciary duty to the company
to act in good faith in their dealings with or on behalf of our company and
exercise their powers and fulfill the duties of their office honestly. This duty
has four essential elements:
●
|
a
duty to act in good faith in the best interests of the
company;
|
|
●
|
a
duty not to personally profit from opportunities that arise from the
office of director;
|
|
●
|
a
duty to avoid conflicts of interest; and
|
|
●
|
a
duty to exercise powers for the purpose for which such powers were
intended.
|
In
general, the Companies Law imposes various duties on officers of a company with
respect to certain matters of management and administration of the company. The
Companies Law imposes fines on persons who fail to satisfy those requirements or
the company itself. However, in many circumstances, an individual is only liable
if he is knowingly guilty of the default or knowingly and willfully authorizes
or permits the default.
Director
Compensation
All
directors hold office until the expiration of their respective terms and until
their successors have been duly elected and qualified. There are no family
relationships among our directors or executive officers. Officers are elected by
and serve at the discretion of the Board of Directors. Employee directors do not
receive any compensation for their services. Non-employee directors may receive
cash, stock or stock options for their service on the Board of Directors. In
addition, non-employee directors are entitled to receive compensation for their
actual travel expenses for each Board of Directors meeting attended.
None of our directors received any director compensation for serving on the
Board of Directors in 2008. Directors who are our officers received
only salary which is shown in the Summary Compensation Table.
Employment
Agreements
We have
entered into four separate employment agreements with each of Carl Kukkonen,
Sung Chang, Maclean Wang and Stephen Muzi. Dr. Kukkonen serves as
Chief Executive Officer, Mr. Chang as President, Mr. Wang as Managing Director
of grass development, Mr. Muzi as Chief Financial Officer, Treasurer and
Secretary. Dr. Kukkonen and Mr. Chang would receive a salary of
$240,000 per annum, Mr. Wang receives $72,000 per annum as an employee, but not
an officer of our company and Mr. Muzi receives $180,000 per annum. Each of them
should are entitled to a bonus as determined by the VGE Board of Directors,
customary insurance and health benefits, 15 days paid leave per year, and
reimbursement for out-of-pocket expenses in the course of his
employment.
Under
Chang’s employment agreement, we will grant him an option to purchase the number
of ordinary shares equal to four percent (4%) of our total outstanding shares as
of the Second Closing Date. The purchase price of the option shares shall be
eighty percent (80%) of the fair market value of such shares as of the Second
Closing Date. The option shall vest over a period of 24 months beginning on the
date of the Employment Agreement, with 1/24 of the option shares vesting on the
first day of each month that Chang is employed with VGE.
Under
Wang’s employment agreement, we will grant him an option to purchase the number
of ordinary shares equal to four percent (4%) of our total outstanding shares as
of the Second Closing Date. The purchase price of the option shares shall be
eighty percent (80%) of the fair market value of such common stock as of the
Second Closing Date. The option shall vest over a period of 24 months beginning
on the date of the Employment Agreement, with 1/24 of the option shares vesting
on the first day of each month that Wang is employed with VGE.
Dr. Carl
Kukkonen will be granted 150,000 VGE ordinary shares and an option to purchase
200,000 shares: Mr. Stephen Muzi will be granted 100,000 shares of VGE common
stock and an option to purchase 150,000 shares; and Dr. Jan Vandersande serving
as Director of Communications will be granted 15,000 shares of VGE common stock
and an option to purchase 15,000 shares. The purchase price of the
option shares shall be eighty percent (80%) of the fair market value of such
common stock as of the Second Closing Date. The option shall vest over a period
of 24 months beginning on the date of the Employment Agreement, with 1/24 of the
option shares vesting on the first day of each month that such person is
employed with VGE.
43
Each
executive shall have an employment term of two years. VGE may terminate the
Employment Agreement for Cause. As used herein, “Cause” means (a) the refusal in
bad faith by executive to carry out specific written directions of the Board,
(b) intentional fraud or dishonest action by executive in his relations with
VGE; (c) the conviction of executive of any crime involving an act of
significant moral turpitude; (d) any act (or failure to act), knowingly
committed by executive, that is in violation of written VGE policies, the
Employment Agreement or VGE’s written agreements with third parties and that is
materially damaging to the business or reputation of VGE as determined in good
faith by the CEO.
Each
executive, by notice to VGE, may terminate the Employment Agreement if a Good
Reason exists. “Good Reason” means the occurrence of any of the following
circumstances without executive’s prior express written consent: (a) a material
adverse change in the nature of executive’s title, duties or responsibilities
with VGE that represents a demotion from his title, duties or responsibilities
as in effect immediately prior to such change; (b) a material breach of the
Employment Agreement by VGE; (c) a failure by VGE to make any payment to
executive when due, unless the payment is not material and is being contested by
VGE, in good faith.
If
executive’s employment with VGE is terminated without Cause or for Good Reason,
executive shall be entitled to receive all salary and benefits due to executive
during the term of the Employment Agreement, and all executive’s stock options,
if any, shall vest on the date of termination.
If the
Second Closing fails to occur within 396 days after the First Closing, the
Employment Agreement shall automatically terminate and neither party shall owe
any obligations whatsoever to the other party under the Employment Agreement,
provided that VGE shall pay to executive all amounts owing to executive at the
time of termination, including for previously accrued but unpaid bonuses and
expense reimbursements.
Each
executive shall not disclose any confidential information of VGE. During the
period commencing upon the date of each Agreement and terminating three years
after termination of employment, no executive, without the prior written
permission of VGE, shall not for any reason whatsoever, (i) enter into the
employment of or render any services to any person, firm or corporation engaged
in any business which competes with VGE (“Competitive Business”); (ii) engage in
any Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee consultant, advisor or in
any other relationship or capacity; (iii) employ, or have or cause any other
person or entity to employ, any person who was employed by VGE at the time of
termination of executive’s employment by VGE (other than Executive’s personal
secretary and assistant); or (iv) solicit, interfere with, or endeavor to entice
away from VGE, for the benefit of a Competitive Business, any of its customers.
Under Chinese law, we may only terminate employment agreements without cause and
without penalty by providing notice of non-renewal one month prior to the date
on which the employment agreement is scheduled to expire. If we fail to provide
this notice or if we wish to terminate an employment agreement in the absence of
cause, then we are obligated to pay the employee one month’s salary for each
year we have employed the employee. We are, however, permitted to terminate an
employee for cause without penalty to our company, where the employee has
committed a crime or the employee’s actions or inactions have resulted in a
material adverse effect to us.
Limitation
of Director and Officer Liability
Pursuant
to our Memorandum and Articles of Association, every director or officer and the
personal representatives of the same shall be indemnified and secured harmless
out of our assets and funds against all actions, proceedings, costs, charges,
expenses, losses, damages or liabilities incurred or sustained by him or her in
or about the conduct of our business or affairs or in the execution or discharge
of his or her duties, powers, authorities or discretions, including without
prejudice to the generality of the foregoing, any costs, expenses, losses or
liabilities incurred by him in defending (whether successfully or otherwise) any
civil proceedings concerning us or our affairs in any court whether in the
British Virgin Islands or elsewhere. No such director or officer will be liable
for: (a) the acts, receipts, neglects, defaults or omissions of any other
such Director or officer or agent; or (b) any loss on account of defect of
title to any of our property; or (c) account of the insufficiency of any
security in or upon which any of our money shall be invested; or (d) any
loss incurred through any bank, broker or other similar person; or (e) any
loss occasioned by any negligence, default, breach of duty, breach of trust,
error of judgment or oversight on his or her part; or (f) any loss, damage
or misfortune whatsoever which may happen in or arise from the execution or
discharge of the duties, powers authorities, or discretions of his or her office
or in relation thereto, unless the same shall happen through his or her own
dishonesty.
44
PRINCIPAL
SHAREHOLDERS
The
following table sets forth information with respect to beneficial ownership of
our ordinary shares as of November 25 , 2009 and as
adjusted to reflect the sale of the ordinary shares offered by us in this
offering, for each person known by us to beneficially own 5% or more of our
ordinary shares, and all of our executive officers and directors individually
and as a group. Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect to the
securities. Except as indicated below, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all ordinary shares shown as beneficially owned by them.
Percentage of beneficial ownership is based on 8,600,000 shares outstanding as
of November 25 , 2009. Our major shareholders do not
possess voting rights that differ from our other shareholders. The address of
each of the below shareholders is c/o VIASPACE Green Energy Inc., 2102 Business
Center Dr., Suite 130, Irvine, CA 92612 unless otherwise
specified.
Amount
of
Beneficial
Ownership
|
Percentage
Ownership
Before Offering
|
Percentage
Ownership After
Offering
|
|||||||||
Carl
Kukkonen (1)
|
5,100,000
|
59.3
|
%
|
59.3
|
%
|
||||||
Sung
Chang (2)
|
1,806,000
|
21.0
|
%
|
16.8
|
%
|
||||||
Amjad
S. Abdallat
|
0
|
0
|
0
|
||||||||
Stephen
Muzi
|
0
|
0
|
0
|
||||||||
VIASPACE
Inc.(1)
|
5,100,000
|
59.3
|
%
|
59.3
|
%
|
||||||
Maclean
Wang (3)
|
525,000
|
6.1
|
%
|
4.9
|
%
|
||||||
GIT,
LLC (4)
|
523,000
|
6.1
|
%
|
4.9
|
%
|
||||||
Directors
and Officers as a group (4 persons)
|
6,906,000
|
80.3
|
%
|
76.1
|
%
|
_______________
(1) The
natural person with voting and dispositive power of ordinary shares held by
VIASPACE Inc. is Carl Kukkonen. Mr. Kukkonen disavows ownership of
such shares. Percentage ownership after offering assumes that all
registered shares have been sold, and VIASPACE holds 5,100,000 shares after the
offering.
(2) Includes
350,000 shares held by his wife, 526,000 shares held by a company of which his
wife is the control person, and 400,000 shares held by his two sons, all of whom
reside in the same household. Percentage ownership after offering
assumes that all registered shares have been sold, and Mr. Chang and immediate
family hold 1,444,800 shares after the offering.
(3) Maclean
Wang is also known by his Chinese name, Ko Hung Wang.
(4) The
natural person with voting and dispositive power of ordinary shares held by GIT,
LLC is Yousan Su.
Shareholder
Agreement and Change of Control
Under the
Shareholder Agreement by and among VIASPACE and Chang, we have three directors.
The parties agree that two directors will be selected by VIASPACE while one
director will be selected by Chang. Carl Kukkonen will be our initial Chairman
of the Board and Chief Executive Officer. Stephen Muzi will be our initial Chief
Financial Officer, Treasurer and Secretary. Chang will be the initial
President.
Carl
Kukkonen will be the initial Chief Executive Officer of IPA BVI and IPA China,
effective as of the Second Closing. Stephen Muzi will be the initial Chief
Financial Officer and Secretary of IPA BVI and IPA China, effective as of the
Second Closing. Chang will be the initial President of IPA BVI and IPA China
(the "Subsidiaries"). Maclean Wang will be initial Managing Director of Grass
Development of IPA China.
Meetings
of each board of directors shall be held at least 4 times per year, at such
places and on such dates as are agreed by the directors. The presence of any 2
of the directors shall constitute a quorum for the transaction of business at a
meeting of the board of directors. The affirmative vote of a majority of the
directors present at a meeting will constitute a decision of the board of
directors; provided, however, that decisions as to Fundamental Matters, as set
forth below, shall require unanimous approval:
●
|
other
than certain permitted issuances, any issuance or agreement to issue any
of our equity securities or those of our subsidiaries;
|
|
●
|
any
transaction of merger, consolidation, amalgamation, recapitalization or
other form of business combination; any joint venture; any liquidation,
winding up or dissolution of us or our subsidiaries; or any acquisition of
any business or assets from, or capital stock of, any
person;
|
45
●
|
any
sale, conveyance, lease, transfer or other disposition of any substantial
assets or any other transaction not in the ordinary course of
business;
|
|
●
|
any
declaration or making of dividend payments or other payments or
distributions made to any shareholders;
|
|
●
|
any
amendment or modification of the Memorandum and Articles of
Association;
|
|
●
|
any
indebtedness incurred or guaranty made by us or our subsidiaries or any
pledge of our or our subsidiaries’ assets;
|
|
●
|
commercial
proposals or contracts which would commit us or our subsidiaries for a
total amount of more than $100,000;
|
|
●
|
decisions
relating to the officers and executive management of us or our
subsidiaries, including compensation, employment and termination of
employment;
|
|
●
|
approval
of our annual budget of and our subsidiaries’;
|
|
●
|
selection
of our auditors and our
subsidiaries.
|
Each
shareholder shall have a right of first refusal of any attempted sale or
transfer of shares of our common stock by the other shareholder except for
certain permitted transfers to related parties. In addition, each shareholder
shall have a "tag along" offer right in which it may include its shares in any
attempted sale of our common stock by the other shareholder.
The
Shareholder Agreement shall terminate if the Second Closing fails to occur, or
as mutually determined by the parties or upon a sale of our company to a third
party.
The
description of the Shareholders Agreement is qualified in its entirety by
reference to such agreements attached hereto.
DILUTION
If you
invest in our common stock, the public offering price per share of our common
stock in the resale offering of $3.00 is much greater than the pro forma
combined net tangible book value per share of our common stock after this
offering. Our pro forma combined net tangible book value at September
30, 2009 was approximately $4,540,000 or $0.53 per share of our common stock,
based on 8.6 million shares outstanding.
This
registration statement is on behalf of our shareholders only and we will not
receive any of the proceeds of this resale offering. As a result, our
pro forma combined net tangible book value at September 30, 2009 assuming the
consummation of this offering is the same as our net tangible book value at
September 30, 2009 . The following table illustrates the per share
dilution to new investors purchasing our common stock in the
offering:
Assumed
public offering price per share
|
$
|
3.00
|
|||||||
Pro
forma combined net tangible book value per share at September 30,
2009 and after the offering
|
$
|
0.53
|
|||||||
Increase
attributable to new investors
|
$
|
0
|
|||||||
Pro
forma combined net tangible book value after the offering
|
$
|
0.53
|
|||||||
Dilution
in pro forma combined net tangible book value per share to new
investors
|
$
|
2.47
|
46
Selling
Security Holders
The
following table sets forth the names of the selling shareholders who may sell
their shares under this prospectus from time to time. No selling shareholder
has, or within the past three years has had, any position, office or other
material relationship with us or any of our predecessors or affiliates other
than as a result of the ownership of our securities, except for Mr. Sung Hsien
Chang, who is an officer of the Company.
The
following table also provides certain information with respect to the selling
shareholders’ ownership of our securities as of November 25 , 2009, the total number of securities they may sell
under this prospectus from time to time, and the number of securities they will
own thereafter assuming no other acquisitions or dispositions of our securities.
The selling shareholders can offer all, some or none of their securities, thus
we have no way of determining the number they will hold after this offering.
Therefore, we have prepared the table below on the assumption that the selling
shareholders will sell all shares covered by this prospectus.
Some of
the selling shareholders may distribute their shares, from time to time, to
their limited and/or general partners or shareholders, who may sell shares
pursuant to this prospectus. Each selling shareholder may also transfer shares
owned by him or her by gift, and upon any such transfer the donee would have the
same right of sale as the selling shareholder.
We may
amend or supplement this prospectus from time to time to update the disclosure
set forth herein. None of the selling shareholders are or were affiliated with
registered broker-dealers. See our discussion entitled “Plan of Distribution”
for further information regarding the selling shareholders’ method of
distribution of these shares.
Name
of Selling Shareholder
|
Number
of
Shares
Owned
Before
Offering
|
Number
of
Shares
Offered
in this
Offering
|
Number
of
Shares
Owned
After
Offering(1)
|
Percentage
Owned
After
Offering(1)
|
||||||||||||
Sung
Hsien Chang (2)
|
530,000
|
106,000
|
424,000
|
4.9
|
%
|
|||||||||||
Green
Solutions Group Limited (3)
|
526,000
|
105,200
|
420,800
|
4.9
|
%
|
|||||||||||
Wen
Liang Chang (4)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Yin
Chia Yang Chang (5)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Sung
Kao Chang (6)
|
40,000
|
30,000
|
10,000
|
0.1
|
%
|
|||||||||||
Yu
Yin Chang (7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Shun
Yin Chang (7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Sung
Hung Chang (6)
|
60,000
|
30,000
|
30,000
|
0.3
|
%
|
|||||||||||
Hsiu
Fen Su (8)
|
350,000
|
70,000
|
280,000
|
3.3
|
%
|
|||||||||||
Chun
Hao Chang (9)
|
200,000
|
40,000
|
160,000
|
1.9
|
%
|
|||||||||||
Jay
Chang (9)
|
200,000
|
40,000
|
160,000
|
1.9
|
%
|
|||||||||||
Chung
Hsin Lin (10)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Yin
Ju Chang (11)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Chan
Sheng Lin (7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Chan
Kuan Lin(7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Tzu
Ching Lin(7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Chan
Chun Lin(7)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Chih
Wei Chang (12)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Ting
Wei Chang(12)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Ya
Hui Chang(12)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Ko
Hsin Yang(12)
|
10,000
|
10,000
|
0
|
0.0
|
%
|
|||||||||||
Zhan
Pei Xiao
|
99,000
|
30,000
|
69,000
|
0.8
|
%
|
|||||||||||
Hai
Yang Xiao
|
500
|
500
|
0
|
0.0
|
%
|
|||||||||||
Hai
Lan Xiao
|
500
|
500
|
0
|
0.0
|
%
|
|||||||||||
I
Sen Chen
|
50,000
|
30,000
|
20,000
|
0.2
|
%
|
|||||||||||
Huan
Ching Hsu
|
100,000
|
30,000
|
70,000
|
0.8
|
%
|
|||||||||||
Su
Nan Wang
|
150,000
|
30,000
|
120,000
|
1.4
|
%
|
|||||||||||
Marty
F. Bridges
|
2,000
|
1,000
|
1,000
|
0.0
|
%
|
47
Name
of Selling Shareholder
|
Number of
Shares
Owned
Before
Offering
|
Number of
Shares
Offered in
this
Offering
|
Number of
Shares
Owned
After
Offering(1)
|
Percentage
Owned
After
Offering(1)
|
||||||||||||
Ko
Hung Wang (13)
|
|
|
525,000
|
|
|
|
105,000
|
|
|
|
420,000
|
|
|
|
4.9
|
%
|
GIT,
LLC. (14)
|
|
|
523,000
|
|
|
|
104,600
|
|
|
|
418,400
|
|
|
|
4.9
|
%
|
Kevin
Wei
|
|
|
100
|
|
|
|
100
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Albert
Wu
|
|
|
500
|
|
|
|
500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Eric
Wu
|
|
|
500
|
|
|
|
500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Kevin
Wu
|
|
|
500
|
|
|
|
500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Alexander
Brown
|
|
|
100
|
|
|
|
100
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Nathaniel
Brown
|
|
|
100
|
|
|
|
100
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Makayla
Xinyu Hu
|
|
|
100
|
|
|
|
100
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Rachel
Xinrui Hu
|
|
|
100
|
|
|
|
100
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Lily
Wang
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Patricia
Roberge
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
3,500,000
|
|
|
|
896,800
|
|
|
|
0
|
|
|
|
30.5
|
%
|
________________
(1)
Assumes that all shares will be resold by the selling shareholders after this
offering. However, the selling shareholders have no obligation to
sell all registered shares.
(2) Mr.
Sung Hsien Chang is the President of VGE.
(3) The
natural person with voting and dispositive powers for Green Solutions Group
Limited is Hsiu Fen Su, the wife of Sung Hsien Chang. Mr. Sung
Hsien Chang has a minority interest in Green Solutions Group
Limited.
(4)
Shareholder is the father of Mr. Sung Hsien Chang.
(5)
Shareholder is the mother of Mr. Sung Hsien Chang.
(6)
Shareholder is the brother of Mr. Sung Hsien Chang.
(7)
Shareholder is the nephew of Mr. Sung Hsien Chang.
(8)
Shareholder is the wife of Mr. Sung Hsien Chang.
(9)
Shareholder is the son of Mr. Sung Hsien Chang.
(10)
Shareholder is the sister-in-law of Mr. Sung Hsien Chang.
(11)
Shareholder is the sister of Mr. Sung Hsien Chang.
(12)
Shareholder is the cousin of Mr. Sung Hsien Chang.
(13)
Shareholder is also known as Maclean Wang, and is an employee of the
Company.
(14) The
natural person with voting and dispositive powers for GIT, LLC is Yousan
Su.
48
PLAN
OF DISTRIBUTION
Each
selling shareholder of the common stock and any of its pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of its registered
ordinary shares on the OTC Bulletin Board or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A selling shareholder may use
any one or more of the following methods when selling shares, subject to
applicable federal and state securities laws:
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
●
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
●
|
privately
negotiated transactions;
|
|
●
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
|
|
●
|
broker-dealers
may agree with the selling shareholders to sell a specified number of such
shares at a stipulated price per share;
|
|
●
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
|
|
●
|
a
combination of any such methods of sale; or
|
|
●
|
any
other method permitted pursuant to applicable
law.
|
The
selling shareholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
FINRA Rule 2440, and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440. The maximum commission or discount to be
received by any Financial Industry Regulatory Authority (“FINRA”) member or
independent broker-dealer will not be greater than 8% for the sale of any
securities included in the registration statement of which this prospectus is a
part.
In
connection with the sale of the common stock or interests therein, the selling
shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may, subject to applicable federal state
securities laws, in turn engage in short sales of the common stock in the course
of hedging the positions they assume. The selling shareholders may also, in
compliance with applicable federal and state securities laws, sell shares of the
common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities. The selling shareholders may also enter into option or
other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities that require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act, in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling shareholder has informed us
that it does not have any written or oral agreement or understanding, directly
or indirectly, with any person to distribute our common stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
49
Because
selling shareholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act, including Rule 172 thereunder. In addition, any
securities covered by this prospectus that qualify for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather than under this
prospectus. There is no underwriter or coordinating broker acting in connection
with the proposed sale of the resale shares by the selling
shareholders.
