ITEM 1. BUSINESS
General
HPC Acquisitions, Inc., DBA Vegalab US
(“VUS”, the “Company”, “we”, “our”, or “us”) is the exclusive North
and South America distributor of Vegalab products supplied by Vegalab SA, Switzerland (“VSA”). Vegalab products consist
of biological pesticides, fertilizers, and specialty biological agents that are highly effective against targeted organisms, non-toxic
to beneficial organisms, and safe for the environment. VUS holds registrations for its products in a number of US states, Costa
Rica, and Panama, and is pursuing additional registrations domestically and in Canada, Mexico, and Central/ South America. To facilitate
marketing and sales, VUS is engaged in a number of testing projects for its products with agricultural businesses. In 2016, VUS
began distributing product, which resulted in $2,115,421 of revenues by the end of the year and a net loss from operations of $95,279
for the calendar year.
The Market Opportunity
Consumer demands are rapidly changing.
Customers want foods produced with natural, non-synthetic, and sustainable inputs. According to a report issued by TechSci Research
on the global organic food market, the projected compounded growth in the global market for organic food is 14% per year through
2021. We believe a growing number of food manufacturers are replacing, or are looking to replace, synthetic inputs in order to
create all natural products that will meet the growing consumer demand for naturally produced foods.
Increasing consumer pressure to minimize
chemical residue in food and regulations restricting or banning the use of chemical compounds in the food chain are primary drivers
of a growing demand for eco-friendly fertilizers, bio-pesticides and specialty biological agents in large scale agricultural businesses.
According to a report published by Research and Markets, the projected global market for bio-pesticides alone is estimated to reach
$8.82 billion by the year 2022, representing a compounded annual growth rate of 17.6% from 2016.
The convergence of changing consumer preferences,
and the commitment of agri-business to reduce chemical compounds in the environment and to produce natural food products, has created
what management believes is a substantial opportunity for growth in the distribution of Vegalab products.
Our Products
VUS’ product line consists of biological
pesticides, fertilizers, and specialty biological agents that are highly effective against targeted organisms, non-toxic to beneficial
organisms, and safe for the environment.
The following products are registered in
one or more jurisdictions and available for sale:
Fertilizers
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Armour Boost
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Copper Boost
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Micro Boost
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Root Boost
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Balance Boost
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Fertile Boost
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Nitrogen Pro
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Sun Boost
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Brix Boost
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Fruit Boost
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NPK Pro
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Temperature Boost
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Calcium Boost 17
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Grow Boost
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Phosphorus Pro
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Vega Pro
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Calcium Boost 23
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Harvest Pro
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Pollen Boost
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Vita Boost
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Cellular Boost
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Kelp Boost
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Potassium Pro
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Vivid Boost
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Color Boost
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Magnesium Boost
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Rigid Boost
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Pesticides
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Biological Agents
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Soil Inoculants
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BioMantle Control
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Blight BioControl
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Myco BioBoost
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Larva Control
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Larva Bio Control
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Mildew Control
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Mosquito BioControl
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Nematode Control
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Slug Control
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Spider Mite Control
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Spore Control
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These products are “natural”
in that the active ingredients consist primarily of oil extracts from different plant sources. The efficacy of the raw material
is effectuated and enhanced through a process of micronization, nano-encapsulation, and amplification.
Previously, organic and natural products
had to wait to be broken down or eroded in order to be absorbed by plants, making these products inefficient and expensive for
commercial use. The challenge with oil extracts is lowering viscosity to maximize dispersion over large areas without impairing
potency. The micronization process used to produce our products addresses this problem; the process gives these oils the ability
to cover a larger surface area and enables deeper penetration into the crevices of plants, insects, and pathogens.
After micronization, these oils go through
a process of amplification, which involves being paired with specific adjuvants and alcohol-based solvents to increase the oil-to-water
bonding capacity. This results in the products having higher dilution rates with better efficacy than other oil-based products
on the market. Finally, the products are nano-encapsulated, which allows the products to remain dormant until activated in the
presence of specific conditions, such as soil moisture, pH, and temperature, which further enhances the efficiency of our products.
Our fertilizers have unique formulations containing organic compounds that facilitate the absorption of minerals, increase growth
rates, and enhance overall crop quality. The fertilizers we offer are formulated to reduce their chemical footprint and to increase
absorption into the plant. With our product formulations, the applicator is able to use smaller amounts of fertilizers, pesticides,
fungicides, etc. to achieve better crop results than the current standard synthetic products on the commercial market.