We have
agreed to use reasonable efforts to keep this registration statement
continuously effective (the “Effective Period”) until the first anniversary of
the effective date of this registration statement plus whatever period of time
as shall equal any period, if any, during the Effective Period in which the
Company was not current with our reporting requirements under the Exchange Act
of 1934, as amended (the “Exchange Act”). The resale shares will be sold only
through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the resale shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the selling shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of the common stock by the selling shareholders or any other
person. We will make copies of this prospectus available to the selling
shareholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
RELATED
PARTY TRANSACTIONS
October
2008 Acquisition
On
October 21, 2008, VIASPACE Inc., our parent company (“VIASPACE”), and we entered
into a Securities Purchase Agreement (the "Purchase Agreement") with Sung Hsien
Chang ("Chang"), and China Gate Technology Co., Ltd., a Brunei Darussalam
company ("Licensor"). Under the Purchase Agreement, we agreed to acquire 100% of
Inter-Pacific Arts Corp., a British Virgin Islands international business
company ("IPA BVI"), and the entire equity interest of Guangzhou Inter-Pacific
Arts Corp., a Chinese wholly owned foreign enterprise registered in Guangdong
province ("IPA China") from Chang, our President. In exchange, VIASPACE agreed
to pay $16 million in a combination of cash, and newly-issued shares of VIASPACE
and our common stock.
The
transactions under the Purchase Agreement ("Acquisition") involve two
phases. At the first closing on October 21, 2008, we issued 3,500,000
newly-issued shares to Chang and his designees. VIASPACE issued
215,384,615 shares of its common stock to Chang and 30,576,007 shares of common
stock to Licensor. Chang delivered 70% of the outstanding common
stock of IPA BVI to us.
The
second closing in which the remaining minority interest of 30% of IPA BVI equity
holdings would be transferred to us is intended to be held within 396 days after
the First Closing ("Second Closing"). At the Second Closing, VIASPACE shall pay
$4.8 million ("Cash Consideration") plus Interest (as determined below) since
the First Closing, in cash to Chang. Interest on the Cash Consideration shall
accrue at 6% for the first six months after the First Closing, and then 18%
until June 10, 2009, and then at an annual rate of
6% thereafter.
On August
21, 2009, the parties entered into a second Amendment to the Purchase Agreement
that the Registrant’s shares held by Chang and others were no longer subject to
forfeiture even if the Second Closing did not occur. This amendment
also extended the Second Closing to November 21, 2009 (which has since been
further extended to December 15, 2009 under a subsequent amendment to the
Purchase Agreement). The Second Closing is scheduled for December 15,
2009, and VIASPACE is to pay $4,800,000 plus interest to
Chang. Interest on the Cash Consideration shall accrue at 6% for the
first six months after the First Closing, and then 18% until June 10, 2009, and
then at an annual rate of 6% thereafter. VIASPACE shall
also issue 1.8% of its then outstanding shares of common stock to
Licensor. Chang shall deliver the remaining 30% of the outstanding
shares of IPA BVI to VGE even if the Second Closing did not occur and the
closing conditions to VIASPACE’s and us are satisfied or
waived. VIASPACE and we believe
that such closing conditions have been satisfied at November 25,
2009. Therefore, even if the Second Closing did not occur, the
remaining 30% of IPA BVI will be transferred to VGE.
In the
event that the Second Closing fails to occur, neither VIASPACE or its affiliates
( excluding us ), or any of their directors or
officers, shall engage in the grass business in China for a period of three
years after the First Closing Date.
As required by the
Purchase Agreement, VGE filed a Form S-1 Registration Statement with the
Securities and Exchange Commission ("SEC") on June 3, 2009 covering the resale
of all or such maximum portion of VGE common stock issued pursuant to the
Purchase Agreement as permitted by SEC regulations. The second
Amendment extends until November 21, 2009, the date that VGE
shall use its best efforts to qualify its Common Stock for quotation on a
trading market. If VGE’s Registration Statement is declared effective
by the SEC on or before December 15 , 2009, the
Second Closing Deadline will be extended until January 15,
2010 .
50
Also
pursuant to the second amendment, VIASPACE irrevocably assigned to Chang and
Licensor the VIASPACE shares issued to Chang and Licensor in the First
Closing of the Purchase Agreement. Licensor agreed to limit sales of
VIASPACE common shares issued at the First Closing to a maximum of 8,800,000
shares in any 90-day period. On October 13, 2009 the parties to the
Purchase Agreement entered into the third Amendment to the Securities Purchase
Agreement in which the parties agreed that in the event that the Second Closing
fails to occur and VIASPACE’s closing conditions to the Second Closing have been
satisfied by Chang, then (1) Chang and/or his designees shall retain
our Shares, (2) VIASPACE shall transfer all shares of our common stock it holds
to Chang, (3) Chang will deliver the remaining 30% equity interest of IPA-BVI to
us, such that we shall receive all equity securities of IPA-BVI, and (4) if
VGE’s common stock is not listed on a Trading Market as of the Second Closing
Deadline, Chang shall also receive such number of shares of VIASPACE common
stock so that Chang shall own a majority of the outstanding shares of VIASPACE
common stock as of the date of issuance. In addition, the parties
clarified that the three year non-competition clause to engage in the grass
business starting from the date of the First Closing does not apply to VGE and
Messrs. Kukkonen and Muzi, but only to VIASPACE and its other
affiliates. Further, we deleted the obligation of Licensor to assign
the grass license to VGE.
Provided
that the Second Closing has occurred, if our common stock is not listed on a
trading market within December 15, 2009 , then
VIASPACE will issue to Chang the number of shares of its common stock equivalent
to US$5,600,000. The stock price will be calculated as the average closing price
of VIASPACE’s common stock during the 60 day period prior to and including the
Second Closing Date. In exchange, Chang shall return all shares of our common
stock he received pursuant to the Purchase Agreement to VIASPACE.
Included
in the Company’s consolidated balance sheet at September 30, 2009 are Related
Party Receivables. The Related Party Receivables represents amounts
due to IPA BVI from Sung Hsien Chang, President of VGE and CEO of IPA China and
IPA BVI, and from JJ International, a company owned by Sung Hsien Chang that
operates separately. IPA China recorded revenues of $233,000 for the
nine months ended September 30, 2009 from JJ. An employee of IPA
China owes $204,000 to VGE at September 30, 2009.
The
following table represents a summary of Related Party Receivables at September
30, 2009 (unaudited) and December 31, 2008:
2009
|
2008
|
|||||||
Due
from Sung Chang
|
$
|
1,009,000
|
$
|
209,000
|
||||
Due
from JJ International
|
706,000
|
657,000
|
||||||
Due
from employee of IPA China
|
204,000
|
―
|
||||||
Total
|
$
|
1,919,000
|
$
|
866,000
|
IPA China
owes $19,000 to an employee of IPA China at September 30, 2009 which is shown as
a Related Party Payable in the accompanying consolidated balance
sheets. In addition, the Company owes $25,000 to its Parent Company
at September 30, 2009 related to expenses paid by Parent Company on behalf of
the Company.
Future
Related Party Transactions
Our
Bylaws provide that all future transactions between us and our officers,
directors and principal stockholders and their affiliates must be approved by a
majority of our Board of Directors, including a majority of the independent and
disinterested members of our Board of Directors, and must be on terms no less
favorable to us than those that we could obtain from unaffiliated
third-parties. Based on its consideration of all of the
relevant facts and circumstances, the Board will decide whether or not to
approve such transaction and will generally approve only those transactions that
are negotiated at arm's length and have terms and conditions that are reasonable
and customary.
All
material related party transactions will be made or entered into on terms that
are no less favorable to us than can be obtained from unaffiliated third
parties. Related party transactions that we have previously entered into were
not approved by independent directors, as we had no independent directors at
that time.
DESCRIPTION
OF SHARE CAPITAL
Our
authorized capital stock consists of 50,000,000 ordinary shares, par value
$0.001 per share. As of the date of this prospectus, 8,600,000 ordinary shares
are issued and outstanding. An additional 1,400,000 shares of ordinary shares
have been reserved for issuance under the Company’s stock incentive
plan. The following summary description relating to our capital stock
does not purport to be complete and is qualified in its entirety by our
Memorandum and Articles of Association.
Ordinary
Shares
Holders
of ordinary shares are entitled to cast one vote for each share on all matters
submitted to a vote of shareholders, including the election of directors. The
holders of ordinary shares are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefore and subject to any preference of any then authorized and issued
preferred stock. See “Dividend Policy.” Such holders do not have any preemptive
or other rights to subscribe for additional shares. All holders of ordinary
shares are entitled to share ratably in any assets for distribution to
shareholders upon the liquidation, dissolution or winding up of the Company,
subject to any preference of any then authorized and issued preferred stock.
There are no conversion, redemption or sinking fund provisions applicable to the
ordinary shares. All outstanding ordinary shares are fully paid and
nonassessable.
Limitations
on the Right to Own Shares
There are
no limitations on the right to own our ordinary shares.
51
Limitations
on Transfer of Shares
Our
Articles of Association gives our directors, at their discretion, the right to
decline to register any transfer of shares.
Disclosure
of Shareholder Ownership
There are
no provisions in our Memorandum of Association or Articles of Association
governing the ownership threshold above which shareholder ownership must be
disclosed.
Changes
in Capital
We may
from time to time by ordinary resolution increase the share capital by such sum,
to be divided into shares of such amount, as the resolution shall prescribe. The
new shares shall be subject to the same provisions with reference to the payment
of calls, lien, transfer, transmission, forfeiture and otherwise as the shares
in the original share capital. We may by ordinary resolution:
·
|
consolidate
and divide all or any of our share capital into shares of larger amount
than our existing shares;
|
·
|
convert
all or any of our paid up shares into stock and reconvert that stock into
paid up shares of any denomination;
|
·
|
in
many circumstances, sub-divide our existing shares, or any of them, into
shares of smaller amount provided that in the subdivision the proportion
between the amount paid and the amount, if any, unpaid on each reduced
share shall be the same as it was in the case of the share from which the
reduced share is derived; and
|
·
|
cancel
any shares which, at the date of the passing of the resolution, have not
been taken or agreed to be taken by any person and diminish the amount of
its share capital by the amount of the shares so
cancelled.
|
We may by
special resolution reduce our share capital and any capital redemption reserve
fund in any manner authorized by law.
Differences
in Corporate Law
The
Companies Law differs from laws applicable to United States corporations and
their shareholders. Set forth below is a summary of the significant differences
between the provisions of the Companies Law applicable to us and the laws
applicable to companies incorporated in the United States and their
shareholders.
Protection
for Minority Shareholders
Under the
laws of most U.S. jurisdictions, majority and controlling shareholders of a
company generally have certain “fiduciary” responsibilities to the minority
shareholders. Corporate actions taken by majority and controlling shareholders
who are unreasonable and materially detrimental to the interest of minority
shareholders may be declared null and void. Notwithstanding, the minority
shareholders may have less protection for their rights under British Virgin
Islands law than they would have under U.S. law.
Powers
of Directors
Unlike
with most U.S. jurisdictions, the directors of a British Virgin Islands company,
subject in certain cases to court’s approvals but without shareholders’
approval, may implement the sale, transfer, exchange or disposition of any
asset, property, part of the business, or securities of the company, if they
determine it is in the best interests of the company, its creditors, or its
shareholders, with the exception that shareholder approval is required for the
disposition of over 50 per cent in value of the assets of the company if not
made in the usual or regular course of the business carried out by the
company.
Conflict
of Interests
Similar
to the laws of most U.S. jurisdictions, when a director becomes aware of the
fact that he has an interest in a transaction which the company is to enter
into, he must disclose it to the board. However, with sufficient disclosure of
interest in relation to that transaction, the director who is interested in a
transaction entered into or to be entered into by the Company may (i) vote on a
matter relating to the transaction; (ii) attend a meeting of directors at which
a matter relating to the transaction arises and be included in the quorum; and
(iii) sign a document on behalf of the company, or do any other thing in his
capacity as a director, that relates to the transaction.
52
Written
Consent and Cumulative Voting
Similar
to the laws of most U.S. jurisdictions, under the British Virgin Islands law,
shareholders are permitted to approve matters by way of written resolution in
place of a formal meeting. The British Virgin Islands law does not make a
specific reference to cumulative voting, and our current memorandum and articles
of association have no provision authorizing cumulative voting.
Independent
Directors
There is
no requirement for a majority of the directors of the company to be independent
as a matter of British Virgin Islands law.
Redemption
Our
ordinary shares are not redeemable at the shareholders’ option. We may redeem
our ordinary shares only with the consent of the shareholders whose ordinary
shares are to be redeemed, except that the consent from the shareholders is not
needed under the circumstances of (i) the compulsory redemption with respect to
fractional shares held by our shareholders in the circumstance of share
division, and (ii) the compulsory redemption, at the request of the shareholders
holding 90% of the votes of the outstanding shares entitled to vote, of the
remaining issued shares.
Takeover
Provisions
The
memorandum and articles of association of our company does not derogate from the
general provisions of British Virgin Islands law and therefore measures such as
a poison pill would have to be in place before a takeover offer is in
contemplation, as, if not, the directors could be seen as exercising their
powers for an improper purpose in trying to introduce such a
measure.
Furthermore,
the creation of additional class of shares would require an amendment to the
memorandum and articles of association of our company. This can only be done
following a resolution of shareholders. If at any time the shares of our company
are divided into different classes, the variation of the rights of any such
class (i.e. by the issue of a further class with preferred rights) will require
the consent of 50 percent of the shares in the affected class. Therefore, the
introduction of poison pill would require an amendment to the memorandum and
articles of association of our company which may only be done by way of
shareholder resolution.
Shareholder’s
Access to Corporate Records
A
shareholder is entitled, on giving written notice to the company, to inspect the
company’s (i) memorandum and articles of association; (ii) register of members;
(iii) register of directors; and (iv) minutes of meetings and resolutions of
members and of those classes of members of which he is a member.
The
directors may, if they are satisfied that it would be contrary to the company’s
interests to allow a member to inspect any document listed above (or any part
thereof), refuse the member to inspect the document or limit the inspection of
the document. The board may also authorize a member to review the companies
account if requested.
Indemnification
British
Virgin Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the British Virgin Islands courts
to be contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime.
Under our
memorandum and articles of association, we may indemnify our directors or any
person who is or was, at the request of the company, serving as a director of,
or in any other capacity is or was acting for, another body corporate or a
partnership, joint venture, trust or other enterprise against expenses
(including legal fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such persons in connection with legal, administrative
or investigative proceedings to which they are a party or are threatened to be
made a party by reason of their acting as our directors or agents. To be
entitled to indemnification, these persons must have acted honestly and in good
faith and in the best interest of the company, and they must have had no
reasonable cause to believe their conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us under the foregoing
provisions, we have been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Mergers
and Similar Arrangements
Under the
laws of the British Virgin Islands, two or more companies may merge or
consolidate in accordance with Section 170 of the Companies Act. A merger means
the merging of two or more constituent companies into one of the constituent
companies, and a consolidation means the uniting of two or more constituent
companies into a new company. In order to merge or consolidate, the directors of
each constituent company must approve a written plan of merger or consolidation
which must be authorized by a resolution of shareholders.
53
While a director may vote on the plan even if he has a financial interest in the plan of merger of consolidation, in order for the resolution to be valid, the interest must have been disclosed to the board forthwith upon him becoming aware of such interest. The transaction will not be avoidable if the shareholders approve it.
Shareholders
not otherwise entitled to vote on the merger or consolidation may still acquire
the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association,
would entitle them to vote as a class or series on the proposed amendment. In
any event, all shareholders must be given a copy of the plan of merger or
consolidation irrespective of whether they are entitled to vote at the meeting
or consent to the written resolution to approve the plan of merger or
consolidation.
The
shareholders of the constituent companies are not required to receive shares of
the surviving or consolidated company but may receive debt obligations or other
securities of the surviving or consolidated company, or other assets, or a
combination thereof. Further, some or all of the shares of a class or series may
be converted into a kind of asset while the other shares of the same class or
series may receive a different kind of asset. As such, not all the shares of a
class or series must receive the same kind of consideration.
After the
plan of merger or consolidation has been approved by the directors and
authorized by a resolution of the shareholders, articles of merger or
consolidation are executed by each company and filed with the Registrar of
Corporate Affairs in the British Virgin Islands.
A
shareholder may dissent from a mandatory redemption of his shares, an
arrangement (if permitted by the court), a merger (unless the shareholder was a
shareholder of the surviving company prior to the merger and continues to hold
the same or similar shares after the merger) and a consolidation. A shareholder
properly exercising his dissent rights is entitled to payment of the fair value
of their shares.
A
shareholder dissenting from a merger or consolidation must object in writing to
the merger or consolidation before the vote by the shareholders on the merger or
consolidation, unless notice of the meeting was not given to the shareholder. If
the merger or consolidation is approved by the shareholders, the company must
within 20 days give notice of this fact to each shareholder who gave written
objection, and to each shareholder who did not receive notice of the meeting.
Such shareholders then have 20 days to give to the company their written
election in the form specified by the Companies Act to dissent from the merger
or consolidation, provided that in the case of a merger, the 20 days starts when
the plan of merger is delivered to the shareholder.
Upon
giving notice of his election to dissent, a shareholder ceases to have any
rights of a shareholder except the right to be paid the fair value of his
shares. As such, the merger or consolidation may proceed in the ordinary course
notwithstanding the dissent.
Within
seven days of the later of the delivery of the notice of election to dissent and
the effective date of the merger or consolidation, the company must make a
written offer to each dissenting shareholder to purchase his shares at a
specified price that the company determines to be their fair value. The company
and the shareholder then have 30 days to agree upon the price. If the company
and a shareholder fail to agree on the price within the 30 days, then the
company and the shareholder shall each designate an appraiser and these two
appraisers shall designate a third appraiser. These three appraisers shall fix
the fair value of the shares as of the close of business on the day before the
shareholders approved the transaction without taking into account any change in
value as a result of the transaction.
Shareholders’
Suits
Similar
to the laws of most U.S. jurisdictions, British Virgin Islands law permits
derivative actions against its directors. However, the circumstances under which
such actions may be brought, and the procedures and defenses available may
result in the rights of shareholders of a British Virgin Islands company being
more limited than those of shareholders of a company incorporated and/or
existing in the United States.
We are
not aware of any reported class action having been brought in a British Virgin
Islands court. Reported derivative actions have been brought but unsuccessfully
for technical reasons. The court of the British Virgin Islands may, on the
application of a shareholder of a company, grant leave to that shareholder to
bring proceedings in the name and on behalf of that company, or intervene in
proceedings to which the company is a party for the purpose of continuing,
defending or discontinuing the proceedings on behalf of the company. In
determining whether to grant leave, the High Court of the British Virgin Islands
must take into account (i) whether the shareholder is acting in good faith; (ii)
whether the derivative action is in the interests of the company taking account
of the views of the company’s directors on commercial matters; (iii) whether the
proceedings are likely to succeed; (iv) the costs of the proceedings in relation
to the relief likely to be obtained; and (v) whether an alternative remedy to
the derivative claim is available.
Leave to
bring or intervene in proceedings may be granted only if the High Court of the
British Virgin Islands is satisfied that (i) the company does not intend to
bring, diligently continue or defend, or discontinue the proceedings, as the
case may be; or (ii) it is in the interests of the company that the conduct of
the proceedings should not be left to the directors or to the determination of
the shareholders as a whole.
Certain
Effects of Authorized but Unissued Stock
We have
41,400,000 ordinary shares remaining authorized but unissued. Authorized but
unissued ordinary shares are available for future issuance without shareholder
approval. Issuance of these shares will dilute your percentage ownership in
us.
54
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no market for our ordinary shares, and a liquid
trading market for our ordinary shares may not develop or be sustained after
this offering. Future sales of substantial amounts of ordinary shares or the
anticipation of those sales could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through sales of our
equity securities.
Rule
144
In
general, under Rule 144 as currently in effect, beginning 90 days after the
effective date of the registration statement of which this prospectus is a part,
a person (or persons whose shares are aggregated) who is deemed to be an
affiliate of our company at the time of sale, or at any time during the
preceding three months, and who has beneficially owned restricted shares for at
least six months, would be entitled to sell within any three-month period a
number of our common shares that does not exceed the greater of 1% of the then
outstanding common shares or the average weekly trading volume of common shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about our company. A person who has
not been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned his or her common shares for at least six months,
would be entitled under Rule 144 to sell such shares without regard to any
manner of sale, notice provisions or volume limitations described above. Any
such sales must comply with the public information provision of Rule 144 until
our common shares have been held for one year.
Rule
701
Securities
issued in reliance on Rule 701 are also restricted and may be sold by
shareholders other than affiliates of our company subject only to manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its six-month holding period requirement.
TAXATION
The
following sets forth the material British Virgin Islands and U.S. federal income
tax consequences of an investment in our ordinary shares. It is based upon laws
and relevant interpretations thereof in effect as of the date of this
prospectus, all of which are subject to change. This discussion does not deal
with all possible tax consequences relating to an investment in our ordinary
shares, such as the tax consequences under state, local and other tax
laws.
U.S.
Federal Income Taxation
The
following discussion describes the material U.S. federal income tax
consequences to you if you are a U.S. Holder (as defined below) of an
investment in the ordinary shares and you hold the ordinary shares as capital
assets. This discussion is based on the tax laws of the United States as in
effect on the date of this prospectus, including the Internal Revenue Code of
1986, as amended, U.S. Treasury regulations in effect as of the date of
this prospectus and judicial and administrative interpretations thereof
available on or before such date. All of the foregoing authorities are subject
to change, which change could apply on a retroactive basis and could affect the
tax consequences described below.
The
following discussion does not deal with the U.S. federal income tax
consequences relevant to you if you are in a special tax situation such
as:
·
|
banks;
|
|
·
|
certain
financial institutions;
|
|
·
|
insurance
companies;
|
|
·
|
broker
dealers;
|
|
·
|
U.S.
expatriates;
|
|
·
|
traders
that elect to mark-to-market;
|
|
·
|
tax-exempt
entities;
|
|
·
|
persons
that have a functional currency other than the
U.S. dollar;
|
|
·
|
persons
liable for alternative minimum tax;
|
|
·
|
persons
holding an ordinary share as part of a straddle, hedging, conversion or
integrated transaction;
|
|
·
|
persons
that actually or constructively own 10% or more of our voting stock;
or
|
|
·
|
persons
holding ordinary shares through partnerships or other pass-through
entities.
|
55
Prospective
purchasers are urged to consult their tax advisors about the application of the
U.S. Federal Income Tax Rules to their particular circumstances as well as the
state, local and foreign tax consequences to them of the purchase, ownership and
disposition of ordinary shares.
·
|
For
purposes of this discussion, you are a U.S. Holder if you are a
beneficial owner of ordinary shares and you are, for U.S. federal
income tax purposes,
|
|
·
|
a
citizen or resident of the United
States;
|
·
|
a
corporation (or other entity taxable as a corporation for
U.S. federal income tax purposes) organized under the laws of the
United States, any State thereof or the District of
Columbia;
|
|
·
|
an
estate whose income is subject to U.S. federal income taxation
regardless of its source; or
|
·
|
a
trust that (1) is subject to the primary supervision of a court
within the United States and one or more U.S. persons have the
authority to control all substantial decisions of the trust or
(2) was in existence on August 20, 1996, was treated as a
U.S. person under the Internal Revenue Code on the previous day and
has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a
U.S. person.
|
If you
are a partner in a partnership or other entity taxable as a partnership that
holds ordinary shares, your tax treatment will depend on your status and the
activities of the partnership. If you are a partner of a partnership holding our
ordinary shares, you should consult your tax advisor regarding the
U.S. federal income tax consequences to you of the purchase, ownership and
disposition of our ordinary shares.
Taxation
of dividends and other distributions on the ordinary shares
Subject
to the passive foreign investment company rules discussed below, the gross
amount of all our distributions to you with respect to the ordinary shares will
be included in your gross income as dividend income on the date of receipt by
you, but only to the extent that the distribution is paid out of our current or
accumulated earnings and profits (as determined under U.S. federal income
tax principles). The dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends received from other
U.S. corporations.
If you
are a non-corporate U.S. Holder, including an individual, for taxable years
beginning before January 1, 2011, dividends may constitute “qualified
dividend income” which is taxed at the lower long-term capital gains rate
provided that (1) the ordinary shares are readily tradable on an
established securities market in the United States, (2) we are not a
passive foreign investment company (as discussed below) for either our taxable
year in which the dividend was paid or the preceding taxable year, and
(3) certain holding period requirements are met. Under Internal Revenue
Service authority, our ordinary shares are considered for the purpose of clause
(1) above to be readily tradable on an established securities market in the
United States if they are listed on the New York Stock Exchange. You are urged
to consult your tax advisors regarding the availability of the lower rate for
dividends paid with respect to our ordinary shares.
Dividends
will constitute foreign source income for U.S. foreign tax credit
limitation purposes. For this purpose, dividends distributed by us with respect
to the ordinary shares will be “passive income” or, in the case of certain
U.S. Holders, “financial services income” for taxable years beginning on or
before January 1, 2007. For taxable years beginning after December 31,
2006, dividends distributed by us with respect to ordinary shares will
constitute “passive category income” but could, in the case of certain
U.S. Holders, constitute “general category income.”
To the
extent that the amount of the distribution exceeds our current and accumulated
earnings and profits, it will be treated first as a tax-free return of your tax
basis in your ordinary shares, and to the extent the amount of the distribution
exceeds your tax basis, the excess will be taxed as capital gain. We do not
intend to calculate our earnings and profits under U.S. federal income tax
principles. Therefore, you should expect that any distribution we make will be
treated as a dividend.
Taxation
of disposition of shares
Subject
to the passive foreign investment company rules discussed below, you will
recognize taxable gain or loss on any sale, exchange or other taxable
disposition of an ordinary share equal to the difference between the amount
realized for the ordinary share and your tax basis in the ordinary share. The
gain or loss will be capital gain or loss. If you are a non-corporate
U.S. Holder, including an individual, who has held the ordinary share for
more than one year, you will be eligible for reduced tax rates. The
deductibility of capital losses is subject to limitations. Any such gain or loss
that you recognize will be treated as U.S. source income or loss for
foreign tax credit limitation purposes.
56
Passive
foreign investment company
We do not
believe we were a passive foreign investment company, or PFIC, for the taxable
year ended December 31 2008, and we do not expect to be a PFIC for our current
taxable year ending December 31 2009. However, our actual PFIC status will not
be determinable until the close of our current taxable year. Accordingly, there
is no guarantee that we will not be a PFIC for the current taxable year.
However, we must make a separate determination each year as to whether we are a
PFIC. As a result, our PFIC status may change. If we are a PFIC for any year
during which you hold ordinary shares, we will continue to be treated as a PFIC
to you for all succeeding years during which you hold ordinary
shares.
A non-
U.S. corporation is considered to be a PFIC for any taxable year if
either:
·
|
at
least 75% of its gross income is passive income,
or
|
·
|
at
least 50% of the average quarterly value of its assets during a taxable
year is derived from assets that produce, or that are held for the
production of, passive income.
|
We will
be treated as owning a proportionate share of the assets and earnings and a
proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25% (by value) of the stock.
In
applying the asset test described above, the value of our assets will be deemed
to be equal to the sum of the aggregate value of our outstanding equity plus our
liabilities. For purposes of the asset test, our goodwill, which is measured as
the sum of the aggregate value of outstanding equity plus liabilities, less the
value of known assets, should be treated as a non-passive asset. Therefore, a
decrease in the market price of our ordinary shares and associated decrease in
the value of our goodwill would cause a reduction in the value of our
non-passive assets for purposes of the asset test. If there is such a reduction
in goodwill and the value of our non-passive assets, the percentage of the value
of our assets that is attributable to passive assets may increase, and if such
percentage, based on an average of the quarterly values during a taxable year,
exceeds 50%, we will be a PFIC for such taxable year. Accordingly, fluctuations
in the market price of our shares may result in us being a PFIC for any year. In
addition, the composition of our income and assets will be affected by how, and
how quickly, we spend our cash.
If we are
a PFIC for any taxable year during which you hold ordinary shares, dividends
paid by us to you will not be eligible for the reduced rate of taxation
applicable to non-corporate U.S. Holders, including individuals. See
“Taxation of dividends and other distributions on the ordinary shares” above.
Additionally, you will be subject to special tax rules, discussed below, with
respect to any “excess distribution” that you receive and any gain you realize
from a sale or other disposition (including a pledge) of the ordinary shares,
unless you make a “mark-to-market” election as discussed below. Distributions
you receive in a taxable year that are greater than 125% of the average annual
distributions you received during the shorter of the three preceding taxable
years or your holding period prior to the current year for the ordinary shares
will be treated as an excess distribution. Under these special tax
rules:
·
|
the
excess distribution or gain will be allocated ratably on a daily basis
over your holding period for the ordinary
shares,
|
·
|
the
amount allocated to the current taxable year, and any taxable year prior
to the first taxable year in which we became a PFIC, will be treated as
ordinary income, and
|
·
|
the
amount allocated to each other year will be subject to the highest tax
rate in effect for that year and the interest charge applicable to
underpayments of tax will be imposed on the resulting tax attributable to
each such year.
|
Alternatively,
if the ordinary shares constitute “marketable stock” in a PFIC, you may make a
mark-to-market election for the ordinary shares to elect out of the tax
treatment discussed in the two preceding paragraphs. We expect that our ordinary
shares will qualify as marketable stock for U.S. federal income tax
purposes. Marketable stock is stock that is regularly traded in other than de
minimis quantities on a qualified exchange, which includes the New York Stock
Exchange. If you make a mark-to-market election for the ordinary shares, you
will include in income each year an amount equal to the excess, if any, of the
fair market value of the ordinary shares as of the close of your taxable year
over your adjusted basis in such ordinary shares. You are allowed a deduction
for the excess, if any, of the adjusted basis of the ordinary shares over their
fair market value as of the close of the taxable year. However, deductions are
allowable only to the extent of any net mark-to-market gains on the ordinary
shares included in your income for prior taxable years. Amounts included in your
income under a mark-to-market election, as well as gain on the actual sale or
other disposition of the ordinary shares, are treated as ordinary income.
Ordinary loss treatment also applies to the deductible portion of any
mark-to-market loss on the ordinary shares, as well as to any loss realized on
the actual sale or disposition of the ordinary shares, to the extent that the
amount of such loss does not exceed the net mark-to-market gains previously
included for such ordinary shares. Your basis in the ordinary shares will be
adjusted to reflect any such income or loss amounts. The tax rules that apply to
distributions by corporations that are not PFICs would apply to distributions by
us.
57
In
addition, we do not intend to prepare or provide you with the information
necessary to make a “qualified electing fund” election.
If you
hold ordinary shares in any year in which we are a PFIC, you will be required to
file Internal Revenue Service Form 8621 regarding distributions received on the
ordinary shares and any gain realized on the disposition of the ordinary
shares.
You are
urged to consult your tax advisor regarding the application of the PFIC rules to
your investment in ordinary shares.
Information
reporting and backup withholding
Dividend
payments with respect to ordinary shares and proceeds from the sale, exchange or
redemption of ordinary shares may be subject to information reporting to the
Internal Revenue Service and possible backup withholding at a current rate of
28%. Backup withholding will not apply, however, if you are a corporation or
other exempt recipient or if you furnish a correct taxpayer identification
number and make any other required certification. If you are required to
establish your exempt status, you must provide such certification on Internal
Revenue Service Form W-9. You are urged to consult your tax advisor regarding
the application of the U.S. information reporting and backup withholding
rules.
Backup
withholding is not an additional tax. Amounts withheld as backup withholding may
be credited against your U.S. federal income tax liability, and you may
obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the Internal Revenue
Service and furnishing any required information in a timely manner.
ENFORCEABILITY
OF CIVIL LIABILITIES
We are
incorporated in the British Virgin Islands because of the following benefits
found there:
·
|
political
and economic stability;
|
·
|
an
effective judicial system;
|
·
|
a
favorable tax system;
|
·
|
the
absence of exchange control or currency restrictions;
and
|
·
|
the
availability of professional and support
services.
|
However,
certain disadvantages accompany incorporation in the British Virgin Islands.
These disadvantages include:
·
|
the
British Virgin Islands has a less developed body of securities laws as
compared to the United States and provides significantly less protection
to investors; and political and economic
stability;
|
·
|
British
Virgin Islands companies may not have standing to sue before the federal
courts of the United States.
|
We have
been advised that there is uncertainty as to whether the courts of the British
Virgin Islands or China would:
·
|
recognize
or enforce judgments of United States courts obtained against us or our
directors or officers predicated upon the civil liability provisions of
the securities laws of the United States or any state in the United
States; or
|
·
|
entertain
original actions brought in the British Virgin Islands or China against us
or our directors or officers predicated upon the securities laws of the
United States or any state in the United
States.
|
We have
been advised that a final and conclusive judgment in the federal or state courts
of the United States under which a sum of money is payable, other than a sum
payable in respect of taxes, fines, penalties or similar charges, may be subject
to enforcement proceedings as a debt in the courts of the British Virgin Islands
under the common law doctrine of obligation.
58
Market
and Pricing Considerations
We cannot
assure you that an active or orderly trading market will develop for our common
stock or that our common stock will trade in the public markets subsequent to
this offering at or above the offering price.
There is
not an established market for our ordinary shares. The offering price
has been arbitrarily determined by management and does not bear any relationship
to our assets, results of operations, or book value, or to any other generally
accepted criteria of valuation.
An active
trading market for our ordinary shares may not develop. It is possible that
after this offering the ordinary shares will not trade in the public market at
or above the initial offering price.
Quotation
on the Over-the-Counter Bulletin Board
We have
applied to have our ordinary shares quoted on the Over-the-Counter Bulletin
Board. If so admitted, we expect our ordinary shares to begin trading
on the OTCBB within 30 days following the effectiveness of this registration
statement. If our ordinary shares are eventually quoted on the OTCBB, we will be
subject to continued disclosure requirements. We estimate that our costs for SEC
reporting and continued quotation on the OTCBB to be approximately $100,000 per
year.
LEGAL
MATTERS
Certain
matters related to the offering relating to U.S. law will be passed on by
Richardson & Patel LLP.
EXPERTS
Our
consolidated balance sheets as of December 31, 2008, and our consolidated
statements of operations, stockholders’ equity, and cash flows for the period
ended December 31, 2008, presented in U.S. dollars, have been included herein
and in the registration statement in reliance upon the report of Goldman Parks
Kurland Mohidin LLP, an independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of that firm as experts in accounting
and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to our ordinary shares offered by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits to the registration statement. For
further information regarding us and our ordinary shares offered hereby, please
refer to the registration statement and the exhibits filed as part of the
registration statement.
In
addition, we file periodic reports with the SEC, including quarterly reports and
annual reports which include our audited financial statements. This registration
statement, including exhibits thereto, and all of our periodic reports may be
inspected without charge at the Public Reference Room maintained by the SEC at
100 F Street, NE, Washington, D.C. 20549. You may obtain copies of the
registration statement, including the exhibits thereto, and all of our periodic
reports after payment of the fees prescribed by the SEC. For additional
information regarding the operation of the Public Reference Room, you may call
the SEC at 1-800-SEC-0330. The SEC also maintains a website which provides
on-line access to reports and other information regarding registrants that file
electronically with the SEC at the address: http://www.sec.gov.
EXPENSES
RELATING TO THIS OFFERING
The
following table sets forth the main estimated expenses in connection with this
offering, other than the placement discounts, expenses and commissions, which we
will be required to pay:
U.S. Securities
and Exchange Commission registration fee
|
|
$
|
321
|
|
Legal
fees and expenses for British Virgin Islands counsel
|
|
15,000
|
||
Legal
fees and expenses for U.S. securities counsel
|
|
50,000
|
||
Accounting
fees and expenses
|
|
50,000
|
||
Total
|
|
$
|
115,321
|
All
amounts are estimated, except the U.S. Securities and Exchange Commission
registration fee.
59
VIASPACE
GREEN ENERGY INC.
FINANCIAL
STATEMENTS
INDEX
|
PAGE
|
Financial
Statements of VIASPACE Green Energy Inc. from inception (July 1, 2008)
through December 31, 2008
|
61
|
Financial
Statements of VIASPACE Green Energy Inc. for the nine months ended
September 30, 2009
|
76
|
|
|
Financial
Statements of Inter-Pacific Arts Corp. and Affiliate for the nine months
ended September 30, 2008
|
90
|
Financial
Statements of Inter-Pacific Arts Corp. and Affiliate for the fiscal
year s ended December 31, 2007 and
2006
|
100
|
60
FINANCIAL
STATEMENTS
TABLE
OF CONTENTS
PAGE
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
62 |
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
Consolidated
Balance Sheet as of December 31, 2008
|
63 |
Consolidated
Statement of Operations from inception (July 1, 2008) through December 31,
2008
|
64 |
Consolidated
Statement of Stockholders’ Equity for the Period Ended December 31,
2008
|
65 |
Consolidated
Statement of Cash Flows from inception (July 1, 2008) through December 31,
2008
|
66 |
Notes
to Consolidated Financial Statements
|
67 |
61
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
VIASPACE
Green Energy Inc.
We have
audited the accompanying consolidated balance sheet of VIASPACE Green Energy
Inc. and subsidiaries as of December 31, 2008, and the related consolidated
statements of operations and other comprehensive income, stockholders' equity,
and cash flows from inception (July 1, 2008) through December 31,
2008. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VIASPACE Green
Energy Inc. and subsidiaries as of December 31, 2008, and the results of their
operations and their cash flows from inception (July 1, 2008) through December
31, 2008, in conformity with U.S. generally accepted accounting
principles.
/s/
Goldman Parks Kurland Mohidin LLP
Goldman
Parks Kurland Mohidin LLP
Encino,
California
October
15, 2009, except for Note 4 for which the date is November 12, 2009
62
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
BALANCE SHEET
December
31,
|
||||
2008
|
||||
ASSETS
|
||||
CURRENT
ASSETS:
|
||||
Cash
and cash equivalents
|
$
|
2,516,000
|
||
Accounts
receivable, net of allowance for doubtful accounts of zero in
2008
|
247,000
|
|||
Inventory
|
342,000
|
|||
Prepaid
expenses
|
20,000
|
|||
Related
party receivables
|
866,000
|
|||
Other
current assets
|
147,000
|
|||
TOTAL
CURRENT ASSETS
|
4,138,000
|
|||
FIXED
ASSETS, net of accumulated depreciation
|
720,000
|
|||
OTHER
ASSETS
|
||||
Land
Use Right, net of accumulated amortization
|
514,000
|
|||
License
to Grass, net of accumulated amortization
|
503,000
|
|||
Goodwill
|
12,322,000
|
|||
TOTAL
OTHER ASSETS
|
13,339,000
|
|||
TOTAL
ASSETS
|
$
|
18,197,000
|
||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||
CURRENT
LIABILITIES:
|
||||
Accounts
payable
|
$
|
536,000
|
||
Related
party payable
|
96,000
|
|||
Accrued
expenses
|
67,000
|
|||
TOTAL
CURRENT LIABILITIES
|
699,000
|
|||
COMMITMENTS
AND CONTINGENCIES
|
||||
STOCKHOLDERS’
EQUITY:
|
||||
Common
stock, $0.001 par value, 50,000,000 shares authorized, 8,600,000 issued
and outstanding
|
9,000
|
|||
Additional
paid in capital
|
17,398,000
|
|||
Accumulated
other comprehensive income
|
―
|
|||
Retained
earnings
|
91,000
|
|||
Total
stockholders’ equity
|
17,498,000
|
|||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
18,197,000
|
See
accompanying notes to consolidated financial statements.
63
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
AND
OTHER COMPREHENSIVE INCOME
July
1, 2008
through
December
31,
2008
|
||||
PRODUCT
REVENUES
|
$ | 866,000 | ||
COST
OF REVENUES
|
249,000 | |||
GROSS
PROFIT
|
617,000 | |||
OPERATING
EXPENSES
|
||||
Selling,
general and administrative expenses
|
516,000 | |||
Total
operating expenses
|
516,000 | |||
INCOME
FROM OPERATIONS
|
101,000 | |||
OTHER
INCOME (EXPENSE)
|
||||
Other
expense
|
(1,000 | ) | ||
Other
income
|
1,000 | |||
Total
other income
|
― | |||
INCOME
BEFORE INCOME TAXES
|
101,000 | |||
Income
taxes
|
10,000 | |||
NET
INCOME
|
$ | 91,000 | ||
NET
INCOME PER SHARE OF COMMON STOCK - Basic and diluted
|
$ | 0.03 | ||
WEIGHTED
AVERAGE SHARES OUTSTANDING - Basic and diluted
|
3,365,223 | |||
NET
INCOME
|
$ | 91,000 | ||
OTHER
COMPREHENSIVE INCOME
|
||||
Foreign
currency translation income
|
― | |||
COMPREHENSIVE
INCOME
|
$ | 91,000 |
See
accompanying notes to consolidated financial statements.
64
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
Common
Stock
|
||||||||||||||||||||||||
Shares
|
Amount
|
Additional
Paid
in
Capital
|
Accumulated
Other
Comprehensive Income
|
Retained
Earnings
|
Total
|
|||||||||||||||||||
BALANCE,
JULY 1, 2008
|
10
|
$
|
10
|
$
|
―
|
$
|
―
|
$
|
―
|
$
|
10
|
|||||||||||||
Net
income from October 21, 2008 through December 31, 2008
|
91,000
|
91,000
|
||||||||||||||||||||||
Issuance
of shares on acquisition of Inter-Pacific Arts
|
8,599,990
|
8,990
|
4,573,000
|
―
|
―
|
4,581,990
|
||||||||||||||||||
Capital
contribution from Parent Company related to acquisition of Inter-Pacific
Arts and Affiliate
|
12,825,000
|
12,825,000
|
||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2008
|
8,600,000
|
$
|
9,000
|
$
|
17,398,000
|
$
|
―
|
$
|
91,000
|
$
|
17,498,000
|
See
accompanying notes to consolidated financial statements.
65
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
July
1, 2008
through
December
31,
2008
|
||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||
Net
income
|
$
|
91,000
|
||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||
Depreciation
and amortization
|
33,000
|
|||
(Increase)
decrease in:
|
||||
Accounts
receivable
|
764,000
|
|||
Inventory
|
63,000
|
|||
Related
party receivable
|
65,000
|
|||
Prepaid
expenses
|
(20,000
|
)
|
||
Other
current assets
|
(113,000
|
)
|
||
Increase
(decrease) in:
|
||||
Accounts
payable
|
(30,000
|
)
|
||
Related
party payable
|
23,000
|
|||
Accrued
expenses
|
51,000
|
|||
Net
cash provided by operating activities
|
927,000
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||
Acquisition
of Inter-Pacific Arts, cash acquired
|
9,000
|
|||
Net
cash provided by investing activities
|
9,000
|
|||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||
Investment
|
1,580,000
|
|||
Net
cash provided by financing activities
|
1,580,000
|
|||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
―
|
|||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
2,516,000
|
|||
CASH
AND CASH EQUIVALENTS, Beginning of period
|
―
|
|||
CASH
AND CASH EQUIVALENTS, End of period
|
$
|
2,516,000
|
||
Supplemental
Disclosure of Cash Flow Information:
|
||||
Cash
paid during the period for:
|
||||
Interest
|
$
|
―
|
||
Income
taxes
|
$
|
―
|
Supplemental
Disclosure of Non-Cash Financing for 2008:
·
|
In
connection with the acquisition of Inter-Pacific Arts, Inc., the Company
issued 3,500,000 shares of Company common stock to the seller of
Inter-Pacific Arts and 5,090,000 shares of Company common stock to the
Company’s Parent Company.
|
See
accompanying notes to consolidated financial statements.
66
VIASPACE
GREEN ENERGY INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD
FROM INCEPTION (JULY 1, 2008) THROUGH DECEMBER 31, 2008
Note
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of
Business – VIASPACE Green Energy Inc. (“VGE”), a British Virgin Islands
international company and its subsidiaries, Inter-Pacific Arts Corp.
(“IPA BVI”) and Guangzhou Inter-Pacific Arts Corp. (“IPA China”) (collectively,
“the Company”, “we” or “us” ) specialize in manufacturing and selling high
quality, copyrighted, framed artwork to retail stores. The Company
manufactures its artwork in the People’s Republic of China (the “PRC”) and sells
its products within China and worldwide. The Company also has a
worldwide sublicense to cultivate and sell Giant King Grass – a natural hybrid,
non-genetically modified, extremely fast-growing, perennial grass that is
suitable for livestock feed as well as a feedstock for biofuel
production. Giant King Grass has the potential to be used in the
production of nonfood crop based biofuels such as cellulosic ethanol, methanol
and green gasoline; burned directly in power plants as a clean substitute for
coal, and in the more immediate term, as animal feed for dairy cows, pigs,
sheep, goats, fish and other animals. VGE was formed on July 1, 2008
and was inactive from July 1, 2008 through October 20, 2008. IPA BVI
is a British Virgin Islands international company formed in 2003 and IPA China
is a Chinese wholly owned foreign enterprise formed in 2003 and registered in
Guangdong province of the PRC.