Distribution Agreement
VUS has the exclusive right to market and
sell the Vegalab products in the Western Hemisphere. David Selakovic, a director, officer, and principal stockholder of VUS, assigned
this exclusive distribution right to VUS in March 2016. Mr. Selakovic held the distribution rights under a distribution agreement
dated October 19, 2012, with ECOWIN Co., Ltd., a Korean company that owns the intellectual property related to the processes for
manufacturing the Vegalab products and manufactures products VUS sells. Additions, removals, and modifications of the Vegalab products
may be made at the discretion of ECOWIN. ECOWIN is required to provide 90-days advance notice of the discontinuation of a product.
For a new product, ECOWIN is required to provide 30-days advance notice of the addition of the new product, and during that period
VUS has the right to decline the addition of the product to the distribution agreement.
VSA is a Swiss company of which David Selakovic
is the sole owner, and it is the world-wide distributor of the products we offer, subject to the exclusive rights of VUS in the
Western Hemisphere. At the present time we purchase all of our products from VSA at its cost.
VSA publishes a product price list periodically,
which lists the distributor price to VUS for all product ordered through VSA. Prices are FOB (Freight on Board) the factory. Pricing
is subject to change at any time at the election of VSA on 30-days advance written notice to VUS. Payment is made in US Dollars
by irrevocable letter of credit issued at the time of the order and payable 90 days from the date of the bill of lading.
VUS has a duty to use all reasonable commercial
efforts to develop and exploit the maximum sales for the entire line of products covered by the distribution agreement. This includes
the obligation to:
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Establish a trained sales force;
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Purchase and maintain an adequate selection and stock of products to meet reasonably expected demand;
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Deliver monthly sales reports;
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Advertise and promote the products, including participation
in trade shows; and
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Obtain and maintain all governmental permits or registrations required to market and sell the products.
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Under the distribution agreement, products
we purchase for resale are warranted by the manufacturer to be free of defects in material and workmanship for a period of 24 months.
At its discretion, the manufacturer may replace or repair defective products, or issue a refund of the purchase price.
Distributing Our Products
We began distribution of our products in
April 2016, which involves several steps. First, we have been aggressively pursuing registration of Vegalab products in jurisdictions
where we believe there is an opportunity to commence sales soon after registration is achieved. There are numerous jurisdictions
in the North and South American Sphere where we can sell product, and we are only beginning to penetrate the large market available
to us. We are focusing our efforts on jurisdictions that major distributors of farming products or major agro-industrial companies
have indicated to us they believe are good candidates for distributing and selling our products. The next step in the process is
to arrange product testing opportunities for the distributors and companies interested in our products, several of which have been
completed with very positive results, and more are in the pipeline. Finally, we negotiate the terms of the distribution or purchase
agreements.
Our distribution process began to gain
traction by the end 2016. In November 2016, we entered into an agreement with Food and Agriculture Innovative Technologies Enterprises
Limited for distribution in Trinidad and Tobago, which includes an option to expand to neighboring islands. We also reached an
exclusive distribution agreement with Fertica Group for Guatemala where the product registration is in process, and we are pursuing
discussions to expand that agreement into El Salvador, Nicaragua, Costa Rica, and Honduras.
Product sales and distribution in a number
of jurisdictions will be cyclical based on the growing season for the jurisdiction and other factors.
Competition
The products we will distribute compete
with similar products produced by other agrichemical businesses, as well as with traditional agrochemicals. Many of these competitors
have well established products, brands, market share, and have much greater financial and operational resources than we do. Being
the new entrant in a well-established market is a difficult task, and there is no assurance we can compete effectively on the basis
of product content and performance, or on price.
We believe our eco-friendly products have
an advantage over traditional agro-chemicals because of testing and reports showing that many agro-chemicals, particularly pesticides
and some fertilizers, degrade the environment and are potentially harmful to humans, which results in higher regulatory scrutiny
and restrictions, as well as potential liability under federal and local laws. We believe the absence of these negative characteristics
in our eco-friendly products make them very appealing to potential distributors and end users and gives us an advantage we can
promote when competing with traditional agro-chemicals.