Basis of
Presentation - The accompanying consolidated financial statements of the
Company have been prepared in accordance with United States generally accepted
accounting principles (“GAAP”) for financial information. 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 in combination.
Company History
– Prior to October 21, 2008, VGE was 100% owned by VIASPACE Inc.
(“VIASPACE” or “Parent Company”) and did not have any active
operations. On October 21, 2008, the majority shareholder of IPA BVI
and IPA China, Sung Hsien Chang (“Chang”), entered into a Securities Purchase
Agreement (the "Purchase Agreement") with VGE, VIASPACE and China Gate
Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under
the Purchase Agreement, VGE acquired 100% of IPA BVI and the entire equity
interest of IPA China from Chang. In exchange, VIASPACE agreed to pay
approximately $16 million in a combination of cash, and newly-issued shares of
VIASPACE and VGE stock. In addition, VIASPACE issued shares of its
common stock to Licensor for Licensor’s sublicense of certain fast growing grass
technology to IPA China.
The
acquisition will be completed through two closings. At the first
closing on October 21, 2008 (“First Closing”), VGE issued 3,500,000 newly-issued
shares to Chang and his designees and 5,090,000 newly-issued shares to
VIASPACE. VIASPACE issued 215,384,615 shares of its common stock to
Chang and 30,576,007 shares of common stock to Licensor. Chang
delivered 70% of the outstanding common stock of IPA BVI to VGE. On
June 22, 2009, the parties entered into an Amendment to the Purchase Agreement
that extended the Second Closing to August 21, 2009. On August 21,
2009, the parties entered into a second Amendment to the Purchase Agreement that
extended the Second Closing to November 21, 2009. In addition, on
August 21, 2009, the parties agreed that the VGE shares held by Chang and others
were no longer subject to forfeiture even if the Second Closing did not
occur. On November 25, 2009, the parties entered into
another amendment to the Securities Purchase Agreement that extended the Second
Closing Deadline from November 21, 2009 to December 15, 2009; and provided
further that if the registration statement were declared effective by the SEC on
or before December 15, 2009, then the Second Closing Deadline would be extended
to January 15, 2010 .
At the
Second Closing, VIASPACE is to pay $4,800,000 plus interest to
Chang. VIASPACE shall also issue 1.8% of its then outstanding shares
of common stock to Licensor. Chang shall deliver the remaining 30% of
the outstanding shares of IPA BVI to VGE even if the Second Closing did not
occur.
The value
paid by VIASPACE and VGE for the acquisition of IPA BVI and IPA China was
$15,832,000. The IPA BVI and IPA China net assets acquired
totaled $3,003,000. The excess of value paid for the acquisition in
excess of net assets acquired is recorded on the balance sheet of VIASPACE and
was assigned to: grass license - $507,000 and goodwill -
$12,322,000.
As of
December 31, 2008, VIASPACE owns 59.3% of the outstanding common shares of
VGE.
67
Principles of
Consolidation – VGE has a controlling interest in IPA BVI and IPA China
and accounts for these subsidiaries under the consolidation
method. Under this method, an affiliated company’s results of
operations are reflected within the Company’s consolidated statement of
operations. Transactions between consolidated affiliated companies are
eliminated in consolidation. The Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 141, “Business Combinations”, which requires
use of the purchase method for all business combinations initiated after June
30, 2001.
Fiscal Year End -
The Company’s fiscal year ends December 31.
Use of Estimates
in the Preparation of the Financial Statements - The preparation of
financial statements, in conformity with United States GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash
Equivalents - The Company considers all highly liquid debt instruments,
purchased with an original maturity of three months or less, to be cash
equivalents.
Concentration of
Credit Risk -
The Company’s financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents, accounts receivable and
related party receivable. The Company maintains all of its cash accounts with
high credit quality institutions. Such balances with any one institution may
exceed FDIC insured limits.
Accounts
Receivable Allowance for Doubtful Accounts - The allowance for doubtful
accounts relates to specifically identified receivables that are evaluated
individually for collectability. We determine a receivable is
uncollectible when, based on current information and events, it is probable that
we will be unable to collect amounts due according to the original contractual
terms of the receivable agreement, without regard to any subsequent
restructurings. Factors considered in assessing collectability include, but are
not limited to, a customer’s extended delinquency, requests for restructuring
and filings for bankruptcy. There is one customer of the Company that
accounts for 85% of the Company’s 2008 revenues.
Inventory– Inventory is stated at
the lower of cost or market. Cost is determined using the average
cost method. Market is determined using net realizable
value. The Company writes down its inventory for estimated
obsolescence, excess quantities and other factors in evaluating net realizable
value. Inventory includes material, direct labor and related
manufacturing overhead.
68
The
following is a summary of inventory at December 31, 2008:
Raw
Materials
|
Finished
Goods
|
Total
|
||||||||||
Framed-Artwork
|
$
|
286,000
|
$
|
16,000
|
$
|
302,000
|
||||||
Grass
|
40,000
|
0
|
40,000
|
|||||||||
Total
|
$
|
326,000
|
$
|
16,000
|
$
|
342,000
|
Property and
Equipment - Property and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property
and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property and equipment is
provided using the straight-line method for substantially all assets and
estimated lives ranging from 5 to 30 years as follows:
Building
|
20
to 30 years
|
||
Machinery
and equipment
|
10
years
|
||
Office
equipment
|
5
years
|
||
Vehicles
|
5
years
|
Land Use Right
– All land in the PRC is government owned and cannot be sold to any
individual or company. IPA China acquired land use right for the land
occupied by its manufacturing facility during 2005 for RMB 5,000,000 or
approximately $605,000. The land lease is for 30
years. Accordingly, the land use right is being amortized on the
straight-line method over 30 years.
License –
IPA China has a sublicense to a grow and sell a new fast-growing hybrid grass
known as Giant King Grass to be used for production of biofuels and as feed for
livestock. IPA China licensed this right from China Gate Technology
Co., Ltd. (Licensor) who obtained the original license from the
inventor. IPA China did not directly pay for the
sublicense. VIASPACE issued shares of its common stock to Licensor
upon the acquisition of IPA China by VIASPACE and the Company on October 21,
2008. The principal of Licensor, Mr. Maclean Wang, is the Director
Grass Development of VGE. Mr. Wang entered into an employment
agreement with VGE on October 21, 2008. The principal of Licensor,
Mr. Maclean Wang, is the Director Grass Development of VGE. Mr. Wang
entered into an employment agreement with VGE on October 21,
2008. Mr. Wang and Mr. Chang were business associates prior to the
licensing of the hybrid grass, but the business association did not relate to
IPA China. Mr. Wang had no involvement with IPA China, IPA BVI, VGE
or VIASPACE prior to the licensing of the hybrid grass.
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.
Income
Taxes– The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
The
statutory corporate income tax rate for foreign enterprises in the PRC was 25%
for 2008. For 2008, IPA China was eligible for a reduced income tax
at 50% of the normal income tax rate. Beginning January 1, 2009, IPA
China will be subjected to the normal income tax rate. IPA China was
exempted from a local income tax rate of 3% for 2008.
VGE and
IPA BVI are British Virgin Islands international companies and not subject to
any United States income taxes.
The
Company does not have any deferred tax assets or liabilities recorded for the
periods covered by the accompanying financial statements due to no significant
book to tax basis differences existing.
Revenue
Recognition – IPA BVI and IPA China have generated revenues to date on
product revenue shipments. In accordance with Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition”
(“SAB No. 104”), IPA recognizes product revenue provided that (1) persuasive
evidence of an arrangement exists, (2) delivery to the customer has occurred,
(3) the selling price is fixed or determinable and (4) collection is reasonably
assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. The price is considered fixed or
determinable when it is not subject to refund or adjustments. Our
standard shipping terms are free on board shipping point. Some of the
Company’s products are sold in the PRC and are subject to Chinese value-added
tax. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing their finished
product. Revenue is recorded net of VAT taxes.
69
Cost of Goods
Sold – Cost of goods sold consists primarily of material costs, employee
compensation, depreciation and related expenses, which are directly attributable
to the production of products. Any write-down of inventory to lower of
cost or market is also recorded in cost of goods sold.
Foreign Currency
Translation and Comprehensive Income (Loss) – IPA China’s functional
currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive
income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date. The sales of IPA BVI are in USD.
Segment Reporting
and Geographic Information – SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" requires use of the “management approach”
model for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. At December 31,
2008, all of the Company's operations are conducted in one industry segment, the
Consumer Products segment which specializes in manufacturing and selling
high-quality, copyrighted, framed artwork to retail stores. In the
future, the Company expects to incur revenue and expenses in a Grass segment,
through its growing, harvesting and selling of its Giant King Grass as a
livestock feed as well as a feedstock for biofuel production. All of
the Company’s revenues for 2008 are in the Consumer Products
segment. All identifiable assets at December 31, 2008 are in the
Asia/Pacific region and are related to the Consumer Products segment, with the
exception of inventory, which is broken down by segment above.
NOTE
2 — FIXED ASSETS
Fixed
assets are comprised of the following at December 31, 2008:
Building
|
$
|
606,000
|
||
Machinery
and equipment
|
192,000
|
|||
Office
equipment
|
73,000
|
|||
Vehicles
|
144,000
|
|||
Total
property and equipment
|
1,015,000
|
|||
Less:
Accumulated depreciation
|
295,000
|
|||
Fixed
assets, net
|
$
|
720,000
|
Depreciation
expense was $28, 000 for the period October 21, 2008 through December 31,
2008.
NOTE
3 — LAND USE RIGHT
Land use
right is composed of the following at December 31, 2008:
Land
use right
|
$
|
605,000
|
||
Less:
Accumulated amortization
|
91,000
|
|||
Land
use right, net
|
$
|
514,000
|
Amortization
expense was $5,000 for the period October 21, 2008 through December 31,
2008. The amortization expense for the next five years will be
$20,000 per year.
NOTE 4 — INTANGIBLE
ASSETS
License to
Grass
As more
fully explained in Note 9, the Company and Parent Company acquired IPA China and
IPA BVI on October 21, 2008. IPA China has a worldwide license to
cultivate and sell a fast-growing high yield hybrid grass called Giant King
Grass that has the potential to be used in the production of nonfood biofuels
and, in the more immediate term, animal feedstock for dairy cows, pigs, sheep,
goats, fish and other animals. The Parent Company issued 30,576,007
shares to the licensor of the Giant King Grass valued at $507,000 on the date of
acquisition. The grass license is being amortized over an estimated
useful life of 20 years. In 2008, $4,000 was recorded as amortization
expense. The amortization expense for the next five years will
be $25,000 in each year.
70
License
to Grass is composed of the following at December 31, 2008:
License
to Grass
|
|
$
|
507,000
|
|
Less:
Accumulated amortization
|
4,000
|
|||
License
to Grass, net
|
$
|
503,000
|
Goodwill
As more
fully explained in Note 9, the Company and Parent Company acquired IPA China and
IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the
acquisition.
NOTE
5 — RELATED PARTIES
Included
in the Company’s Consolidated Balance Sheets at December 31, 2008 are Related
Party Receivables. The Related Party Receivables represents amounts
due to IPA BVI from Sung Chang, the Company’s owner and from JJ International, a
company owned by Sung Chang that operates separately.
The
following table represents a summary of Related Party Receivables at December
31, 2008:
Due
from Sung Chang
|
$
|
209,000
|
||
Due
from JJ International
|
657,000
|
|||
Total
|
$
|
866,000
|
The
Company has a related party payable of $96,000 at December 31,
2008. IPA China owes $75,000 to a related party related to
framed-artwork production. IPA China also owes $21,000 to a company
related to an employee of IPA China.
IPA China
performs manufacturing services in the PRC for JJ
International. During 2008, IPA China recorded revenues of $418,000
from JJ International which amount is included in the Consolidated Statement of
Operations presented.
71
NOTE
6 — INCOME TAXES
Income
tax receivables, net at December 31, 2008, respectively are included in Other
Current Assets on the accompanying balance sheet as they have a net debit
balance. Income tax receivables consist of the following at December
31, 2008:
Value
added tax receivable
|
$
|
84,000
|
||
Income
tax payable
|
(8,000
|
)
|
||
Total
|
$
|
76,000
|
IPA China
is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 24% on
income reported in the statutory financial statements after appropriated tax
adjustments.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for 2008:
U.S.
statutory rates
|
34.0 | % | ||
Tax
rate difference
|
(10.0 | %) | ||
Effect
of tax holiday
|
(12.5 | %) | ||
Effect
of IPA China income (loss)
|
(2.6 | %) | ||
Total
|
9.9 | % |
Note
7 — COMMITMENTS AND CONTINGENCIES
IPA
China’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
IPA art
designers work with buyers from retail chains to choose prints and other art
forms from catalogs of licensed work. We only purchase prints from companies
with whom we have long-standing relationships, and we guarantee our customers
there are no counterfeits and that all royalties have been paid. The
vendors from whom we purchase prints guarantee to us that all of the prints they
are selling are not counterfeits and that all royalties have been paid to the
artist of the prints. We then pass this guarantee on to our
customers. Since the time IPA was formed in 2003, we have not
received any legal claims challenging any of the prints we have
sold.
VGE
entered into four separate two-year employment agreements with each of Carl
Kukkonen, Sung Chang, Stephen Muzi and Maclean Wang. Kukkonen would
serve as Chief Executive Officer, Chang as President, Muzi as Chief Financial
Officer and Wang as Managing Director of Grass Development of IPA
China. Kukkonen and Chang would receive a salary of $240,000 per
annum, Muzi receives $180,000 per annum and Wang receives $84,000 per
annum. Each of them is entitled to a bonus as determined by the VGE
Board of Directors, customary insurance and health benefits, 15 days paid leave
per year, and reimbursement for out-of-pocket expenses in the course of his
employment.
Under
Chang’s employment agreement, VGE will grant him an option to purchase the
number shares of its common stock equal to four percent (4%) of VGE’s total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The option shall
vest over 24 months beginning on the date of the Employment Agreement, with 1/24
of the option shares vesting on the first day of each month that Chang is
employed with VGE. There was no stock compensation recorded during
2008 since the options are not granted unless the Second Closing occurs as
discussed in Note 9.
72
Under
Wang’s employment agreement, VGE will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of VGE’s total outstanding
shares as of the Second Closing Date. The purchase price of the
option shares shall be eighty percent (80%) of the fair market value of such
common stock as of the Second Closing Date. The option shall vest
over 24 months beginning on the date of the Employment Agreement, with 1/24 of
the option shares vesting on the first day of each month that Wang is employed
with VGE. There was no stock compensation recorded during 2008 since the options
are not granted unless the Second Closing occurs as discussed in Note
9.
The
Second Closing date was extended until November 21, 2009, based on an amendment
to the Securities Purchase Agreement on August 21, 2009. We do not
know exactly what the fair market value of VGE common stock will be on November
21, 2009, but we have determined a Proposed Maximum Offering Price Per Unit of
$3.00 per share in a recent Form S-1 filing for each share of common
stock. 8% of outstanding common shares will be issued to Mr. Chang
and Mr. Wang (4% of total outstanding shares to Mr. Chang and Mr. Wang) which
translates to 688,000 common shares. Assuming $3.00 per share common
stock price on November 21, 2009, this would result in the Company issuing these
stock incentive options at a per share price of $2.40 per share (20% discount),
resulting in stock compensation expense of approximately $412,800 to be
amortized over 24 months which is the stock option vesting period, or $17,200
per month.
In the
event that the Second Closing does not occur within 396 days after the First
Closing, each Employment Agreement shall automatically terminate.
The
Company is not party to any legal proceedings at the present time.
Note
8 — FINANCIAL ACCOUNTING DEVELOPMENTS
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159") which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair
value. SFAS No. 159 was effective for us on January 1, 2008. The
adoption of SFAS No. 159 did not have a significant impact on our financial
position, cash flows, and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited. The adoption of SFAS No. 141 did not have a significant
impact on our financial position, cash flows, and results of
operations.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination
of the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact of SFAS
FSP 142-3, but does not expect the adoption of this pronouncement will have a
material impact on its financial position, results of operations or cash
flows.
73
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with United States GAAP. SFAS 162 will not have an
impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on the
Company’s financial statements.
NOTE
9— ACQUISITION OF IPA
On
October 21, 2008, VIASPACE and VGE entered into a Securities Purchase Agreement
(the "Purchase Agreement") with Sung Hsien Chang (“Chang”) and China Gate
Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under
the Purchase Agreement, we agreed to acquire 100% of IPA BVI and the entire
equity interest of IPA China from Chang, the sole shareholder of IPA BVI and IPA
China. In exchange, VIASPACE agreed to pay approximately $15.282
million in a combination of cash, and newly-issued shares of VIASPACE and VGE
stock. In addition, VIASPACE issued shares of its common stock to
Licensor for Licensor’s sublicense of certain fast growing grass technology to
IPA China.
The
acquisition will be completed through two closings. At the first
closing on October 21, 2008 (“First Closing”), VGE issued 3,500,000 newly-issued
shares to Chang and his designees and 5,090,000 newly-issued shares to
VIASPACE. VIASPACE issued 215,384,615 shares of its common stock to
Chang and 30,576,007 shares of common stock to Licensor. Chang
delivered 70% of the outstanding common stock of IPA BVI. On June 22,
2009, the parties entered into an Amendment to the Purchase Agreement that
extended the Second Closing to August 21, 2009.
On August
21, 2009, the parties entered into a second Amendment to the Purchase Agreement
that the VGE shares held by Chang and others were no longer subject to
forfeiture even if the Second Closing did not occur. This amendment
also extended the Second Closing to November 21, 2009. The Second
Closing is scheduled for November 21, 2009, and VIASPACE is to pay $4,800,000
plus interest to Chang. Interest on the Cash Consideration shall
accrue at 6% for the first six months after the First Closing, and then 18%
until June 10, 2009, and then at an annual rate of 6%. There is a
loan of $4,800,000 on the balance sheet of VIASPACE. The interest
expense owed on this loan is due by VIASPACE and not VGE. VIASPACE
shall also issue 1.8% of its then outstanding shares of common stock to
Licensor. Chang shall deliver the remaining 30% of the outstanding
shares of IPA BVI to VGE even if the Second Closing did not
occur. Chang will also cause IPA China to be a wholly-owned
subsidiary of IPA BVI including obtaining all governmental approvals required
for such transfer.
VIASPACE
and VGE’s obligations to consummate the Second Closing is conditioned upon,
among other things, the transfer of the equity of IPA China from Chang to IPA
BVI and the execution of the assignment of the right to grow and harvest
fast-growing proprietary grasses from Licensor to IPA China.
Also,
pursuant to the second Amendment, VIASPACE irrevocably assigned to Chang and
Licensor the VIASPACE shares issued to Chang and Licensor in the First Closing
of the Purchase Agreement. Licensor agreed to limit sales of VIASPACE
common shares issued at the First Closing to a maximum of 8,800,000 shares in
any 90-day period.
In the
event that the Second Closing fails to occur, neither VIASPACE or its
affiliates, or any of their directors or officers, shall engage in the grass
business in China for a period of three years after the First Closing
Date.
On
October 13, 2009 the parties to the Purchase Agreement entered into the third
Amendment to the Purchase Agreement in which the parties agreed that in the
event that the Second Closing fails to occur and VIASPACE’s closing conditions
to the Second Closing have been satisfied by Chang, then (1) Chang and his
designees shall retain the 3,500,000 VGE shares issued at the First Closing, (2)
VIASPACE shall transfer all shares of VGE common stock it holds to Chang, (3)
Chang will deliver the remaining 30% equity interest of IPA BVI to VGE, such
that VGE shall receive all equity securities of IPA BVI, and (4) if VGE’s common
stock is not listed on a Trading Market as of the Second Closing Deadline, Chang
shall also receive such number of shares of VIASPACE common stock so that Chang
shall own a majority of the outstanding shares of VIASPACE common stock as of
the date of issuance. In addition, the parties clarified that the
three year non-competition clause to engage in the grass business starting from
the date of the First Closing does not apply to VGE and Messrs. Kukkonen and
Muzi, but only to VIASPACE and its other affiliates. Further, we
deleted the obligation of Licensor to assign the grass license to
VGE.
74
As of the
First Closing, Chang warrants that IPA BVI and IPA China’s cash equivalents
(which includes all cash plus accounts receivables less accounts payable) will
be $3 million. Any difference between $3 million and the actual cash
equivalents on the financial records of IPA BVI and IPA China as of the First
Closing is a Cash Shortfall. Chang agreed to deposit the Cash
Shortfall into IPA BVI’s bank account once the amount is
determined. In December 2008, Chang deposited $1,580,000 in the bank
account of IPA BVI related to this Cash Shortfall.
As
required by the Purchase Agreement, VGE filed a Form S-1 Registration Statement
with the SEC on June 3, 2009 covering the resale of all or such maximum portion
of VGE common stock issued pursuant to the Purchase Agreement as permitted by
SEC regulations. The second Amendment extends until November 21,
2009, the date that VGE shall use its best efforts to qualify its Common Stock
for quotation on a trading market. If VGE’s Registration Statement is
declared effective by the SEC on or before November 21, 2009, the Second Closing
Deadline will be extended until December 21, 2009.
Provided
that the Second Closing has occurred, if VGE common stock is not listed on a
trading market by the Second Closing deadline, then VIASPACE will issue to Chang
the number of shares of its common stock equivalent to $5,600,000. The stock
price will be calculated as the average closing price of VIASPACE’s common stock
during the 60 day period prior to and including the Second Closing
Date.
Licensor
and Chang each represents and covenants that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement
regarding such land use rights shall grant the land use rights to IPA China, but
shall be assignable to VGE at VGE’s option. The term of such
agreement, including possible renewals, shall be at least 10 years.