Regulatory Considerations
Our activities are subject to extensive
federal, state, local and foreign governmental regulations. These regulations may prevent us or our collaborators from developing
or commercializing products in a timely manner or under technically or commercially feasible conditions, and may impose expenses,
delays and other impediments to our product development and registration efforts. In the United States, the Environmental Protection
Agency (“EPA”) regulates our bio-based pest management products under the Federal Insecticide, Fungicide and Rodenticide
Act (“FIFRA”), the Federal Food, Drug and Cosmetics Act (“FFDCA”) and the Food Quality Protection Act (“FQPA”).
In addition, our fertilizers are regulated as fertilizers or biostimulants in each of the fifty states.
In 2004, the United States Congress passed
the Pesticide Registration Improvement Renewal Act, which was reauthorized in 2007 and 2012, a result of efforts from an industry
coalition of pesticide companies and environmental groups, to codify pesticide approval times in return for user fees. This law
facilitates faster approval times for biopesticides, with EPA approvals typically received within 16 to 24 months, compared with
36 months or longer for conventional chemical pesticides. Registration processes for state and foreign governments vary between
jurisdictions and can take up to 12 months for state governments, such as California and New York, and up to 36 months or more
for foreign governments. In some instances, California and Canada will conduct joint reviews with the EPA, which allows some pesticides
to receive concurrent approvals in California, Canada and the United States. However, in most instances, most foreign government
submissions will not occur until after a U.S. registration has been secured. To register a crop protection product with the EPA,
companies must demonstrate the product is safe to mammals, non-target organisms, endangered species and the environment. To demonstrate
the bio-based pest management product’s safety, required studies must be conducted that evaluate mammalian toxicology, toxicological
effects to non-target organisms in the environment (ecotoxicological exposures) and physical and chemical properties of the product.
The registration dossier is subject to both scientific and administrative reviews by EPA scientists and management before registration
approval. The scientific review involves thorough evaluation of submitted data and completion of risk assessments for human dietary
and ecotoxicological exposures. Upon completion of this process, the registration package, including the proposed label, is sent
to the Office of General Council for legal review. The final step in the registration process is administrative sign-off by the
EPA director of the Biopesticides and Pollution Prevention Division.
In addition to EPA approval, we are required
to obtain regulatory approval from the appropriate state regulatory authority in individual states and foreign regulatory authorities
before we can market or sell any pest management product in those jurisdictions. Foreign governments typically require up to two
seasons of locally generated field efficacy data on crop-pest combinations before a product dossier can be submitted for review.
California and foreign jurisdictions also require us to submit product efficacy data, which the EPA historically has not required,
but may request.
We engage third party contractors with
experience in the regulatory registration processes of federal and local governments to assist us with obtaining regulatory approvals
and permits for our products.
Since our plant fertilizers are not used
to control pests, they currently fall outside the legal scope of FIFRA, FFDCA and FQPA and, therefore, we do not need to submit
applications for EPA registrations for such products. However, we must still submit state registrations for our fertilizers, and
those containing microbes of foreign origin may also need to be “deregulated” (or determined not to be a plant pest)
under the Plant Protection Act by the USDA Animal and Plant Health Inspection Service prior to use in field trials or for large
scale release. Nevertheless, the regulatory process is significantly accelerated compared to that for bio-pesticides.
Annex I to this report is a current list of the government registrations
we have obtained for our products.
History
On March 8, 2016, VUS closed the sale of
12,011,000 shares of common stock to David Selakovic at a total purchase price of $303,100, paid in cash. Concurrently, Mr. Selakovic
was appointed a director, and to the positions of Chairman of the Board, Chief Executive Officer, and Chief Financial Officer.
Craig S. Laughlin, the former Chairman of the Board, Chief Executive Officer, President, and Chief Financial Officer, remained
a director and serves as the President and Secretary of VUS. In connection with the foregoing investment and changes in management,
Mr. Selakovic assigned to VUS certain assets consisting of (a) the exclusive right to distribute in the Western Hemisphere natural
agrochemicals marketed under the name “Vegalab” and manufactured by ECOWIN Co., Ltd., a Korean company, (b) certain
governmental permits for the sale of ECOWIN agrochemicals, and (c) the trademark “Vegalab.” As a result of the foregoing
transactions VUS acquired distribution rights to the Vegalab products, permits related to those products, a trademark, and cash
to commence the business of selling Vegalab products.
During the two-year period prior to the
investment by Mr. Selakovic in VUS, we were classified as a “shell company” as defined in Rule 12b-2 adopted under
the Securities Exchange Act of 1934, as amended (“Exchange Act”), seeking to acquire or develop a business opportunity.
Employees
HPC has no full-time employees. Our executive
officers are responsible for implementing our business described above with the assistance of independent contractors.
Further Information and Reports
We are required to file with the Securities
and Exchange Commission annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports of certain events on Form
8-K, and proxy and information statements disseminated to stockholders in connection with meetings of stockholders and other stockholder
actions. Copies of these and any other materials we file with the Commission may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1580 – 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part
of our filings may be obtained from the Public Reference Section of the Securities and Exchange Commission (“SEC”)
at 100 F Street, N.E., Washington, D.C. 20549, upon payment of the prescribed fees. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s filings with the Commission are also available
through its web site at http://www.sec.gov.
ITEM 1A. RISK FACTORS
Our operations and financial results
are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial
condition, results of operations, cash flows, growth prospects and the trading price of our common stock.
Risks Relating to Our Business and Strategy
We are an early stage company that
is developing its business, so there is no assurance we will be successful in establishing and growing our business or achieve
sustainable positive results of operations.
We are an early stage company working to
establish distribution and sales for our products in North and South America. This is a new venture started in April 2016, so we
cannot predict to what extent we may be successful in generating revenue and growing the business. Our ability to develop our business
more quickly is hindered by our limited financial and operational resources. We are subject to all of the risks and uncertainties
inherent in a development stage business any one or more of which could be an impediment to achieving our business objectives.
We expect to require additional financing
in the future to meet our business requirements. Such capital raising may be costly, difficult, or not possible to obtain and,
if obtained, could significantly dilute current stockholders’ equity interests.
Achieving any success in our marketing
and distribution plans means we will need to be able to purchase inventory to meet demand and grow our administrative infrastructure
to service our distributors and customers. Accordingly, we expect to need significant additional financing to develop and expand
our business. We may seek additional funds from public and private stock offerings, business collaborations, borrowings from banks
and other lenders, or other sources. Additional capital may not be available on terms acceptable to us, or at all. Any additional
equity financing may be significantly dilutive to stockholders, and debt financing, if available, may include restrictive covenants
and bear high rates of interest. In addition, we may incur substantial costs in pursuing future capital financing, including investment
banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs.
We also may be required to recognize non-cash expenses in connection with certain securities we issue, such as warrants, which
may adversely impact our financial results.
If we cannot raise more money when needed
or are unable to use our future working capital under financial covenants contained in future debt financing agreements, we may
have to reduce our capital expenditures, scale-back our business development, or reduce general and administrative expenditures.
We could also be forced to cease operations. Any of these eventualities would likely have a material adverse impact on our results
of operations and on the value of our equity.
Our business may fail if we are not
able to increase sales.
Our future success will depend on our ability
to significantly increase sales of our eco-friendly agro-products. Our initial sales of products began in the second calendar quarter
of 2016, and we are still in the very early stages of establishing distributors and customers who will be regular purchasers of
our products. There is no assurance we will be successful in doing so, and the inability to grow our sales and revenue would adversely
affect our results of operations and could ultimately force us to cease operations.
We have limited experience in marketing
and selling our products and will need to expand our sales and marketing infrastructure.
We currently have limited sales and marketing
experience and capabilities. As of December 31, 2016, our Chief Executive Officer and a small number of distributors and independent
contractors were engaged in the sales and marketing effort. We will need to further develop our sales and marketing capabilities
and find agro-product distributors in order to successfully increase sales of our Vegalab products. There can be no assurance that
the sales and marketing team we develop will successfully compete against the sales and marketing teams of our current and future
competitors, many of which may have more established relationships with distributors and growers. Our inability to recruit, train
and retain sales and marketing personnel, or their inability to effectively market and sell VUS products could impair our ability
to gain market acceptance of our products and cause our sales to suffer.
If we are unable to maintain and
further establish successful relations with the third-party distributors that are our principal customers, or they do not focus
adequate resources on selling our products or are unsuccessful in selling them to end users, sales of our products will be adversely
affected.
A significant part of our strategy is to
engage independent distributors of agro-products to distribute and assist us with the marketing and sale of Vegalab products. Revenue
growth will depend in large part on our success in establishing and maintaining this sales and distribution channel. However, there
can be no assurance that our distributors will be successful in selling our products to end users, or will focus adequate resources
on selling them, and they may not continue to purchase or market our products for a number of reasons.