The value
paid by VIASPACE and VGE for the acquisition was $15,832,000 composed
of: fair market value of VIASPACE stock issued for assets acquired -
$4,589,000; VIASPACE loan to Mr. Sung Chang - $4,800,000; and VIASPACE minority
interest in VGE - $6,443,000. The net assets acquired totaled
$3,003,000. The excess of value paid for the acquisition in excess of
net assets acquired was assigned to: grass license - $507,000 and
goodwill - $12,322,000 which are recorded on the balance sheet of
VIASPACE.
The
acquisition of IPA BVI and IPA China occurred on October 21,
2008. The following table reflects the Company’s consolidated
unaudited results of operations as if the acquisition occurred on January 1,
2008 and January 1, 2007, respectively.
2008
|
2007
|
|||||||
Revenues
– as reported
|
$
|
866,000
|
$
|
―
|
||||
Revenues
– pro forma
|
$
|
6,624,000
|
$
|
5,462,000
|
||||
Net
Income – as reported
|
$
|
91,000
|
$
|
―
|
||||
Net
Income – pro forma
|
$
|
939,000
|
$
|
843,000
|
||||
Earnings
per share - basic and diluted – as reported
|
$
|
0.01
|
$
|
―
|
||||
Earnings
per share - basic and diluted – pro forma
|
$
|
0.11
|
$
|
0.10
|
75
VIASPACE
GREEN ENERGY INC.
FINANCIAL
STATEMENTS
SEPTEMBER
30, 2009
TABLE
OF CONTENTS
PAGE
|
|
CONSOLIDATED
FINANCIAL STATEMENTS:
|
|
Consolidated
Balance Sheet as of September 30, 2009 (unaudited) and December 31, 2008
(audited)
|
77
|
Consolidated
Statement of Operations for Three and Nine Months Ended September 30, 2009
(unaudited)
|
78
|
Consolidated
Statement of Stockholders’ Equity as of September 30, 2009
(unaudited)
|
79
|
Consolidated
Statement of Cash Flows for Nine Months Ended September 30, 2009
(unaudited)
|
80
|
Notes
to Consolidated Financial Statements
|
81
|
76
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
||||||||
September
30
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
1,049,000
|
$
|
2,516,000
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $18,000 in 2009 and
zero in 2008
|
499,000
|
247,000
|
||||||
Inventory
|
337,000
|
342,000
|
||||||
Prepaid
expenses
|
35,000
|
20,000
|
||||||
Related
party receivables
|
1,919,000
|
866,000
|
||||||
Other
current assets
|
6,000
|
147,000
|
||||||
TOTAL
CURRENT ASSETS
|
3,845,000
|
4,138,000
|
||||||
FIXED
ASSETS, net of accumulated depreciation
|
744,000
|
720,000
|
||||||
OTHER
ASSETS:
|
||||||||
Land
Use Right, net of accumulated amortization
|
557,000
|
514,000
|
||||||
License
to Grass, net of accumulated amortization
|
484,000
|
503,000
|
||||||
Goodwill
|
12,322,000
|
12,322,000
|
||||||
TOTAL
OTHER ASSETS
|
13,363,000
|
13,399,000
|
||||||
TOTAL
ASSETS
|
$
|
17,952,000
|
$
|
18,197,000
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
372,000
|
$
|
536,000
|
||||
Related
party payable
|
44,000
|
96,000
|
||||||
Accrued
expenses
|
157,000
|
67,000
|
||||||
TOTAL
CURRENT LIABILITIES
|
573,000
|
699,000
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY:
|
||||||||
Common
stock, $0.001 par value, 50,000,000 shares authorized, 8,600,000 issued
and outstanding in 2009 and 2008
|
9,000
|
9,000
|
||||||
Additional
paid in capital
|
17,378,000
|
17,398,000
|
||||||
Retained
earnings (Accumulated deficit)
|
(8,000
|
)
|
91,000
|
|||||
Total
stockholders’ equity
|
17,379,000
|
17,498,000
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
17,952,000
|
$
|
18,197,000
|
See
accompanying notes to consolidated financial statements.
77
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF OPERATIONS
AND
OTHER COMPREHENSIVE LOSS
(Unaudited)
Three
Months
Ended
September
30,
2009
|
(Unaudited)
Nine
Months
Ended
September
30,
2009
|
|||||||
REVENUES
|
$
|
1,064,000
|
$
|
2,935,000
|
||||
COST
OF REVENUES
|
609,000
|
1,643,000
|
||||||
GROSS
PROFIT
|
455,000
|
1,292,000
|
||||||
OPERATING
EXPENSES
|
||||||||
Selling,
general and administrative expenses
|
425,000
|
1,392,000
|
||||||
Total
operating expenses
|
425,000
|
1,392,000
|
||||||
INCOME
(LOSS) FROM OPERATIONS
|
30,000
|
(100,000
|
)
|
|||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
expense
|
―
|
|
(5,000
|
)
|
||||
Other
income (expense), net
|
―
|
6,000
|
||||||
Total
other income, net
|
―
|
1,000
|
||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
30,000
|
(99,000
|
)
|
|||||
Income
taxes
|
(2,000
|
)
|
―
|
|||||
NET
INCOME (LOSS)
|
32,000
|
(99,000
|
)
|
|||||
OTHER
COMPREHENSIVE LOSS
|
||||||||
Foreign
currency translation loss
|
―
|
|
―
|
|||||
COMPREHENSIVE
INCOME (LOSS)
|
$
|
32,000
|
$
|
(99,000
|
)
|
|||
NET
INCOME PER SHARE OF COMMON STOCK - Basic and diluted
|
$
|
0.00
|
$
|
(0.01
|
)
|
|||
WEIGHTED
AVERAGE SHARES OUTSTANDING - Basic and diluted
|
8,600,000
|
8,600,000
|
See
accompanying notes to consolidated financial statements.
78
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
Common
Stock
|
||||||||||||||||||||||||
Shares
|
Amount
|
Additional
Paid
in
Capital
|
Accumulated
Other
Comprehensive Income
|
Retained
Earnings
(Accumulated
Deficit)
|
Total
|
|||||||||||||||||||
BALANCE,
DECEMBER 31, 2008
|
8,600,000
|
$
|
9,000
|
$
|
17,398,000
|
$
|
―
|
$
|
91,000
|
$
|
17,498,000
|
|||||||||||||
Net
loss
|
(99,000
|
)
|
(99,000
|
)
|
||||||||||||||||||||
Other
comprehensive expense:
|
||||||||||||||||||||||||
Foreign
currency translation expense
|
―
|
―
|
||||||||||||||||||||||
Amortization
of capital contribution from Parent Company related to acquisition of
Inter-Pacific Arts and Affiliate
|
(20,000
|
)
|
(20,000
|
)
|
||||||||||||||||||||
BALANCE,
SEPTEMBER 30, 2009
|
8,600,000
|
$
|
9,000
|
$
|
17,378,000
|
$
|
―
|
$
|
(8,000
|
)
|
$
|
17,379,000
|
See
accompanying notes to consolidated financial statements.
79
VIASPACE
GREEN ENERGY INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
(Unaudited)
Nine
Months
Ended
September
30,
2009
|
||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||
Net
loss
|
$
|
(99,000
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||
Depreciation
and amortization
|
73,000
|
|||
(Increase)
decrease in:
|
||||
Accounts
receivable
|
(243,000
|
)
|
||
Inventory
|
35,000
|
|||
Prepaid
expenses
|
(15,000
|
)
|
||
Other
current assets
|
132,000
|
|||
Increase
(decrease) in:
|
||||
Accounts
payable
|
(164,000
|
)
|
||
Related
party receivables
|
(341,000
|
)
|
||
Accrued
expenses
|
96,000
|
|||
Net
cash used in operating activities
|
(526,000
|
)
|
||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||
Acquisition
of equipment
|
(77,000
|
)
|
||
Acquisition
of land use rights
|
(64,000
|
)
|
||
Net
cash used in investing activities
|
(141,000
|
)
|
||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||
Related
party loans
|
(800,000
|
)
|
||
Net
cash used in financing activities
|
(800,000
|
)
|
||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(1,467,000
|
)
|
||
CASH
AND CASH EQUIVALENTS, Beginning of Year
|
2,516,000
|
|||
CASH
AND CASH EQUIVALENTS, End of Period
|
$
|
1,049,000
|
||
Supplemental
Disclosure of Cash Flow Information:
|
||||
Cash
paid during the period for:
|
||||
Interest
|
$
|
(5,000
|
)
|
|
Income
taxes
|
$
|
―
|
See
accompanying notes to consolidated financial statements.
80
VIASPACE
GREEN ENERGY INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD
ENDED SEPTEMBER 30, 2009
Note
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of
Business – VIASPACE Green Energy Inc. (“VGE”), a British Virgin Islands
international company and its subsidiaries, Inter-Pacific Arts Corp.
(“IPA BVI”) and Guangzhou Inter-Pacific Arts Corp. (“IPA China”) (collectively,
“the Company”, “we” or “us” ) specialize in manufacturing and selling high
quality, copyrighted, framed artwork to retail stores. The Company
manufactures its artwork in the People’s Republic of China (the “PRC”) and sells
its products within China and worldwide. The Company also has a
worldwide sublicense to cultivate and sell Giant King Grass – a natural hybrid,
non-genetically modified, extremely fast-growing, perennial grass that is
suitable for livestock feed as well as a feedstock for biofuel
production. Giant King Grass has the potential to be used in the
production of nonfood crop based biofuels such as cellulosic ethanol, methanol
and green gasoline; burned directly in power plants as a clean substitute for
coal, and in the more immediate term, as animal feed for dairy cows, pigs,
sheep, goats, fish and other animals. VGE was formed on July 1, 2008
and was inactive from July 1, 2008 through October 20, 2008. IPA BVI
is a British Virgin Islands international company formed in 2003 and IPA China
is a Chinese wholly owned foreign enterprise formed in 2003 and registered in
Guangdong province of the PRC.
Basis of
Presentation - The accompanying unaudited consolidated financial
statements of the Company have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) for financial information and
with Securities and Exchange Commission (“SEC”) instructions to Form
10-Q. Accordingly, the unaudited financial statements do not include
all of the information and footnotes required by GAAP. Operating
results for the nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the fiscal year ended
December 31, 2009. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been reflected in these interim financial
statements. All significant intercompany accounts and transactions
have been eliminated on consolidation.
Company History
– Prior to October 21, 2008, VGE was 100% owned by VIASPACE Inc.
(“VIASPACE” or “Parent Company”) and did not have any active
operations. On October 21, 2008, the majority shareholder of IPA BVI
and IPA China, Sung Hsien Chang (“Chang”), entered into a Securities Purchase
Agreement (the "Purchase Agreement") with VGE, VIASPACE and China Gate
Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under
the Purchase Agreement, VGE acquired 100% of IPA BVI and the entire equity
interest of IPA China from Chang. In exchange, VIASPACE agreed to pay
approximately $16 million in a combination of cash, and newly-issued shares of
VIASPACE and VGE stock. In addition, VIASPACE issued shares of its
common stock to Licensor for Licensor’s sublicense of certain fast growing grass
technology to IPA China.
The
acquisition will be completed through two closings. At the first
closing on October 21, 2008 (“First Closing”), VGE issued 3,500,000 newly-issued
shares to Chang and his designees and 5,090,000 newly-issued shares to
VIASPACE. VIASPACE issued 215,384,615 shares of its common stock to
Chang and 30,576,007 shares of common stock to Licensor. Chang
delivered 70% of the outstanding common stock of IPA BVI to VGE. On
June 22, 2009, the parties entered into an Amendment to the Purchase Agreement
that extended the Second Closing to August 21, 2009. On August 21,
2009, the parties entered into a second Amendment to the Purchase Agreement that
extended the Second Closing to November 21, 2009. In addition, on
August 21, 2009, the parties agreed that the VGE shares held by Chang and others
were no longer subject to forfeiture even if the Second Closing did not
occur.
At the
Second Closing, VIASPACE is to pay $4,800,000 plus interest to
Chang. VIASPACE shall also issue 1.8% of its then outstanding shares
of common stock to Licensor. Chang shall deliver the remaining 30% of
the outstanding shares of IPA BVI to VGE even if the Second Closing did not
occur.
The value
paid by VIASPACE and VGE for the acquisition of IPA BVI and IPA China was
$15,832,000. The IPA BVI and IPA China net assets acquired
totaled $3,003,000. The excess of value paid for the acquisition in
excess of net assets acquired is recorded on the balance sheet of VIASPACE and
was assigned to: grass license - $507,000 and goodwill -
$12,322,000.
As of
September 30, 2009 and December 31, 2008, VIASPACE owns 59.3% of the outstanding
common shares of VGE.
Principles of
Consolidation – VGE has a controlling interest in IPA BVI and IPA China
and accounts for these subsidiaries under the consolidation
method. Under this method, an affiliated company’s results of
operations are reflected within the Company’s consolidated statement of
operations. Transactions between consolidated affiliated companies are
eliminated in consolidation. The Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 141, “Business Combinations” (codified in FASB
ASC Topic 805), which requires use of the purchase method for all business
combinations initiated after June 30, 2001.
Fiscal Year End -
The Company’s fiscal year ends December 31.
81
Use of Estimates
in the Preparation of the Financial Statements - The preparation of
financial statements, in conformity with United States GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash
Equivalents - The Company considers all highly liquid debt instruments,
purchased with an original maturity of three months or less, to be cash
equivalents.
Concentration of
Credit Risk -
The Company’s financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents, accounts receivable and
related party receivable. The Company maintains all of its cash accounts with
high credit quality institutions. Such balances with any one institution may
exceed FDIC insured limits.
Accounts
Receivable Allowance for Doubtful Accounts - The allowance for doubtful
accounts relates to specifically identified receivables that are evaluated
individually for collectability. We determine a receivable is
uncollectible when, based on current information and events, it is probable that
we will be unable to collect amounts due according to the original contractual
terms of the receivable agreement, without regard to any subsequent
restructurings. Factors considered in assessing collectability include, but are
not limited to, a customer’s extended delinquency, requests for restructuring
and filings for bankruptcy. There is one customer of the Company that
accounts for 75% of the Company’s revenues for 2009.
Inventory
– Inventory is
stated at the lower of cost or market. Cost is determined using the
average cost method. Market is determined using net realizable
value. The Company writes down its inventory for estimated
obsolescence, excess quantities and other factors in evaluating net realizable
value. Inventory includes material, direct labor and related
manufacturing overhead.
The
following is a summary of inventory at September 30, 2009
(unaudited):
Raw
Materials
|
Finished
Goods
|
Total
|
||||||||||
Framed-Artwork
|
$
|
260,000
|
$
|
29,000
|
$
|
289,000
|
||||||
Grass
|
48,000
|
―
|
48,000
|
|||||||||
Total
|
$
|
308,000
|
$
|
29,000
|
$
|
337,000
|
The
following is a summary of inventory at December 31, 2008:
Raw
Materials
|
Finished
Goods
|
Total
|
||||||||||
Framed-Artwork
|
$
|
286,000
|
$
|
16,000
|
$
|
302,000
|
||||||
Grass
|
40,000
|
―
|
40,000
|
|||||||||
Total
|
$
|
326,000
|
$
|
16,000
|
$
|
342,000
|
Property and
Equipment - Property and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property
and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property and equipment is
provided using the straight-line method for substantially all assets and
estimated lives ranging from 5 to 30 years as follows:
Building
|
20
to 30 years
|
||
Machinery
and equipment
|
10
years
|
||
Office
equipment
|
5
years
|
||
Vehicles
|
5
years
|
Land Use Right
– All land in the PRC is government owned and cannot be sold to any
individual or company. IPA China acquired land use rights for the
land occupied by its manufacturing facility during 2005 for RMB 5,000,000 or
approximately $605,000. The land lease is for 30
years. Accordingly, the land use right is being amortized on the
straight-line method over 30 years. In the first quarter of 2009,
VGE leased approximately 45 hectares (111 acres) of land in the Guangdong
province of the PRC for 20 years at a cost of RMB 172,080 or approximately
$25,000 every three years. In the third quarter of 2009, VGE signed a
lease for approximately 55 hectares (136 acres) of land in Guangdong
province. The lease begins October 1, 2009 with a lease life of about
29 years at a cost of approximately RMB 65,000 or approximately $8,000 per
year. This land is being used to grow Giant King grass.
82
License –
IPA China has a license to a grow and sell a new fast-growing hybrid grass known
as Giant King Grass to be used for production of biofuels and as feed for
livestock. IPA China sublicensed this right from China Gate
Technology Co., Ltd. (Licensor) who obtained the original license from the
inventor. IPA China did not directly pay for the license.
VIASPACE issued shares of its common stock to Licensor upon the acquisition of
IPA China by VIASPACE and the Company on October 21, 2008. The
principal of Licensor, Mr. Maclean Wang, is the Director Grass Development of
VGE. Mr. Wang entered into an employment agreement with VGE on
October 21, 2008. The principal of Licensor, Mr. Maclean Wang, is the
Director Grass Development of VGE. Mr. Wang entered into an
employment agreement with VGE on October 21, 2008. Mr. Wang and Mr.
Chang were business associates prior to the licensing of the hybrid grass, but
the business association did not relate to IPA China. Mr. Wang had no
involvement with IPA China, IPA BVI, VGE or VIASPACE prior to the licensing of
the hybrid grass. As discussed in Note 9, in the event that the
Second Closing of the acquisition of IPA BVI and China does not occur, VGE’s
Parent Company will no longer be permitted to operate in the grass business for
three years; however, VGE will continue to be permitted to operate in the grass
business.
In
addition, as discussed in Note 9, the Licensor and Sung Chang, the seller of IPA
China and IPA BVI, each represented that at least 100 hectares of arable land in
Guangdong province in China will be available for grass farming by IPA China
within 12 months after the First Closing Date. IPA China secured 45
hectares of arable land in the first quarter of 2009 and leased an additional 55
ha in the third quarter of 2009. The requirement has been met so this
requirement no longer has any impact on our ability to utilize our grass license
rights.
Fair Value of
Financial Instruments - The recorded value of accounts receivables,
related party receivables, related party payables, 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.
Income
Taxes– The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” (codified in FASB
ASC Topic 740), which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be
realized.
The
statutory corporate income tax rate for foreign enterprises in the PRC was 25%
for 2009. IPA China is subject to local income tax rate of 3% for
2009.
VGE and
IPA BVI are British Virgin Islands international companies and not subject to
United States income taxes.
The
Company does not have any deferred tax assets or liabilities recorded for the
periods covered by the accompanying financial statements due to no significant
book to tax basis differences existing.
Revenue
Recognition – IPA BVI and IPA China have generated revenues to date on
product revenue shipments. In accordance with Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition”
(“SAB No. 104”) (codified in FASB ASC Topic 605), IPA recognizes product revenue
provided that (1) persuasive evidence of an arrangement exists, (2) delivery to
the customer has occurred, (3) the selling price is fixed or determinable and
(4) collection is reasonably assured. Delivery is considered to have
occurred when title and risk of loss have transferred to the customer. The price
is considered fixed or determinable when it is not subject to refund or
adjustments. Our standard shipping terms are free on board shipping
point. Some of the Company’s products are sold in the PRC and are
subject to Chinese value-added tax. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished product. Revenue is recorded net of VAT
taxes.
Cost of Goods
Sold – Cost of goods sold consists primarily of material costs, employee
compensation, depreciation and related expenses, which are directly attributable
to the production of products. Any write-down of inventory to lower of
cost or market is also recorded in cost of goods sold.
Foreign Currency
Translation and Comprehensive Income (Loss) – IPA China’s functional
currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive
income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date. The sales of IPA BVI are in USD.
83
Segment Reporting
and Geographic Information – SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (codified in FASB ASC Topic 280) requires
use of the “management approach” model for segment reporting. The management
approach model is based on the way a company's management organizes segments
within the company for making operating decisions and assessing performance.
Reportable segments are based on products and services, geography, legal
structure, management structure, or any other manner in which management
disaggregates a company. At September 30, 2009, the Company's
operations are conducted in two industry segments, the Consumer Products segment
which specializes in manufacturing and selling high-quality, copyrighted, framed
artwork to retail stores and the Grass segment, through its growing, harvesting
and selling of its Giant King Grass as a livestock feed as well as a feedstock
for biofuel production. From a geographic standpoint, all of the
Company’s revenues for 2009 are to customers in the United
States. All of the Company’s revenues for 2009 are in the Consumer
Products segment. All identifiable assets at September 30, 2009 are
in the Asia/Pacific region and are related to the Consumer Products segment,
with the exception of inventory, which is broken down by segment
above.
NOTE
2 — FIXED ASSETS
Fixed
assets are comprised of the following at September 30, 2009 (unaudited) and
December 31, 2008:
2009
|
2008
|
|||||||
Building
|
$
|
627,000
|
$
|
606,000
|
||||
Machinery
and equipment
|
248,000
|
192,000
|
||||||
Office
equipment
|
73,000
|
73,000
|
||||||
Vehicles
|
144,000
|
144,000
|
||||||
Total
property and equipment
|
1,092,000
|
1,015,000
|
||||||
Less:
Accumulated depreciation
|
348,000
|
295,000
|
||||||
Fixed
assets, net
|
$
|
744,000
|
$
|
720,000
|
Depreciation
expense was $18,000 for the three months ended September 30,
2009. Depreciation expense was $52,000 for the nine months ended
September 30, 2009.
NOTE
3 — LAND USE RIGHT
Land use
right is composed of the following at September 30, 2009 (unaudited) and
December 31, 2008:
2009
|
2008
|
|||||||
Land
use right
|
$
|
669,000
|
$
|
605,000
|
||||
Less:
Accumulated amortization
|
112,000
|
91,000
|
||||||
Land
use right, net
|
$
|
557,000
|
$
|
514,000
|
Amortization
expense was $8,000 for the three months ended September 30,
2009. Amortization expense was $21,000 for the nine months ended
September 30, 2009. The amortization for the next five years will
be: 2010 - $38,000; 2011 - $38,000; 2012 - $33,000; 2013 - $30,000;
and 2014 - $20,000.
NOTE 4 — INTANGIBLE
ASSETS
License to
Grass
As more
fully explained in Note 9, the Company and Parent Company acquired IPA China and
IPA BVI on October 21, 2008. IPA China has a worldwide license to
cultivate and sell a fast-growing high yield hybrid grass called Giant King
Grass that has the potential to be used in the production of nonfood biofuels
and, in the more immediate term, animal feedstock for dairy cows, pigs, sheep,
goats, fish and other animals. The Parent Company issued 30,576,007
shares to the licensor of the Giant King Grass valued at $507,000 on the date of
acquisition. The grass license is being amortized over an estimated
useful life of 20 years. In 2009, $23,000 was recorded as
amortization expense. The amortization expense for the next
five years will be $25,000 in each year.