For example, many distributors lack experience
in marketing bio-based agro-products, which generally must be used differently than conventional chemical pesticides. Distributors
may not continue to market our products if they receive negative feedback from end users, even if we believe our products are being
blamed for damage to treated plants caused by other pesticides with which our products have been combined (whether properly or
improperly). In addition, many of our distributors are in the business of distributing and manufacturing other, possibly competing,
pest management and plant health products, including internally developed and commercialized bio-based products as well as bio-based
products developed by larger agrichemical companies that negotiate to “bundle” such specialty products with other high
demand products. As a result, our distributors may earn higher margins by selling competing products or combinations of competing
products. If we are unable to establish or maintain successful relationships with independent distributors, we will need to further
develop our own sales and distribution capabilities, which would be expensive and time-consuming, and the success of which would
be uncertain.
Adverse weather conditions and other
natural conditions can reduce acreage planted or incidence of crop disease or pest infestations, which can adversely affect our
results of operations.
Production of the crops on which our products
are typically applied is vulnerable to extreme weather conditions such as heavy rains, hurricanes, hail, tornadoes, freezing conditions,
drought, fires and floods. Weather conditions can be impacted by climate change resulting from global warming, including changes
in precipitation patterns and the increased frequency of extreme weather events, or other factors. Unfavorable weather conditions
can reduce both acreage planted and incidence (or timing) of certain crop diseases or pest infestations, each of which may reduce
demand for our products. For example, in 2015 and 2014, key markets in the United States experienced low rainfall or drought resulting
reductions in acreage planted in those markets. Shortened bloom cycles relating to changes in weather patterns also could reduce
the amount of pesticides and plant health products used during a growing season. In addition, ideal weather conditions can reduce
the incidence of diseases and pest infestations and increase yields without the use of additional pesticide and plant health applications.
Increased yields can also reduce commodity prices causing growers to make a decision not to increase costs by reducing the amount
of pesticides and plant health products used during a growing season. Since all of our products have different margins, changes
in product mix as a result of these conditions could affect our overall margins.
If our ongoing or future field trials
are unsuccessful, we may be unable to obtain regulatory approval of our products on a timely basis.
The successful completion of multiple field
trials in domestic and foreign locations on various crops and water infrastructures is critical to the success of our product development
and marketing efforts. If our ongoing or future field trials are unsuccessful or produce inconsistent results or unanticipated
adverse side effects on crops or on non-target organisms, or if we are unable to collect reliable data, regulatory approval of
our products could be delayed or we may be unable to commercialize our products. In addition, more than one growing or treatment
season may be required to collect sufficient data and we may need to collect data from different geographies to prove performance
for customer adoption. Although we have conducted successful field trials on a broad range of crops, we cannot be certain that
additional field trials conducted on a greater number of acres, or on crops for which we have not yet conducted field trials, will
be successful. Moreover, the results of our ongoing and future field trials are subject to a number of conditions beyond our control,
including weather-related events such as drought or floods, severe heat or frost, hail, tornadoes and hurricanes, or low or no
natural occurrence of the pests intended for testing. Generally, we pay third parties, such as growers, consultants and universities,
to conduct field tests on our behalf. Incompatible crop treatment practices or misapplication of our products by these third parties
or lack of sufficient occurrence of the identified pests in nature for a particular trial could impair the success of our field
trials.
Our inability to obtain regulatory
approvals, or to comply with ongoing and changing regulatory requirements, could delay or prevent sales of the products we are
distributing.
The field testing, sale, and use of our
bio-based agro-products are extensively regulated by the EPA and state, local and foreign governmental authorities. These regulations
substantially increase the time and cost associated with bringing our products to market. If we do not receive the necessary governmental
approvals to test and market our products, or if regulatory authorities revoke our approvals, do not grant approvals in a timely
manner or grant approvals subject to restrictions on their use, we may be unable to sell our products in out licensed distribution
area, which would adversely affect future revenues.
Bio-based agro-products are not well
understood, which necessitates investment in customer education and makes effectively marketing and selling our products difficult.