84
License to Grass is composed of the following at September 30, 2009 (unaudited) and December 31, 2008:
2009
|
2008
|
|||||||
License
to Grass
|
$
|
507,000
|
$
|
507,000
|
||||
Less:
Accumulated amortization
|
|
29,000
|
4,000
|
|||||
License
to Grass, net
|
$
|
484,000
|
$
|
503,000
|
Goodwill
As more
fully explained in Note 9, the Company and Parent Company acquired IPA China and
IPA BVI on October 21, 2008 and recorded goodwill of $12,322,000 related to the
acquisition.
NOTE
5 — RELATED PARTIES
Included
in the Company’s consolidated balance sheet at September 30, 2009 are Related
Party Receivables. The Related Party Receivables represents amounts
due to IPA BVI from Sung Hsien Chang, President of VGE and CEO of IPA China and
IPA BVI, and from JJ International, a company owned by Sung Hsien Chang that
operates separately. IPA China recorded revenues of $233,000 for the
nine months ended September 30, 2009 from JJ. An employee of IPA
China owes $204,000 to VGE at September 30, 2009.
The
following table represents a summary of Related Party Receivables at September
30, 2009 (unaudited) and December 31, 2008:
2009
|
2008
|
|||||||
Due
from Sung Chang
|
$
|
1,009,000
|
$
|
209,000
|
||||
Due
from JJ International
|
706,000
|
657,000
|
||||||
Due
from employee of IPA China
|
204,000
|
―
|
||||||
Total
|
$
|
1,919,000
|
$
|
866,000
|
IPA China
owes $19,000 to an employee of IPA China at September 30, 2009 which is shown as
a Related Party Payable in the accompanying consolidated balance
sheets. In addition, the Company owes $25,000 to its Parent Company
at September 30, 2009 related to expenses paid by Parent Company on behalf of
the Company.
Employment
Agreements
On
October 21, 2008, VGE entered into two-year employment agreements with each of
Dr. Carl Kukkonen, Mr. Sung Chang, Mr. Stephen Muzi and Mr. Maclean
Wang. Dr. Kukkonen would serve as Chief Executive Officer, Mr. Chang
as President, Mr. Muzi as Chief Financial Officer, Treasurer and Secretary and
Mr. Wang as Managing Director of Grass Development. Dr. Kukkonen and
Mr. Chang would receive a salary of $240,000 per annum, Mr. Muzi receives
$180,000 per annum and Mr. Wang receives $84,000 per annum. Each of
them is entitled to a bonus as determined by the VGE Board of Directors,
customary insurance and health benefits, 15 days paid leave per year, and
reimbursement for out-of-pocket expenses in the course of his
employment. These employment agreements are terminated if the Company
fails to achieve the Second Closing of IPA BVI and IPA China as discussed in
Note 9.
NOTE
6 — INCOME TAXES
IPA China
is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 25% in
2009 on income reported in the statutory financial statements after appropriated
tax adjustments. VGE and IPA BVI are British Virgin Islands
international companies and not subject to United States income
taxes.
NOTE
7 — COMMITMENTS AND CONTINGENCIES
Operations in the
PRC
IPA
China’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
85
IPA art
designers work with buyers from retail chains to choose prints and other art
forms from catalogs of licensed work. We only purchase prints from companies
with whom we have long-standing relationships, and we guarantee our customers
there are no counterfeits and that all royalties have been paid. The
vendors from whom we purchase prints guarantee to us that all of the prints they
are selling are not counterfeits and that all royalties have been paid to the
artist of the prints. We then pass this guarantee on to our
customers. Since the time IPA was formed in 2003, we have not
received any legal claims challenging any of the prints we have
sold.
Employment
Agreements
VGE
entered into four separate two-year employment agreements with each of Carl
Kukkonen, Sung Chang, Stephen Muzi and Maclean Wang. Kukkonen would
serve as Chief Executive Officer, Chang as President, Muzi as Chief Financial
Officer and Wang as Managing Director of Grass Development of IPA
China. Kukkonen and Chang would receive a salary of $240,000 per
annum, Muzi receives $180,000 per annum and Wang receives $84,000 per
annum. Each of them is entitled to a bonus as determined by the VGE
Board of Directors, customary insurance and health benefits, 15 days paid leave
per year, and reimbursement for out-of-pocket expenses in the course of his
employment.
Under
Chang’s employment agreement, VGE will grant him an option to purchase the
number shares of its common stock equal to four percent (4%) of VGE’s total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The options vest
over 24 months beginning on the date of the Employment Agreement, with 1/24 of
the option shares vesting on the first day of each month that Chang is employed
with VGE. There was no stock compensation recorded during 2009 since
the options are not granted unless the Second Closing occurs as discussed in
Note 9.
Under
Wang’s employment agreement, VGE will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of VGE’s total outstanding
shares as of the Second Closing Date. The purchase price of the
option shares shall be eighty percent (80%) of the fair market value of such
common stock as of the Second Closing Date. The options vest over 24
months beginning on the date of the Employment Agreement, with 1/24 of the
option shares vesting on the first day of each month that Wang is employed with
VGE. There was no stock compensation recorded during 2009 since the options are
not granted unless the Second Closing occurs as discussed in Note
9.
As
discussed in Note 9, the Second Closing date was extended until November 21,
2009, based on an amendment to the Securities Purchase Agreement on August 21,
2009. We do not know exactly what the fair market value of VGE common
stock will be on November 21, 2009, but we have determined a Proposed Maximum
Offering Price Per Unit of $3.00 per share in a recent Form S-1 filing for each
share of common stock. 8% of outstanding common shares will be issued
to Mr. Chang and Mr. Wang (4% of total outstanding shares to Mr. Chang and Mr.
Wang) which translates to 688,000 common shares. Assuming $3.00 per
share common stock price on November 21, 2009, this would result in the Company
issuing these stock incentive options at a per share price of $2.40 per share
(20% discount), resulting in stock compensation expense of approximately
$412,800 to be amortized over 24 months which is the stock option vesting
period, or $17,200 per month.
In the
event that the Second Closing does not occur, then each Employment Agreement
shall automatically terminate.
These
commitments are summarized as follow, at September 30, 2009 by
year:
2010
|
$
|
744,000
|
||
2011
|
62,000
|
|||
$
|
806,000
|
Litigation
The
Company is not party to any legal proceedings at the present time.
NOTE
8 — FINANCIAL ACCOUNTING DEVELOPMENTS
In April
2009, the Financial Accounting Standards Board (“FASB”) issued FSP
No. SFAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (“FSP No. SFAS 157-4”). FSP
No. SFAS 157-4, which is codified in FASB ASC Topics 820-10-35-51 and
820-10-50-2, provides additional guidance for estimating fair value and
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
The Company adopted FSP No. SFAS 157-4 beginning April 1, 2009.
This FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
86
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments,” which is
codified in FASB ASC Topic 320-10. This FSP modifies the requirements for
recognizing other-than-temporarily impaired debt securities and changes the
existing impairment model for such securities. The FSP also requires additional
disclosures for both annual and interim periods with respect to both debt and
equity securities. Under the FSP, impairment of debt securities will be
considered other-than-temporary if an entity (1) intends to sell the
security, (2) more likely than not will be required to sell the security
before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The FSP further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary,
(1) the entire shortfall of the security’s fair value versus its amortized
cost basis or (2) only the credit loss portion would be recognized in
earnings while the remaining shortfall (if any) would be recorded in other
comprehensive income. This FSP requires entities to initially apply the
provisions of the standard to previously other-than-temporarily impaired debt
securities existing as of the date of initial adoption by making a
cumulative-effect adjustment to the opening balance of retained earnings in the
period of adoption. The cumulative-effect adjustment potentially reclassifies
the noncredit portion of a previously other-than-temporarily impaired debt
security held as of the date of initial adoption from retained earnings to
accumulated other comprehensive income. The Company adopted FSP
No. SFAS 115-2 and SFAS 124-2 beginning April 1, 2009. This
FSP had no material impact on the Company’s financial position, results of
operations or cash flows.
In
April 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” which is codified in
FASB ASC Topic 825-10-50. This FSP essentially expands the disclosure
about fair value of financial instruments that were previously required only
annually to also be required for interim period reporting. In addition, the FSP
requires certain additional disclosures regarding the methods and significant
assumptions used to estimate the fair value of financial instruments. These
additional disclosures are required beginning with the quarter ending
June 30, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events,” codified in FASB ASC
Topic 855-10-05, which provides guidance to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
No. 165 also requires entities to disclose the date through which subsequent
events were evaluated as well as the rationale for why that date was selected.
SFAS No. 165 is effective for interim and annual periods ending after June 15,
2009, and accordingly, the Company adopted this pronouncement during the second
quarter of 2009. SFAS No. 165 requires that public entities evaluate subsequent
events through the date that the financial statements are issued. The Company
has evaluated subsequent events through the time of filing these financial
statements with the SEC on November 9, 2009.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140,” codified as FASB ASC
Topic 860, which requires entities to provide more information regarding sales
of securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. SFAS No. 166 eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets and
requires additional disclosures. SFAS No. 166 is effective for fiscal years
beginning after November 15, 2009. The Company does not believe the adoption of
SFAS No. 166 will have an impact on its financial condition, results of
operations or cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” codified as FASB ASC Topic 810-10, which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS No.
167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance. SFAS No. 167 requires an
ongoing reassessment of whether a company is the primary beneficiary of a
variable interest entity. SFAS No. 167 also requires additional disclosures
about a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. SFAS No. 167 is effective for
fiscal years beginning after November 15, 2009. The Company does not believe the
adoption of SFAS No. 167 will have an impact on its financial condition, results
of operations or cash flows.
NOTE 9— ACQUISITION OF IPA BVI AND
IPA CHINA
On
October 21, 2008, VIASPACE and VGE entered into a Securities Purchase Agreement
(the "Purchase Agreement") with Sung Hsien Chang (“Chang”) and China Gate
Technology Co., Ltd., a Brunei Darussalam company ("Licensor"). Under
the Purchase Agreement, we agreed to acquire 100% of IPA BVI and the entire
equity interest of IPA China from Chang, the sole shareholder of IPA BVI and IPA
China. In exchange, VIASPACE agreed to pay approximately $15.282
million in a combination of cash, and newly-issued shares of VIASPACE and VGE
stock. In addition, VIASPACE issued shares of its common stock to
Licensor for Licensor’s sublicense of certain fast growing grass technology to
IPA China.
The
acquisition will be completed through two closings. At the first
closing on October 21, 2008 (“First Closing”), VGE issued 3,500,000 newly-issued
shares to Chang and his designees and 5,090,000 newly-issued shares to
VIASPACE. VIASPACE issued 215,384,615 shares of its common stock to
Chang and 30,576,007 shares of common stock to Licensor. Chang
delivered 70% of the outstanding common stock of IPA BVI. On June 22,
2009, the parties entered into an Amendment to the Purchase Agreement that
extended the Second Closing to August 21, 2009.
87
On August
21, 2009, the parties entered into a second Amendment to the Purchase Agreement
that the VGE shares held by Chang and others were no longer subject to
forfeiture even if the Second Closing did not occur. This amendment
also extended the Second Closing to November 21, 2009. The Second
Closing is scheduled for November 21, 2009, and VIASPACE is to pay $4,800,000
plus interest to Chang. Interest on the Cash Consideration shall
accrue at 6% for the first six months after the First Closing, and then 18%
until June 10, 2009, and then at an annual rate of 6%. There is a
loan of $4,800,000 on the balance sheet of VIASPACE. The interest
expense owed on this loan is due by VIASPACE and not VGE. VIASPACE
shall also issue 1.8% of its then outstanding shares of common stock to
Licensor. Chang shall deliver the remaining 30% of the outstanding
shares of IPA BVI to VGE even if the Second Closing did not
occur. Chang will also cause IPA China to be a wholly-owned
subsidiary of IPA BVI including obtaining all governmental approvals required
for such transfer.
VIASPACE
and VGE’s obligations to consummate the Second Closing is conditioned upon,
among other things, the transfer of the equity of IPA China from Chang to IPA
BVI and the execution of the assignment of the right to grow and harvest
fast-growing proprietary grasses from Licensor to IPA China.
Also,
pursuant to the second Amendment, VIASPACE irrevocably assigned to Chang and
Licensor the VIASPACE shares issued to Chang and Licensor in the First Closing
of the Purchase Agreement. Licensor agreed to limit sales of VIASPACE
common shares issued at the First Closing to a maximum of 8,800,000 shares in
any 90-day period.
In the
event that the Second Closing fails to occur, neither VIASPACE or its
affiliates, or any of their directors or officers, shall engage in the grass
business in China for a period of three years after the First Closing
Date.
On
October 13, 2009 the parties to the Purchase Agreement entered into the third
Amendment to the Purchase Agreement in which the parties agreed that in the
event that the Second Closing fails to occur and VIASPACE’s closing conditions
to the Second Closing have been satisfied by Chang, then (1) Chang and his
designees shall retain the 3,500,000 VGE shares issued at the First Closing, (2)
VIASPACE shall transfer all shares of VGE common stock it holds to Chang, (3)
Chang will deliver the remaining 30% equity interest of IPA BVI to VGE, such
that VGE shall receive all equity securities of IPA BVI, and (4) if VGE’s common
stock is not listed on a Trading Market as of the Second Closing Deadline, Chang
shall also receive such number of shares of VIASPACE common stock so that Chang
shall own a majority of the outstanding shares of VIASPACE common stock as of
the date of issuance. In addition, the parties clarified that the
three year non-competition clause to engage in the grass business starting from
the date of the First Closing does not apply to VGE and Messrs. Kukkonen and
Muzi, but only to VIASPACE and its other affiliates. Further, we
deleted the obligation of Licensor to assign the grass license to
VGE.
As of the
First Closing, Chang warrants that IPA BVI and IPA China’s cash equivalents
(which includes all cash plus accounts receivables less accounts payable) will
be $3 million. Any difference between $3 million and the actual cash
equivalents on the financial records of IPA BVI and IPA China as of the First
Closing is a Cash Shortfall. Chang agreed to deposit the Cash
Shortfall into IPA BVI’s bank account once the amount is
determined. In December 2008, Chang deposited $1,580,000 in the bank
account of IPA BVI related to this Cash Shortfall.
As
required by the Purchase Agreement, VGE filed a Form S-1 Registration Statement
with the SEC on June 3, 2009 covering the resale of all or such maximum portion
of VGE common stock issued pursuant to the Purchase Agreement as permitted by
SEC regulations. The second Amendment extends until November 21,
2009, the date that VGE shall use its best efforts to qualify its Common Stock
for quotation on a trading market. If VGE’s Registration Statement is
declared effective by the SEC on or before November 21, 2009, the Second Closing
Deadline will be extended until December 21, 2009.
Provided
that the Second Closing has occurred, if VGE common stock is not listed on a
trading market by the Second Closing deadline, then VIASPACE will issue to Chang
the number of shares of its common stock equivalent to $5,600,000. The stock
price will be calculated as the average closing price of VIASPACE’s common stock
during the 60 day period prior to and including the Second Closing
Date.
Licensor
and Chang each represents and covenants that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement
regarding such land use rights shall grant the land use rights to IPA China, but
shall be assignable to VGE at VGE’s option. The term of such
agreement, including possible renewals, shall be at least 10 years.
The value
paid by VIASPACE and VGE for the acquisition was $15,832,000 composed
of: fair market value of VIASPACE stock issued for assets acquired -
$4,589,000; VIASPACE loan to Mr. Sung Chang - $4,800,000; and VIASPACE minority
interest in VGE - $6,443,000. The net assets acquired totaled
$3,003,000. The excess of value paid for the acquisition in excess of
net assets acquired was assigned to: grass license - $507,000 and
goodwill - $12,322,000 which are recorded on the balance sheet of
VIASPACE.
88
The
acquisition of IPA occurred on October 21, 2008. The following table
reflects the Company’s consolidated unaudited results of operations for the
three and nine months ended September 30, 2008, as if the acquisition occurred
on January 1, 2008:
For
the Three
Months Ended
September
30, 2008
(unaudited)
|
For
the Nine
Months Ended
September
30, 2008
(unaudited)
|
|||||||
Revenues
– as reported
|
$
|
―
|
$
|
―
|
||||
Revenues
– pro forma
|
$
|
1,964,000
|
$
|
5,066,000
|
||||
Net
Income – as reported
|
$
|
―
|
$
|
―
|
||||
Net
Income – pro forma
|
$
|
241,000
|
$
|
999,000
|
89
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
TABLE
OF CONTENTS
PAGE
|
|
COMBINED
FINANCIAL STATEMENTS:
|
|
Combined
Balance Sheets as of September 30, 2008 (Unaudited) and December 31,
2007
|
91
|
Combined
Statements of Operations for the Nine Months Ended September 30, 2008 and
2007 (Unaudited)
|
92
|
Combined
Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
2007 (Unaudited)
|
93
|
Notes
to Combined Financial Statements (Unaudited)
|
94
|
90
INTER-PACIFIC ARTS CORP. AND AFFILIATE
COMBINED
BALANCE SHEETS
|
September 30,
2008
(Unaudited)
|
December 31,
2007
|
||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash
equivalents
|
$ | 578,000 | $ | 149,000 | ||||
Accounts
receivable, net of allowance for doubtful accounts of zero in 2008 and
2007
|
579,000 | 147,000 | ||||||
Inventory
|
776,000 | 215,000 | ||||||
Prepaid
expenses
|
48,000 | ― | ||||||
Related
party receivable
|
655,000 | 504,000 | ||||||
Other
current assets
|
26,000 | 55,000 | ||||||
TOTAL
CURRENT ASSETS
|
2,662,000 | 1,070,000 | ||||||
FIXED
ASSETS, net of accumulated depreciation
|
748,000 | 670,000 | ||||||
LAND
USE RIGHT, net of accumulated amortization
|
519,000 | 534,000 | ||||||
TOTAL
ASSETS
|
$ | 3,929,000 | $ | 2,274,000 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 709,000 | $ | 338,000 | ||||
Related
party payable
|
265,000 | ― | ||||||
Accrued
expenses
|
57,000 | 52,000 | ||||||
TOTAL
CURRENT LIABILITIES
|
1,031,000 | 390,000 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY:
|
||||||||
Common
stock, $1.00 par value, 50,000 shares authorized, 50,000 issued and
outstanding in 2008 and 2007, respectively
|
50,000 | 50,000 | ||||||
Additional
paid in capital
|
1,397,000 | 1,397,000 | ||||||
Accumulated
other comprehensive income
|
42,000 | 28,000 | ||||||
Retained
earnings
|
1,409,000 | 409,000 | ||||||
Total
stockholders’ equity
|
2,898,000 | 1,884,000 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 3,929,000 | $ | 2,274,000 |
See
accompanying notes to combined financial statements.
91
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
COMBINED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(Unaudited)
|
For the Nine Months Ended
September 30,
|
|||||||
|
2008
|
2007
|
||||||
REVENUES
|
$ | 5,066,000 | $ | 4,435,000 | ||||
COST
OF REVENUES
|
3,264,000 | 2,567,000 | ||||||
GROSS
PROFIT
|
1,802,000 | 1,868,000 | ||||||
OPERATING
EXPENSES
|
||||||||
Selling,
general and administrative expenses
|
799,000 | 695,000 | ||||||
Total
operating expenses
|
799,000 | 695,000 | ||||||
INCOME
FROM OPERATIONS
|
1,003,000 | 1,173,000 | ||||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
― | 1,000 | ||||||
Interest
expense
|
(2,000 | ) | (1,000 | ) | ||||
Total
other expense
|
(2,000 | ) | ― | |||||
INCOME
BEFORE INCOME TAXES
|
1,001,000 | 1,173,000 | ||||||
Income
taxes
|
2,000 | 2,000 | ||||||
NET
INCOME
|
999,000 | 1,171,000 | ||||||
OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||
Foreign
currency translation income (loss)
|
14,000 | (5,000 | ) | |||||
COMPREHENSIVE
INCOME
|
$ | 1,013,000 | $ | 1,166,000 |
See
accompanying notes to combined financial statements.
92
INTER-PACIFIC ARTS CORP. AND AFFILIATE
COMBINED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
For the Nine Months Ended
September 30,
|
|||||||
|
2008
|
2007
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 999,000 | $ | 1,171,000 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
76,000 | 62,000 | ||||||
(Increase)
decrease in:
|
||||||||
Accounts
receivable
|
(417,000 | ) | 27,000 | |||||
Inventory
|
(557,000 | ) | 164,000 | |||||
Related
party receivable
|
(151,000 | ) | (71,000 | ) | ||||
Prepaid
expenses and other current assets
|
(27,000 | ) | (449,000 | ) | ||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
348,000 | (167,000 | ) | |||||
Related
party payable
|
251,000 | 725,000 | ||||||
Accrued
expenses
|
4,000 | 174,000 | ||||||
Net
cash provided by operating activities
|
526,000 | 1,636,000 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to fixed assets
|
(97,000 | ) | (1,000 | ) | ||||
Net
cash used in investing activities
|
(97,000 | ) | (1,000 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Payments
of dividends
|
― | (991,000 | ) | |||||
Net
cash used in financing activities
|
― | (991,000 | ) | |||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
― | (6,000 | ) | |||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
429,000 | 638,000 | ||||||
CASH
AND CASH EQUIVALENTS, Beginning of period
|
149,000 | 279,000 | ||||||
CASH
AND CASH EQUIVALENTS, End of period
|
$ | 578,000 | $ | 917,000 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | — | $ | — | ||||
Income
taxes
|
$ | 2,000 | $ | 2,000 |
See
accompanying notes to combined financial statements.
93
INTER-PACIFIC ARTS CORP. AND AFFILIATE
NOTES
TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
(Unaudited)
Note
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of
Business - Inter-Pacific Arts Corp. (“IPA BVI”), a British Virgin Islands
international company formed in 2003, and Guangzhou Inter-Pacific Arts Corp.