The market for bio-based agro-products
is underdeveloped when compared to conventional pesticides and fertilizers. Customers in the crop production sector are generally
cautious in their adoption of new products and technologies. Growers often require on-farm demonstrations of a given pest management
or plant health product. Initial purchases of the product tend to be conservative, with the grower testing on a small portion of
their overall crop. As the product is proven, growers incorporate the product into their rotational programs and deploy it on a
greater percentage of their operations. As a result, large scale adoption generally takes several growing seasons. In addition,
customers have historically perceived bio-based agro-products as more expensive and less effective than conventional chemical pesticides.
To succeed, we will need to continue to change that perception. To the extent that the market for bio-based agro-products does
not further develop or customers elect to continue to purchase and rely on conventional chemical products, our market opportunity
will be limited.
The high level of competition in
the market for pest management and plant health products may result in pricing pressure, reduced margins or the inability of our
products to achieve market acceptance.
The markets for pest management and plant
health products are intensely competitive, rapidly changing and undergoing consolidation. We may be unable to compete successfully
against our current and future competitors, which may result in price reductions, reduced margins and the inability to achieve
market acceptance for our products.
Many entities are engaged in developing
pest management and plant health products. Our competitors include major multinational agrichemical companies such as Arysta, BASF,
Bayer, Dow Agrosciences, DuPont, FMC, Monsanto, Sumitomo Chemical and Syngenta, some of which have developed bio-based products
for our target markets, as well as specialized bio-based pesticide and plant health businesses such as AgraQuest (now a part of
Bayer), Certis USA (now a part of Mitsui), Novozymes (in a joint venture with Monsanto), Valent Biosciences (now a part of Sumitomo),
and Marrone Bio Innovations. Many of these organizations have longer operating histories, significantly greater resources, greater
brand recognition and a larger base of customers than we do. As a result, they may be able to devote greater resources to the manufacture,
promotion or sale of their products, receive greater resources and support from independent distributors, initiate or withstand
substantial price competition or more readily take advantage of acquisition or other opportunities. Further, many of the large
agrichemical companies have a more diversified product offering than we do, which may give these companies an advantage in meeting
customers’ needs by enabling them to offer a broader range of pest management and plant health solutions. In addition, we
could face competition in the future from new, well-financed start-up companies such as AgBiome and Indigo.
Our product sales are subject to
weather conditions and other factors beyond our control, which may cause our operating results to fluctuate significantly quarterly
and annually.
The level of seasonality in our business
overall is difficult to evaluate as a result of our relatively early stage of development and our development of what is a new
geographic market for Vegalab products. It is possible that our business may become more seasonal, or experience seasonality in
different periods, than anticipated, particularly as we expand into new geographical territories within North and South America,
or add or change distributors or distributor programs.
Notwithstanding any such seasonality, we
expect substantial fluctuation in sales year over year and quarter over quarter as a result of a number of variables on which sales
of our products are dependent. Weather conditions, natural disasters and other factors affect planting and growing seasons and
incidence of pests and plant disease, and accordingly affect decisions by our distributors, direct customers, and end users about
the types and amounts of pest management and plant health products to purchase and the timing of use of such products. In addition,
disruptions that cause delays by growers in harvesting or planting can result in the movement of orders to a future quarter, which
would negatively affect the quarter and cause fluctuations in our operating results. Customers also may purchase large quantities
of our products in a particular quarter to store and use over long periods of time or time their purchases to manage their inventories,
which may cause significant fluctuations in our operating results for a particular quarter or year, and low commodity prices may
discourage growers from purchasing our products in an effort to reduce their costs and increase their margins for a growing season.
Our expense levels are based in part on
our expectations regarding future sales. As a result, any shortfall in sales relative to our expectations could cause significant
fluctuations in our operating results from quarter to quarter, which could result in uncertainty surrounding our level of earnings
and possibly a decrease in our stock price.
We rely on the experience and expertise
of our senior management team, and if we are unable to recruit or retain qualified personnel, our development efforts may be significantly
delayed.
We depend entirely on our two executive
officers and a very small office staff to perform the tasks required to develop our business. Our ability to develop the business
will depend on recruiting qualified sales and marketing, and management personnel to succeed. At our early stage of development
there is a balance between growth and building staff to enhance and support that growth that is difficult to find. Growth that
cannot be supported by adequate administrative resources will often result in a loss of sales and growth momentum, and an investment
in administrative resources that is not supported by adequate growth and revenue will result in negative results. The process of
hiring, training and successfully integrating qualified personnel into our operation is lengthy and expensive, and our inability
to manage this aspect of our development effectively could adversely affect our results of operations.