(“IPA China”), (collectively, “the Company”, “we” or “us” ) specialize in
manufacturing and selling high quality, copyrighted, framed artwork to retail
stores. The Company manufactures its artwork in the People’s Republic
of China (“PRC’) and sells its product within China and
worldwide. The Company also has a license to cultivate Giant King
Grass – a natural hybrid non-genetically modified perennial livestock feed as
well as a feedstock for biofuel production.
Basis of
Presentation - The accompanying combined financial statements of the
Company have been prepared in accordance with United States generally accepted
accounting principles (“GAAP”) for financial information. 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 in combination. Certain reclassifications have
been made to the September 30, 2007 combined financial statements in order to
conform to the September 30, 2008 combined financial statement
presentation.
Principles of
Combination - IPA China, a Chinese wholly owned foreign enterprise
registered in Guangdong province of the PRC, is an affiliated company in which
the Company’s sole shareholder owns a 100% controlling voting interest, and is
accounted for in a manner similar to the pooling of interest method of
accounting. Under this method, financial statements of entities under
common control are combined for all periods presented. Transactions between IPA
BVI and IPA China are eliminated in combination.
Fiscal Year End -
The Company’s fiscal year ends December 31.
Use of Estimates
in the Preparation of the Financial Statements - The preparation of
financial statements, in conformity with United States GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash
Equivalents - The Company considers all highly liquid debt instruments,
purchased with an original maturity of three months or less, to be cash
equivalents.
Concentration of
Credit Risk -
The Company’s financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents, accounts receivable and
related party receivable. The Company maintains all of its cash accounts with
high credit quality institutions. Such balances with any one institution may
exceed FDIC insured limits.
Accounts
Receivable Allowance for Doubtful Accounts - The allowance for doubtful
accounts relates to specifically identified receivables that are evaluated
individually for collectability. We determine a receivable is
uncollectible when, based on current information and events, it is probable that
we will be unable to collect amounts due according to the original contractual
terms of the receivable agreement, without regard to any subsequent
restructurings. Factors considered in assessing collectability include, but are
not limited to, a customer’s extended delinquency, requests for restructuring
and filings for bankruptcy. There is one customer of the Company that
accounts for 81% and 71% of the Company’s revenues for the nine months ended
September 30, 2008 and 2007, respectively.
Inventory
– Inventory is
stated at the lower of cost or market. Cost is determined using the
average cost method. Market is determined using net realizable
value. The Company writes down its inventory for estimated
obsolescence, excess quantities and other factors in evaluating net realizable
value. All inventory on the balance sheet as of December 31, 2007 and
2006 is raw materials.
Property and
Equipment - Property and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property
and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property and
equipment is provided using the straight-line method for substantially all
assets and estimated lives ranging from 5 to 30 years as follows:
Building
|
20
to 30 years
|
||
Machinery
and equipment
|
10
years
|
||
Office
equipment
|
5
years
|
||
Vehicles
|
5
years
|
94
Land Use Right
– All land in the PRC is government owned and cannot be sold to any
individual or company. IPA China acquired land use right for the land
occupied by its manufacturing facility during 2005 for RMB 5,000,000 or
approximately $605,000. The land lease contract is for a period of 30
years. Accordingly, the land use right is being amortized on the
straight-line method over a period of 30 years.
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.
Income
Taxes– The
Company utilizes Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
statutory corporate income tax rate for foreign enterprises in the PRC is 24%
for 2007 and 2006. For the years ending December 31, 2006, 2007 and
2008, respectively, IPA China was eligible for a reduced income tax at 50% of
the normal income tax rate. Beginning January 1, 2009, IPA China will
be subjected to the normal income tax rate.
IPA BVI
is a British Virgin Islands international company and not subject to any United
States income taxes.
The
Company does not have any deferred tax assets or liabilities recorded for the
periods covered by the accompanying financial statements.
Cost of Goods
Sold – Cost of goods sold consists primarily of material costs, employee
compensation, depreciation and related expenses, which are directly attributable
to the production of products. Any write-down of inventory to lower of
cost or market is also recorded in cost of goods sold.
Foreign Currency
Translation and Comprehensive Income (Loss) – IPA China’s functional
currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive
income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date. The sales of IPA are in USD.
Segment
Reporting and Geographic
Information – SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company's
management organizes segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company. At September 30, 2008
and 2007 and for the nine months then ended, all of the Company's operations are
conducted in one industry segment, the Consumer Products segment which
specializes in manufacturing and selling high-quality, copyrighted, framed
artwork to retail stores. In the future, the Company expects to incur
revenue and expenses in a Grass segment, through its growing, harvesting and
selling of its Giant King Grass as a livestock feed as well as a feedstock for
biofuel production. From a geographic standpoint, all of the
Company’s revenues for the nine months ended September 30, 2008 and 2007 are to
customers in the United States. All identifiable assets at September
30, 2008 and December 31, 2007 are in the Asia/Pacific region.
95
NOTE 2 — FIXED ASSETS
Fixed
assets are comprised of the following at September 30, 2008 and December 31,
2007, respectively:
|
September 30,
2008
(Unaudited)
|
December 31,
2007
|
||||||
Building
|
$ | 585,000 | $ | 585,000 | ||||
Machinery
and equipment
|
179,000 | 179,000 | ||||||
Office
equipment
|
69,000 | 69,000 | ||||||
Vehicles
|
180,000 | 41,000 | ||||||
Total
property and equipment
|
1,013,000 | 874,000 | ||||||
Less:
Accumulated depreciation
|
265,000 | 204,000 | ||||||
Fixed
assets, net
|
$ | 748,000 | $ | 670,000 |
Depreciation
expense was $61,000 and $47,000 for the nine months ended September 30, 2008 and
2007, respectively.
NOTE 3 — LAND USE
RIGHT
Land use
right is composed of the following at September 30, 2008 and December 31, 2007,
respectively:
|
September 30, 2008
(Unaudited)
|
December 31,
2007
|
||||||
Land
use right
|
$ | 605,000 | $ | 605,000 | ||||
Less:
Accumulated amortization
|
86,000 | 71,000 | ||||||
Land
use right, net
|
$ | 519,000 | $ | 534,000 |
Amortization
expense was $15,000 for each of the nine months ended September 30, 2008 and
2007, respectively. The amortization expense for the next five years
will be $20,000 in each year.
NOTE 4 — RELATED PARTIES
Included
in the Company’s Combined Balance Sheets at September 30, 2008 and December 31,
2007, respectively, are Related Party Receivables and Related Party
Payables. The Related Party Receivables represents amounts due to IPA
BVI from Sung Chang, the Company’s owner and from JJ International, a company
owned by Sung Chang that operates separately. The Related Party
Payable represents amounts due to Sung Chang by IPA China.
96
The
following table represents a summary of Related Party Receivables at September
30, 2008 and December 31, 2007, respectively:
|
September 30, 2008
(Unaudited)
|
December 31,
2007
|
||||||
Due
from Sung Chang
|
$ | ― | $ | 92,000 | ||||
Due
from JJ International
|
655,000 | 412,000 | ||||||
Total
|
$ | 655,000 | $ | 504,000 |
The
following table represents a summary of Related Party Payables at September 30,
2008 and December 31, 2007, respectively.
|
September 30, 2008
(Unaudited)
|
December 31,
2007
|
||||||
Due
to Sung Chang
|
$ | 265,000 | $ | ― |
IPA China
performs manufacturing services in the PRC for JJ
International. During the nine months ended September 30, 2008 and
2007, respectively, IPA China recorded revenues of $337,000 and $446,000,
respectively to JJ International which amounts are included in the Combined
Statement of Operations presented.
Note 5 — COMMITMENTS AND CONTINGENCIES
IPA
China’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
The Company is not party to any legal proceedings at the present time.
Note
6 — FINANCIAL ACCOUNTING DEVELOPMENTS
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination
of the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact of SFAS
FSP 142-3, but does not expect the adoption of this pronouncement will have a
material impact on its financial position, results of operations or cash
flows.
97
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States (the “GAAP hierarchy”). SFAS 162 will not have
an impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on the
Company’s financial statements.
Note
7 — SUBSEQUENTS EVENTS
On
October 21, 2008, the majority shareholder of IPA BVI and IPA China, Sung Hsien
Chang, entered into a Securities Purchase Agreement (the "Purchase Agreement")
with VIASPACE Green Energy Inc. (“VGE”), a wholly-owned subsidiary of VIASPACE
Inc. (“VIASPACE”) and China Gate Technology Co., Ltd., a Brunei Darussalam
company ("Licensor"). Under the Purchase Agreement, VGE acquired 100%
of IPA and the entire equity interest of IPA China from Chang. In
exchange, VIASPACE agreed to pay approximately $16 million in a combination of
cash, and newly-issued shares of VIASPACE and VGE stock. In addition,
VIASPACE issued shares of its common stock to Licensor for Licensor’s license of
certain fast growing grass technology to IPA China.
The
acquisition will be completed through two closings. At the first
closing which took place on October 21, 2008 (“First Closing”), VGE issued
3,500,000 newly-issued shares to Chang and his designees. VIASPACE
issued 215,384,615 shares of its common stock to Chang and 30,576,007 shares of
common stock to Licensor. Chang delivered 70% of the outstanding
common stock of IPA BVI. The second closing will be held within 240
days after the first closing ("Second Closing"). At the Second
Closing, VIASPACE shall pay $4.8 million plus interest to
Chang. Interest on the Cash Consideration shall accrue at 6% for the
first six months after the First Closing, and then 18%
thereafter. VIASPACE shall also issue 1.8% of its then outstanding
shares of common stock to Licensor. Chang shall deliver the remaining
30% of the outstanding shares of IPA BVI to VGE. Chang will also
cause IPA China to be a wholly-owned subsidiary of IPA BVI including obtaining
all governmental approvals required for such transfer.
VIASPACE
and VGE’s obligations to consummate the Second Closing is conditioned upon,
among other things, the transfer of the equity of IPA China from Chang to IPA
BVI and the execution of the assignment of the right to grow and harvest
fast-growing proprietary grasses from Quanzhou Keyi Husbandry Breeding and
Planting Co. from Licensor to IPA China.
VGE
entered into four separate two-year employment agreements with each of Carl
Kukkonen, Sung Chang, Stephen Muzi and Maclean Wang. Kukkonen would
serve as Chief executive Officer, Chang as President, Muzi as Chief Financial
Officer and Wang as Managing Director of Grass Development of IPA
China. Kukkonen and Chang would receive a salary of $240,000 per
annum, Muzi receives $180,000 per annum and Wang receives $84,000 per
annum. Each of them are entitled to a bonus as determined by the VGE
Board of Directors, customary insurance and health benefits, 15 days paid leave
per year, and reimbursement for out-of-pocket expenses in the course of his
employment.
Under
Chang’s employment agreement, VGE will grant him an option to purchase the
number shares of its common stock equal to four percent (4%) of VGE’s total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The option shall
vest over a period of 24 months beginning on the date of the Employment
Agreement, with 1/24 of the option shares vesting on the first day of each month
that Chang is employed with VGE.
98
Under
Wang’s employment agreement, VGE will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of VGE’s total outstanding
shares as of the Second Closing Date. The purchase price of the
option shares shall be eighty percent (80%) of the fair market value of such
common stock as of the Second Closing Date. The option shall vest
over a period of 24 months beginning on the date of the Employment Agreement,
with 1/24 of the option shares vesting on the first day of each month that Wang
is employed with VGE.
In the
event that the Second Closing does not occur within 240 days after the First
Closing, the Purchase Agreement and each Employment Agreement shall
automatically terminate and all stock certificates delivered at First Closing
shall be returned.
If the
Second Closing does not occur within 240 days although most of VIASPACE’s
closing conditions have been satisfied, then Chang may receive additional VGE
shares or retain VIASPACE shares as follows: if the VGE stock is listed on a
trading market, then VIASPACE shall transfer to Chang all the VGE
shares. If the VGE stock is not listed on a trading market, then
Chang shall retain the VIASPACE shares instead of returning them to the
Company.
In the
event that the Second Closing fails to occur, neither VIASPACE or its
affiliates, or any of their directors or officers, shall engage in the grass
business in China for a period of three years after the First Closing
Date.
During
the 75 day period after the First Closing, VGE shall engage an independent
auditor acceptable to Chang to perform an audit of the financial records of IPA
BVI and IPA China in accordance with federal securities laws. As of
the First Closing, Chang warrants that IPA BVI and IPA China’s cash equivalents
(which includes all cash plus accounts receivables less accounts payable) will
be $3.0 million. Any difference between $3.0 million and the actual
cash equivalents on the financial records of IPA BVI and IPA China as of the
First Closing is a Cash Shortfall. Chang agrees to deposit the Cash
Shortfall into IPA BVI’s bank account once the amount is
determined.
Within
150 days of the First Closing, VGE shall prepare and file with the Securities
and Exchange Commission ("SEC") a registration statement covering the resale of
all or such maximum portion of VGE common stock issued pursuant to the Purchase
Agreement as permitted by SEC regulations ("Registration Statement") that are
not then registered on an effective Registration Statement for an offering to be
made on a continuous basis pursuant to Rule 415. Alternatively, VGE
shall register its common stock on a registration statement on Form
10. VGE shall use its best efforts to qualify its Common Stock for
quotation on a trading market as soon as practicable, but in no event later than
the 240th day after the closing of this Agreement or the 90th day after the
effectiveness of the Registration Statement on Form S-1 registering some or all
of VGE Common Stock or on Form 10.
Provided
that the Second Closing has occurred, if VGE common stock is not listed on a
trading market within 240 days after the First Closing, then VIASPACE will issue
to Chang the number of shares of its common stock equivalent to $5,600,000. The
stock price will be calculated as the average closing price of VIASPACE’s common
stock during the 60 day period prior to and including the Second Closing
Date. In exchange, Chang shall return all shares of VGE common stock
it received pursuant to the Purchase Agreement to the Company
Licensor
and Chang each represents and covenants that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement
regarding such land use rights shall grant the land use rights to IPA China, but
shall be assignable to VGE at VGE’s option. The term of such
agreement, including possible renewals, shall be at least 10 years.
99
INTER-PACIFIC
ARTS CORP.
TABLE
OF CONTENTS
PAGE
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
101
|
COMBINED
FINANCIAL STATEMENTS:
|
|
Combined
Balance Sheets as of December 31, 2007 and 2006
|
102
|
Combined
Statements of Operations for the Years Ended December 31, 2007 and
2006
|
103
|
Combined
Statements of Stockholders’ Equity as of December 31, 2007 and
2006
|
104
|
Combined
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
|
105
|
Notes
to Combined Financial Statements
|
106
|
100
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Inter-Pacific
Arts Corp.
We have
audited the accompanying combined balance sheets of Inter-Pacific Arts Corp. and
Affiliate as of
December 31, 2007 and 2006, and the related combined statements of operations
and other comprehensive income, stockholders' equity, and cash flows for the
years ended December 31, 2007 and 2006. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the combined financial statements referred to above present fairly, in
all material respects, the financial position of Inter-Pacific Arts Corp. and
Affiliate as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for the years ended December 31, 2007 and 2006, in
conformity with U.S. generally accepted accounting principles.
Goldman
Parks Kurland Mohidin LLP
Encino,
California
January
2, 2009
101
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
COMBINED
BALANCE SHEETS
|
December 31,
|
December 31,
|
||||||
|
2007
|
2006
|
||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash
equivalents
|
$ | 149,000 | $ | 279,000 | ||||
Accounts
receivable, net of allowance for doubtful accounts of zero in 2007 and
2006
|
147,000 | 397,000 | ||||||
Inventory
|
215,000 | 362,000 | ||||||
Prepaid
expenses
|
― | 12,000 | ||||||
Related
party receivable
|
504,000 | 64,000 | ||||||
Other
current assets
|
55,000 | 9,000 | ||||||
TOTAL
CURRENT ASSETS
|
1,070,000 | 1,123,000 | ||||||
FIXED
ASSETS, net of accumulated depreciation
|
670,000 | 694,000 | ||||||
LAND
USE RIGHT, net of accumulated amortization
|
534,000 | 554,000 | ||||||
TOTAL
ASSETS
|
$ | 2,274,000 | $ | 2,371,000 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 338,000 | $ | 165,000 | ||||
Accrued
expenses
|
52,000 | 1,000 | ||||||
TOTAL
CURRENT LIABILITIES
|
390,000 | 166,000 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY:
|
||||||||
Common
stock, $1.00 par value, 50,000 shares authorized, 50,000 issued and
outstanding in 2007 and 2006, respectively
|
50,000 | 50,000 | ||||||
Additional
paid in capital
|
1,397,000 | 1,397,000 | ||||||
Accumulated
other comprehensive income
|
28,000 | 12,000 | ||||||
Retained
earnings
|
409,000 | 746,000 | ||||||
Total
stockholders’ equity
|
1,884,000 | 2,205,000 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 2,274,000 | $ | 2,371,000 |
See
accompanying notes to combined financial statements.
102
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
COMBINED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
|
Year Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
REVENUES
|
$ | 5,462,000 | $ | 3,171,000 | ||||
COST
OF REVENUES
|
3,339,000 | 1,873,000 | ||||||
GROSS
PROFIT
|
2,123,000 | 1,298,000 | ||||||
OPERATING
EXPENSES
|
||||||||
Selling,
general and administrative expenses
|
949,000 | 736,000 | ||||||
Total
operating expenses
|
949,000 | 736,000 | ||||||
INCOME
FROM OPERATIONS
|
1,174,000 | 562,000 | ||||||
OTHER
INCOME
|
||||||||
Interest
income
|
3,000 | 7,000 | ||||||
Other
income
|
1,000 | 1,000 | ||||||
Total
other income
|
4,000 | 8,000 | ||||||
INCOME
BEFORE INCOME TAXES
|
1,178,000 | 570,000 | ||||||
Income
taxes
|
11,000 | ― | ||||||
NET
INCOME
|
1,167,000 | 570,000 | ||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||
Foreign
currency translation income
|
16,000 | 12,000 | ||||||
COMPREHENSIVE
INCOME
|
$ | 1,183,000 | $ | 582,000 |
See
accompanying notes to combined financial statements.
103
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
COMBINED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Common Stock
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid in
Capital
|
Accumulated Other Comprehensive
Income
|
Retained
Earnings
|
Total
|
||||||||||||||||||
BALANCE,
DECEMBER 31, 2005
|
50,000 | $ | 50,000 | $ | 1,397,000 | $ | — | $ | 1,269,000 | $ | 2,716,000 | |||||||||||||
Net
income
|
570,000 | 570,000 | ||||||||||||||||||||||
Dividends
|
(1,093,000 | ) | (1,093,000 | ) | ||||||||||||||||||||
Foreign
currency translation gain (loss)
|
12,000 | 12,000 | ||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2006
|
50,000 | 50,000 | 1,397,000 | 12,000 | 746,000 | 2,205,000 | ||||||||||||||||||
Net
income
|
1,167,000 | 1,167,000 | ||||||||||||||||||||||
Dividends
|
(1,504,000 | ) | (1,504,000 | ) | ||||||||||||||||||||
Foreign
currency translation gain (loss)
|
16,000 | 16,000 | ||||||||||||||||||||||
BALANCE,
DECEMBER 31, 2007
|
50,000 | $ | 50,000 | $ | 1,397,000 | $ | 28,000 | $ | 409,000 | $ | 1,884,000 |
See
accompanying notes to combined financial statements.
104
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
COMBINED
STATEMENTS OF CASH FLOWS
|
Years Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 1,167,000 | $ | 570,000 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
86,000 | 74,000 | ||||||
(Increase)
decrease in:
|
||||||||
Accounts
receivable
|
256,000 | 295,000 | ||||||
Inventory
|
150,000 | (230,000 | ) | |||||
Related
party receivable
|
(440,000 | ) | (64,000 | ) | ||||
Prepaid
expenses and other current assets
|
(32,000 | ) | 34,000 | |||||
Increase
(decrease) in:
|
||||||||
Accounts
payable
|
162,000 | 164,000 | ||||||
Related
party payable
|
(11,000 | ) | (6,000 | ) | ||||
Accrued
expenses
|
51,000 | (213,000 | ) | |||||
Net
cash provided by operating activities
|
1,389,000 | 624,000 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Additions
to fixed assets
|
(4,000 | ) | (3,000 | ) | ||||
Net
cash provided used in investing activities
|
(4,000 | ) | (3,000 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Payments
of dividends
|
(1,504,000 | ) | (1,093,000 | ) | ||||
Net
cash used in financing activities
|
(1,504,000 | ) | (1,093,000 | ) | ||||
EFFECT
OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS
|
(11,000 | ) | (2,000 | ) | ||||
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(130,000 | ) | (474,000 | ) | ||||
CASH
AND CASH EQUIVALENTS, Beginning of period
|
279,000 | 753,000 | ||||||
CASH
AND CASH EQUIVALENTS, End of period
|
$ | 149,000 | $ | 279,000 | ||||
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | — | $ | — | ||||
Income
taxes
|
$ | 11,000 | $ | — |
See
accompanying notes to combined financial statements.
105
INTER-PACIFIC
ARTS CORP. AND AFFILIATE
NOTES
TO COMBINED FINANCIAL STATEMENTS
YEARS
ENDED DECEMBER 31, 2007 AND 2006
Note
1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of
Business - Inter-Pacific Arts Corp. (“IPA BVI”), a British Virgin Islands
international company formed in 2003, and Guangzhou Inter-Pacific Arts Corp.
(“IPA China”), (collectively, “the Company”, “we” or “us” ) specialize in
manufacturing and selling high quality, copyrighted, framed artwork to retail
stores. The Company manufactures its artwork in the People’s Republic
of China (“PRC’) and sells its product within China and
worldwide. The Company also has a license to cultivate Giant King
Grass – a natural hybrid non-genetically modified perennial livestock feed as
well as a feedstock for biofuel production.
Basis of
Presentation - The accompanying combined financial statements of the
Company have been prepared in accordance with United States generally accepted
accounting principles (“GAAP”) for financial information. 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 in combination. Certain reclassifications have
been made to the December 31, 2006 combined financial statements in order to
conform to the December 31, 2007 combined financial statement
presentation.
Principles of
Combination - IPA China, a Chinese wholly owned foreign enterprise
registered in Guangdong province of the PRC, is an affiliated company in which
the Company’s sole shareholder owns a 100% controlling voting interest, and is
accounted for in a manner similar to the pooling of interest method of
accounting. Under this method, financial statements of entities under
common control are combined for all periods presented. Transactions
between IPA BVI and IPA China are eliminated in combination.