If our third-party manufacturer is
unable to produce our products at a satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost,
our business could be negatively impacted.
We are a distributor and entirely dependent
on VSA and ECOWIN for all product we propose to sell. The inability of VSA and ECOWIN to provide Vegalab products on a timely basis
in the quantities we need to supply distributors and customers would adversely affect our operations and revenue. At present there
are no additional sources for our products, so the inability to obtain these products from VSA and ECOWIN would effectively suspend
or terminate our business operations.
Any decline in agricultural production
in our market area could have a material adverse effect on the market for our products and on our results of operations and financial
condition.
Conditions in the agricultural industry
in North and South America will significantly impact our operations and results. The agricultural industry can be affected by a
number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, domestic
and international demand for agricultural products, and U.S. and foreign policies regarding trade in agricultural products. State
and federal governmental policies, including farm subsidies and commodity support programs, as well as the prices of products used
in agriculture and the prices at which produce may be sold, may also directly or indirectly influence the number of acres planted,
the mix of crops planted and the use of agro-products for particular agricultural applications. There are various proposals pending
before the U.S. Congress to cut or eliminate various agricultural subsidies, which may adversely impact the U.S. agricultural industry.
Further, there is strong sentiment in the current U.S. government to substantially modify existing trade agreements in North and
South America, which creates uncertainty with respect to how these policy issues may affect the market for our products.
We may be exposed to product liability
and remediation claims, which could harm our business.
The use of certain bio-based agro-products
is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include
requirements that only certified or professional users apply the product or that certain products be used only on certain types
of locations, may require users to post notices on properties to which products have been or will be applied, may require notification
to individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients. Even if we
comply with all such regulations and obtain all necessary registrations, we cannot provide assurance that our products will not
cause injury to crops, the environment, or people under all circumstances. For example, our products may be improperly combined
with other pesticides or, even when properly combined, our products may be blamed for damage caused by these other pesticides.
The costs of remediation or products liability could materially adversely affect our future quarterly or annual operating results.
We currently maintain product liability
insurance at levels we believe are sufficient and consistent with industry standards for companies at our stage of development.
We cannot guarantee that our product liability insurance is adequate and, at any time, it is possible that this insurance coverage
may not be available on commercially reasonable terms or at all. A product liability claim could result in liability to us greater
than our assets or insurance coverage. Moreover, even if we have adequate insurance coverage, product liability claims or recalls
could result in negative publicity or force us to devote significant time and attention to those matters, which could harm our
business.
Our business is subject to various
governmental regulations, and compliance with these regulations may cause us to incur significant expenses. If we fail to maintain
compliance with applicable regulations, we may be forced to recall products and cease their manufacture and distribution, which
could subject us to civil or criminal penalties.
The complex legal and regulatory environment
exposes us to compliance and litigation costs and risks that could materially affect our operations and financial results. These
laws and regulations may change, sometimes significantly, as a result of political or economic events. They include environmental
laws and regulations, tax laws and regulations, import and export laws and regulations, government contracting laws and regulations,
labor and employment laws and regulations, securities and exchange laws and regulations, and other laws such as the Foreign Corrupt
Practices Act. In addition, proposed laws and regulations in these and other areas could affect the cost of our business operations.
Violations of any of these laws and regulations could subject us to criminal or civil enforcement actions, any of which could have
a material adverse effect on our business, financial condition or results of operations.
Risks Related to Ownership of our Common
Stock
Our principal stockholders will have
significant voting power and may take actions that may not be in the best interest of other stockholders.
As of December 31, 2016, our executive
officers and directors beneficially owned or controlled, directly or indirectly, an aggregate of 16,161,000 shares, or 80.8% of
our common stock. Consequently, our executive officers control the vote on any matter submitted to the stockholders for approval,
including the election of directors and the approval or disapproval of corporate actions that our other stockholders do not view
as beneficial. As a result, the market price of our common stock could be adversely affected.
Our common stock may experience extreme
price and volume fluctuations, and you may not be able to resell shares of our common stock at or above the price you paid.
We are an early stage company with a limited
trading history, which has been historically volatile. The trading price of our common stock will likely continue to be highly
volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control.