Fiscal Year End -
The Company’s fiscal year ends December 31.
Use of Estimates
in the Preparation of the Financial Statements - The preparation of
financial statements, in conformity with United States GAAP, requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash
Equivalents - The Company considers all highly liquid debt instruments,
purchased with an original maturity of three months or less, to be cash
equivalents.
Concentration of
Credit Risk -
The Company’s financial instruments that are exposed to concentration of
credit risk consist primarily of cash equivalents, accounts receivable and
related party receivable. The Company maintains all of its cash accounts with
high credit quality institutions. Such balances with any one institution may
exceed FDIC insured limits.
Accounts
Receivable Allowance for Doubtful Accounts - The allowance for doubtful
accounts relates to specifically identified receivables that are evaluated
individually for collectability. We determine a receivable is
uncollectible when, based on current information and events, it is probable that
we will be unable to collect amounts due according to the original contractual
terms of the receivable agreement, without regard to any subsequent
restructurings. Factors considered in assessing collectability include, but are
not limited to, a customer’s extended delinquency, requests for restructuring
and filings for bankruptcy. There is one customer of the Company that
accounts for 73% and 57% of the Company’s revenues for the year ended December
31, 2007 and 2006, respectively.
Inventory
– Inventory is
stated at the lower of cost or market. Cost is determined using the
average cost method. Market is determined using net realizable
value. The Company writes down its inventory for estimated
obsolescence, excess quantities and other factors in evaluating net realizable
value. All inventory on the balance sheet as of December 31, 2007 and
2006 is raw materials.
Property and
Equipment - Property and equipment are stated at cost, net of accumulated
depreciation. Expenditures for maintenance and repairs are expensed as incurred;
additions, renewals and betterments are capitalized. When property
and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Depreciation of property and equipment is
provided using the straight-line method for substantially all assets and
estimated lives ranging from 5 to 30 years as follows:
Building
|
20
to 30 years
|
||
Machinery
and equipment
|
10
years
|
||
Office
equipment
|
5
years
|
||
Vehicles
|
5
years
|
106
Land Use Right
– All land in the PRC is government owned and cannot be sold to any
individual or company. IPA China acquired land use right for the land
occupied by its manufacturing facility during 2005 for RMB 5,000,000 or
approximately $605,000. The land lease contract is for a period of 30
years. Accordingly, the land use right is being amortized on the
straight-line method over a period of 30 years.
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.
Income
Taxes– The
Company utilizes Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes,” which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
statutory corporate income tax rate for foreign enterprises in the PRC is 24%
for 2007 and 2006. For the years ending December 31, 2006, 2007 and
2008, respectively, IPA China was eligible for a reduced income tax at 50% of
the normal income tax rate. Beginning January 1, 2009, IPA China will
be subjected to the normal income tax rate.
IPA BVI
is a British Virgin Islands international company and not subject to any United
States income taxes.
The
Company does not have any deferred tax assets or liabilities recorded for the
periods covered by the accompanying financial statements.
Cost of Goods
Sold – Cost of goods sold consists primarily of material costs, employee
compensation, depreciation and related expenses, which are directly attributable
to the production of products. Any write-down of inventory to lower of
cost or market is also recorded in cost of goods sold.
Foreign Currency
Translation and Comprehensive Income (Loss) – IPA China’s functional
currency is the Renminbi (“RMB”). For financial reporting purposes,
RMB has been translated into United States dollars ("USD") as the reporting
currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the reporting
period. Translation adjustments arising from the use of
different exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive
income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date. The sales of IPA are in USD.
107
Segment Reporting
and Geographic Information – SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" requires use of the “management approach”
model for segment reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. At December 31,
2007 and 2006 and for the years then ended, all of the Company's operations are
conducted in one industry segment, the Consumer Products segment which
specializes in manufacturing and selling high-quality, copyrighted, framed
artwork to retail stores. In the future, the Company expects to incur
revenue and expenses in a Grass segment, through its growing, harvesting and
selling of its Giant King Grass as a livestock feed as well as a feedstock for
biofuel production. From a geographic standpoint, all of the
Company’s revenues for 2007 and 2006 are to customers in the United
States. All identifiable assets at December 31, 2007 and 2006 are in
the Asia/Pacific region.
NOTE 2 — FIXED
ASSETS
Fixed
assets are comprised of the following at December 31, 2007 and 2006,
respectively:
|
December 31,
2007
|
December 31,
2006
|
||||||
Building
|
$ | 585,000 | $ | 565,000 | ||||
Machinery
and equipment
|
179,000 | 165,000 | ||||||
Office
equipment
|
69,000 | 63,000 | ||||||
Vehicles
|
41,000 | 39,000 | ||||||
Total
property and equipment
|
874,000 | 832,000 | ||||||
Less:
Accumulated depreciation
|
204,000 | 138,000 | ||||||
Fixed
assets, net
|
$ | 670,000 | $ | 694,000 |
Depreciation
expense was $66,000 and $54,000 for the years ended December 31, 2007 and 2006,
respectively.
NOTE 3 — LAND USE
RIGHT
Land use
right is composed of the following at December 31, 2007 and 2006,
respectively:
|
December 31,
2007
|
December 31,
2006
|
||||||
Land
use right
|
$ | 605,000 | $ | 605,000 | ||||
Less:
Accumulated amortization
|
71,000 | 51,000 | ||||||
Land
use right, net
|
$ | 534,000 | $ | 554,000 |
Amortization
expense was $20,000 for each of the years ended December 31, 2007 and 2006,
respectively. The amortization expense for the next five years will
be $20,000 in each year.
NOTE
4 — RELATED PARTIES
Included
in the Company’s Combined Balance Sheets at December 31, 2007 and 2006 are
Related Party Receivables. The Related Party Receivables represents
amounts due to IPA BVI from Sung Chang, the Company’s owner and from JJ
International, a company owned by Sung Chang that operates
separately.
108
The following table represents a summary of Related Party Receivables at December 31, 2007 and 2006, respectively:
|
December 31,
2007
|
December 31,
2006
|
||||||
Due
from Sung Chang
|
$ | 92,000 | $ | 64,000 | ||||
Due
from JJ International
|
412,000 | ― | ||||||
Total
|
$ | 504,000 | $ | 64,000 |
IPA China
performs manufacturing services in the PRC for JJ
International. During the years ended December 31, 2007 and 2006, IPA
China recorded revenues of $546,000 and $670,000, respectively to JJ
International which amounts are included in the Combined Statement of Operations
presented.
NOTE 5 — INCOME TAXES
Income
tax receivables, net at December 31, 2007 and 2006, respectively are included in
Other Current Assets on the accompanying balance sheets as they have a net debit
balance. Income tax receivables consist of the following at December
31, 2007 and 2006, respectively:
December 31,
2007
|
December 31,
2006
|
|||||||
Value
added tax receivable
|
$ | 41,000 | $ | 7,000 | ||||
Income
tax receivable (payable)
|
(3,000 | ) | 1,000 | |||||
Total
|
$ | 38,000 | $ | 8,000 |
IPA China
is governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a statutory rate of 24% on
income reported in the statutory financial statements after appropriated tax
adjustments.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31, 2007 and 2006:
December 31,
2007
|
December 31,
2006
|
|||||||
U.S.
statutory rates
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(10 | %) | (10 | %) | ||||
Effect
of tax holiday
|
(12 | %) | (12 | %) | ||||
Effect
of IPA China loss
|
(11 | %) | (12 | %) | ||||
Total
|
1 | % | ― | % |
Note
6 — COMMITMENTS AND CONTINGENCIES
IPA
China’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
The
Company is not party to any legal proceedings at the present time.
109
Note
7 — FINANCIAL ACCOUNTING DEVELOPMENTS
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159") which permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair
value. SFAS No. 159 was effective for us on January 1, 2008. We are
currently evaluating the impact of adopting SFAS No. 159 on our financial
position, cash flows, and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS No. 141 (Revised 2007) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS No. 141
(Revised 2007) requires an acquiring entity to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value,
with limited exceptions, and applies to a wider range of transactions or events.
SFAS No. 141 (Revised 2007) is effective for fiscal years beginning on or
after December 15, 2008 and early adoption and retrospective application is
prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS
161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 142-3, “Determination
of the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141R, and other GAAP. This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact of SFAS
FSP 142-3, but does not expect the adoption of this pronouncement will have a
material impact on its financial position, results of operations or cash
flows.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with United States GAAP. SFAS 162 will not
have an impact on the Company’s financial statements.
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of SFAS 163 is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, SFAS 163 does not apply to financial
guarantee contracts issued by enterprises excluded from the scope of Statement
60 or to some insurance contracts that seem similar to financial guarantee
insurance contracts issued by insurance enterprises (such as mortgage guaranty
insurance or credit insurance on trade receivables). SFAS 163 also does not
apply to financial guarantee insurance contracts that are derivative instruments
included within the scope of FASB Statement No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 163 will not have an impact on the
Company’s financial statements.
110
Note 8 — SUBSEQUENTS EVENTS
On
October 21, 2008, the majority shareholder of IPA BVI and IPA China, Sung Hsien
Chang, entered into a Securities Purchase Agreement (the "Purchase Agreement")
with VIASPACE Green Energy Inc. (“VGE”), a wholly-owned subsidiary of VIASPACE
Inc. (“VIASPACE”) and China Gate Technology Co., Ltd., a Brunei Darussalam
company ("Licensor"). Under the Purchase Agreement, VGE acquired 100%
of IPA and the entire equity interest of IPA China from Chang. In
exchange, VIASPACE agreed to pay approximately $16 million in a combination of
cash, and newly-issued shares of VIASPACE and VGE stock. In addition,
VIASPACE issued shares of its common stock to Licensor for Licensor’s license of
certain fast growing grass technology to IPA China.
The
acquisition will be completed through two closings. At the first
closing which took place on October 21, 2008 (“First Closing”), VGE issued
3,500,000 newly-issued shares to Chang and his designees. VIASPACE
issued 215,384,615 shares of its common stock to Chang and 30,576,007 shares of
common stock to Licensor. Chang delivered 70% of the outstanding
common stock of IPA BVI. The second closing will be held within 240
days after the first closing ("Second Closing"). At the Second
Closing, VIASPACE shall pay $4.8 million plus interest to
Chang. Interest on the Cash Consideration shall accrue at 6% for the
first six months after the First Closing, and then 18%
thereafter. VIASPACE shall also issue 1.8% of its then outstanding
shares of common stock to Licensor. Chang shall deliver the remaining
30% of the outstanding shares of IPA BVI to VGE. Chang will also
cause IPA China to be a wholly-owned subsidiary of IPA BVI including obtaining
all governmental approvals required for such transfer.
VIASPACE
and VGE’s obligations to consummate the Second Closing is conditioned upon,
among other things, the transfer of the equity of IPA China from Chang to IPA
BVI and the execution of the assignment of the right to grow and harvest
fast-growing proprietary grasses from Quanzhou Keyi Husbandry Breeding and
Planting Co. from Licensor to IPA China.
VGE
entered into four separate two-year employment agreements with each of Carl
Kukkonen, Sung Chang, Stephen Muzi and Maclean Wang. Kukkonen would
serve as Chief executive Officer, Chang as President, Muzi as Chief Financial
Officer and Wang as Managing Director of Grass Development of IPA
China. Kukkonen and Chang would receive a salary of $240,000 per
annum, Muzi receives $180,000 per annum and Wang receives $84,000 per
annum. Each of them are entitled to a bonus as determined by the VGE
Board of Directors, customary insurance and health benefits, 15 days paid leave
per year, and reimbursement for out-of-pocket expenses in the course of his
employment.
Under
Chang’s employment agreement, VGE will grant him an option to purchase the
number shares of its common stock equal to four percent (4%) of VGE’s total
outstanding shares as of the Second Closing Date. The purchase price
of the option shares shall be eighty percent (80%) of the fair market value of
such common stock as of the Second Closing Date. The option shall
vest over a period of 24 months beginning on the date of the Employment
Agreement, with 1/24 of the option shares vesting on the first day of each month
that Chang is employed with VGE.
Under
Wang’s employment agreement, VGE will grant him an option to purchase the number
shares of its common stock equal to four percent (4%) of VGE’s total outstanding
shares as of the Second Closing Date. The purchase price of the
option shares shall be eighty percent (80%) of the fair market value of such
common stock as of the Second Closing Date. The option shall vest
over a period of 24 months beginning on the date of the Employment Agreement,
with 1/24 of the option shares vesting on the first day of each month that Wang
is employed with VGE.
In the
event that the Second Closing does not occur within 240 days after the First
Closing, the Purchase Agreement and each Employment Agreement shall
automatically terminate and all stock certificates delivered at First Closing
shall be returned.
If the
Second Closing does not occur within 240 days although most of VIASPACE’s
closing conditions have been satisfied, then Chang may receive additional VGE
shares or retain VIASPACE shares as follows: if the VGE stock is listed on a
trading market, then VIASPACE shall transfer to Chang all the VGE
shares. If the VGE stock is not listed on a trading market, then
Chang shall retain the VIASPACE shares instead of returning them to the
Company.
111
In the
event that the Second Closing fails to occur, neither VIASPACE or its
affiliates, or any of their directors or officers, shall engage in the grass
business in China for a period of three years after the First Closing
Date.
During
the 75 day period after the First Closing, VGE shall engage an independent
auditor acceptable to Chang to perform an audit of the financial records of IPA
BVI and IPA China in accordance with federal securities laws. As of
the First Closing, Chang warrants that IPA BVI and IPA China’s cash equivalents
(which includes all cash plus accounts receivables less accounts payable) will
be $3.0 million. Any difference between $3.0 million and the actual
cash equivalents on the financial records of IPA BVI and IPA China as of the
First Closing is a Cash Shortfall. Chang agrees to deposit the Cash
Shortfall into IPA BVI’s bank account once the amount is
determined.
Within
150 days of the First Closing, VGE shall prepare and file with the Securities
and Exchange Commission ("SEC") a registration statement covering the resale of
all or such maximum portion of VGE common stock issued pursuant to the Purchase
Agreement as permitted by SEC regulations ("Registration Statement") that are
not then registered on an effective Registration Statement for an offering to be
made on a continuous basis pursuant to Rule 415. Alternatively, VGE
shall register its common stock on a registration statement on Form
10. VGE shall use its best efforts to qualify its Common Stock for
quotation on a trading market as soon as practicable, but in no event later than
the 240th day after the closing of this Agreement or the 90th day after the
effectiveness of the Registration Statement on Form S-1 registering some or all
of VGE Common Stock or on Form 10.
Provided
that the Second Closing has occurred, if VGE common stock is not listed on a
trading market within 240 days after the First Closing, then VIASPACE will issue
to Chang the number of shares of its common stock equivalent to $5,600,000. The
stock price will be calculated as the average closing price of VIASPACE’s common
stock during the 60 day period prior to and including the Second Closing
Date. In exchange, Chang shall return all shares of VGE common stock
it received pursuant to the Purchase Agreement to the Company
Licensor
and Chang each represents and covenants that at least 100 hectares of arable
land in Guangdong province in China will be available for grass farming by IPA
China within 12 months after the First Closing Date. Any agreement
regarding such land use rights shall grant the land use rights to IPA China, but
shall be assignable to VGE at VGE’s option. The term of such
agreement, including possible renewals, shall be at least 10 years.
112
No
dealer, salesperson or other person is authorized to give any information or to
represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
VIASPACE
GREEN ENERGY INC.
Ordinary
Shares
896,800
Shares
Prospectus
113
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13.
|
Other
Expenses of Issuance and
Distribution.
|
The
estimated expenses payable by us in connection with the offering described in
this registration statement (other than the placement discounts and commissions)
will be as follows. With the exception of the filing fees for the U.S.
Securities Exchange Commission and FINRA, all amounts are
estimates.
U.S. Securities
and Exchange Commission registration fee
|
|
$
|
321
|
|
Legal
fees and expenses for British Virgin Islands counsel
|
|
15,000
|
||
Legal
fees and expenses for U.S. securities counsel
|
|
50,000
|
||
Accounting
fees and expenses
|
|
50,000
|
||
Total
|
|
$
|
115,321
|
Item 14.
|
Indemnification
of Directors and Officers
|
British
Virgin Islands law and our articles of association provide that we may indemnify
our directors, officers, advisors and trustee acting in relation to any of our
affairs against actions, proceedings, costs, charges, losses, damages and
expenses incurred by reason of any act done or omitted in the execution of their
duty in their capacities as such. Under our articles of association,
indemnification is not available, however, if those events were incurred or
sustained by or through their own willful neglect or default.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Item 15.
|
Recent
Sales of Unregistered Securities
|
In
October 2008, we issued 3,500,000 ordinary shares in connection with our
acquisition of IPA BVI and IPA China to Sung Chang and his
designees. We believe these transactions were exempt from
registration under Regulation D and/or Regulation S under the Securities
Act.
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a)
Exhibits
The
following exhibits are filed herewith or incorporated by reference in this
prospectus:
Exhibit
Number
|
Document
|
|
3.1
|
Amended
and Restated Memorandum and Articles of Association of the Registrant
(2)
|
|
5.1
|
Opinion
of Maples and Calder (2)
|
|
10.1
|
Securities
Purchase Agreement dated as of October 21, 2008 by and among VIASPACE Inc.
(“VIASPACE”), Sung Chang (“Chang”), the Registrant and the other persons
listed therein (1)
|
|
10.2
|
Shareholder
Agreement dated as of October 21, 2008 by and among VIASPACE, Chang and
the other persons listed therein, and the Registrant
(1)
|
114
10.3
|
|
Employment
Agreement dated as of October 21, 2008 by and between the Registrant and
Carl Kukkonen (1)
|
10.4
|
|
Employment
Agreement dated as of October 21, 2008 by and between the Registrant and
Sung Chang (1)
|
10.5
|
|
Employment
Agreement dated as of October 21, 2008 by and between the Registrant and
Stephen Muzi (1)
|
10.6
|
Employment
Agreement dated as of October 21, 2008 by and between the Registrant and
Maclean Wang (1)
|
|
10.7
|
Agreement
between IPA China and China Gate Technology Co., Ltd. dated on or about
October 2008 ( 1 )
|
|
10.8
|
Amendment
No. 1 dated as of June 22, 2009 to the Securities Purchase Agreement dated
as of October 21, 2008 by and among VIASPACE Inc., Sung Chang, the
Registrant and the other persons listed therein ( 1 )
|
|
10.9
|
Amendment
No. 2 dated as of August 21, 2009 to the Securities Purchase Agreement
dated as of October 21, 2008 by and among VIASPACE Inc., Sung Chang, the
Registrant and the other persons listed therein ( 1 )
|
|
10.10
|
Amendment
No. 3 dated as of October 14, 2009 to the Securities Purchase Agreement
dated as of October 21, 2008 by and among VIASPACE Inc., Sung Chang, the
Registrant and the other persons listed therein (1)
|
|
10.11 | Amendment No. 4 dated as of November 21, 2009 to the Securities Purchase Agreement dated as of October 21, 2008 by and among VIASPACE Inc., Sung Chang, the Registrant and the other persons listed therein (2) | |
10.12 |
Amendment
No. 5 dated as of November 25, 2009 to the Securities Purchase Agreement
dated as of October 21, 2008 by and among VIASPACE Inc., Sung Chang, the
Registrant and the other persons listed therein
(2)
|
|
21.1
|
Subsidiaries
of the Registrant (1)
|
|
23.1
|
Consent
of Goldman Parks Kurland Mohidin LLP (2)
|
|
23.2 | Consent of Goldman Parks Kurland Mohidin LLP (2) | |
23.3 | Consent of Maples and Calder (Filed as Exhibit 5.1) | |
24.1
|
Power
of Attorney (included on page II-6 of the Registration Statement)
(1)
|
|
99.1
|
2009
Stock Incentive Plan (1)
|
|
99.2
|
Memorandum
of Understanding dated as of September 2, 2009 by and among Dragon Power
Ltd, the Registrant and VIASPACE, Inc. ( 1
)
|
(1)
|
Previously
filed.
|
(2)
|
Filed
herewith.
|
(3)
|
To
be filed by amendment.
|
(b)
|
Financial
Statement Schedules
|
|
None.
|
Item 17.
|
Undertakings
|
The
Registrant hereby undertakes:
(a) to
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) include
any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement; and
(iii) include
any additional or changed information with respect to the plan of
distribution.
115
(b) that,
for the purpose of determining any liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) to
file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(d) that
insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant,
the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registration of expenses
incurred or paid by a director, officer or controlling person to the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(e) that,
for the purpose of determining liability under the Securities Act to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
(f) that,
for the purpose of determining liability of the Registrant under the Securities
Act to any purchaser in the initial distribution of the securities, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the Registrant will be a seller to the purchaser and
will be considered to offer or sell such securities to such
purchaser:
(i) any
preliminary prospectus or prospectus of the Registrant relating to the offering
filed pursuant to Rule 424;
(ii) any
free writing prospectus relating to the offering prepared by or on behalf of the
Registrant or used or referred to by the Registrant;
(iii) the
portion of any other free writing prospectus relating to the offering containing
material information about the Registrant or its securities provided by or on
behalf of the Registrant; and
(iv) any
other communication that is an offer in the offering made by the Registrant to
the purchaser.
116
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Irvine, California, on the 25 th day
of November, 2009.
VIASPACE
GREEN ENERGY INC.,
|
||
a
British Virgin Islands company
|
||
/s/
Carl Kukkonen
|
||
Carl
Kukkonen
|
||
Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
||
November
25 , 2009
|
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below does
hereby constitute and appoint Carl Kukkonen as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and sign any registration statement for the same offering covered by
this Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended and all
post-effective amendments thereto and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature
|
|
Title
|
|
Date
|
/s/
Carl Kukkonen
Carl
Kukkonen
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
November
25 , 2009
|
/s/
Sung Chang *
Sung
Chang
|
|
President
and Director
|
|
November
25 , 2009
|
/s/
Amjad S. Abdallat *
Amjad
S. Abdallat
|
|
Director
|
|
November
25 , 2009
|
/s/
Stephen Muzi *
Stephen
Muzi
|
|
Chief
Financial Officer
(Principal
Accounting and Financial Officer)
|
|
November
25 , 2009
|
* /s/
Carl Kukkonen
Carl
Kukkonen, Attorney-in-Fact
117