These factors include:
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our small public float relative to the total number of shares of common stock that are issued and
outstanding;
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quarterly variations in our results of operations, those of our competitors or those of our customers;
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announcements of technological innovations, new products or services or new commercial relationships
by us or our competitors;
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our ability to develop the market for our products;
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disruption to our operations;
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media reports and publications about Vegalab products;
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modification of our distribution rights;
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new regulatory pronouncements and changes in regulatory guidelines or the status of our regulatory
approvals;
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general and industry-specific economic conditions; and
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the commencement of, or our involvement in, litigation.
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Any market in shares of our common
stock will be subject to the penny stock restrictions that are likely to adversely affect liquidity and make trading difficult.
Until our shares of common stock qualify
for inclusion or listing on a national exchange, if ever, the trading of our securities will be in the over-the-counter market
which is commonly referred to as the OTC Market maintained by OTC Markets, Inc. As a result, an investor may find it difficult
to dispose of, or to obtain accurate quotations as to the price of our securities.
SEC Rule 15g-9 establishes the definition
of a "penny stock," for purposes relevant to us, as any equity security that has a market price of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. It is likely that our
shares will be considered to be penny stocks for the immediately foreseeable future. This classification adversely affects the
market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require
that a broker or dealer approve a person's account for transactions in penny stocks and the broker or dealer receive from the investor
a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to
approve a person's account for transactions in penny stocks, the broker or dealer must obtain financial information and investment
experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable
for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks
of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure
schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth the basis on which the broker
or dealer made the suitability determination, and that the broker or dealer received a signed, written agreement from the investor
prior to the transaction.
Disclosure also has to be made about the
risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers
may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt
to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares
in the secondary market and have the effect of reducing the level of trading activity in the secondary market. These additional
sales practice and disclosure requirements could impede the sale of our securities, if and when our securities become publicly
traded. In addition, the liquidity for our securities may decrease, with a corresponding decrease in the price of our securities.
Our shares in all probability will be subject to such penny stock rules for the foreseeable future and our shareholders will, in
all likelihood, find it difficult to sell their securities. Recently, several brokerage firms and clearing firms have adopted special
“house rules” which make it more difficult for their customers to hold or trade low priced stock and these rules may
make it difficult for our shareholders to sell their stock.
Substantial future sales of our common
stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common
stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common
stock. As of December 31, 2016, we had 20,000,000 shares of common stock outstanding, 16,161,000 shares of which were held by our
directors and officers. Although these shares are subject to volume and manner of sale restrictions of Rule 144 of the Securities
Act, any determination by holders of a substantial number of such shares to sell our stock, or the perception that such sales may
occur, could cause our stock price to decline.
Because we have no plans to pay dividends
on our common stock, investors must look solely to stock appreciation for a return on their investment in us.
We have never declared or paid any cash
dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends
will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other
considerations that the board of directors deems relevant. Investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase
our common stock.
We incur significant costs as a result
of operating as a public company, and our management is required to devote substantial time to comply with the laws and regulations
affecting public companies.
As a public company, we incur significant
legal, accounting and other expenses, including costs associated with public company reporting and corporate governance requirements,
in order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC. Our
management and other personnel have needed to devote a substantial amount of time to these compliance initiatives, and our legal
and accounting compliance costs have increased. We also may need to hire additional staff or consultants in the areas of investor
relations, legal, and accounting to continue to operate as a public company. The expenses incurred by public companies for reporting
and corporate governance purposes have increased dramatically over the past several years. We expect these rules and regulations
to continue to increase our legal and financial compliance costs substantially and to make some activities more time consuming
and costly. We are currently unable to estimate these costs with any degree of certainty. Greater expenditures may be necessary
in the future with the advent of new laws and regulations pertaining to public companies.
Provisions in our charter documents
could discourage a takeover that stockholders may consider favorable.
Provisions in our articles of incorporation
and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include
the following:
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the right of our board of directors to elect directors to fill a vacancy created by the expansion
of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill
vacancies on our board of directors;
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the prohibition of cumulative voting in our election of directors, which would otherwise allow
less than a majority of stockholders to elect director candidates;
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the requirement that stockholders provide advance notice to nominate individuals for election to
our board of directors or to propose matters that can be acted upon at a stockholders’ meeting;
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the ability of our board of directors to issue, without stockholder approval, shares of undesignated
preferred stock with terms set by the board of directors, which rights could be senior to those of our common stock; and
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the ability of our board of directors to alter our bylaws without obtaining stockholder approval.
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