SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|x||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended September 30, 2017
|¨||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from ___________ to ___________
Commission file number: 0-53248
(Exact Name of Registrant as Specified in its Charter)
State or Other Jurisdiction of
Incorporation or Organization
|I.R.S. Employer Identification No.|
|636 U.S. Highway 1, Ste. 110, North Palm Beach, FL||33408|
|Address of Principal Executive Offices||Zip Code|
|Registrant’s Telephone Number, Including Area Code|
|HPC Acquisitions, Inc.|
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer ¨||Accelerated filer ¨|
|Non-accelerated filer ¨ (Do not check if a smaller reporting company)||Smaller reporting company x|
|Emerging growth company x|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At November 16, 2017, 21,439,560 shares of common stock, par value $0.001.
Vegalab, Inc. (formerly HPC Acqusitions, Inc.)
Form 10-Q for the Quarter Ended September 30, 2017
Table of Contents
|Part I - Financial Information|
|Item 1 - Financial Statements||3|
|Item 2 - Management's Discussion and Analysis of Financial Condition and Plan of Operations||12|
|Item 3 - Quantitative and Qualitative Disclosures about Market Risk||14|
|Item 4 - Controls and Procedures||14|
|Part II - Other Information|
|Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds||14|
|Item 6 - Exhibits||14|
Vegalab, Inc. (formerly HPC Acqusitions, Inc.)
|September 30,||December 31,|
|Cash and cash equivalents||$||130,125||$||151|
|Total Current Assets||2,332,379||2,581,393|
|Property, plant and equipment, net of accumulated depreciation||21,138||-|
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accounts payable – trade||$||111,404||$||67,563|
|Accounts payable – related party||1,501,704||1,727,857|
|Accrued income taxes||-||17,036|
|Accrued interest payable - related party||4,395||2,474|
|Current portion of long term loan payable||2,890||-|
|Notes payable – related party||1,318||175,000|
|Total Current Liabilities||1,621,711||1,989,930|
|Loan payable - Long Term||4,689||-|
|Commitments and Contingencies|
|Preferred stock – $0.001 par value, 10,000,000 shares authorized, none issued and outstanding||-||-|
|Common stock – $0.001 par value, 50,000,000 shares authorized, 21,056,225 and 20,140,000 shares issued and outstanding, respectively||21,056||20,140|
|Additional paid-in capital||2,201,183||1,377,499|
|Total Stockholders’ Equity||741,617||605,963|
|Total Liabilities and Stockholders’ Equity||$||2,368,017||$||2,595,893|
|The accompanying notes are an integral part of these unaudited financial statements.|
Vegalab, Inc. (formerly HPC Acqusitions, Inc.)
Statements of Operations
For the Three and Nine Months Ended September 30, 2017 and 2016
|For the Three Months Ended||For the Nine Months Ended|
|September 30,||September 30,|
|Cost of goods sold||167,322||104,355||477,752||1,156,534|
|General and administrative expenses||222,978||86,589||780,361||257,108|
|Total operating expenses||222,978||86,589||780,361||257,108|
|Income (loss) from operations||(209,846||)||(36,370||)||(702,161||)||174,007|
|Income (loss) before provision for income taxes||(209,954||)||(37,080||)||(705,982||)||172,096|
|Provision (benefit) for income taxes||-||-||(17,036||)||64,800|
|Net income (loss)||$||(209,954||)||$||(37,080||)||$||(688,946||)||$||107,296|
|Net income (loss) per common share - basic and diluted||$||(0.01||)||$||(0.00||)||$||(0.03||)||$||0.01|
|Weighted-average common shares outstanding - basic and diluted||20,876,513||20,000,000||20,573,211||16,863,077|
The accompanying notes are an integral part of these unaudited financial statements.
Vegalab, Inc. (formerly HPC Acqusitions, Inc.)
Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016
|For the Nine Months Ended|
|Cash flows from operating activities|
|Net income (loss) for the period||$||(688,946||)||$||107,296|
|Adjustments to reconcile net income (loss) to net cash used in operating activities:|
|(Increase) decrease in|
|Increase (decrease) in|
|Accounts payable – trade||43,841||17,445|
|Accounts payable – related parties||(226,153||)||1,838,414|
|Accrued income taxes||(17,036||)||64,800|
|Accrued interest payable to controlling stockholder||1,921||(32,169||)|
|Net cash used in operating activities||(503,752||)||(521,998||)|
|Cash flows from investing activities|
|Purchase of property, plant and equipment||(14,201||)||-|
|Net cash used in investing activities||(16,010||)|
|Cash flows from financing activities|
|Principal payments on notes payable||(1,182||)||-|
|Repayments on notes payable to controlling stockholder, net||(173,682||)||(209,652||)|
|Proceeds from sale of common stock||824,600||703,100|
|Net cash provided by financing activities||649,736||493,448|
|Increase (decrease) in cash||129,974||(28,550||)|
|Cash at beginning of period||151||78,278|
|Cash at end of period||$||130,125||$||49,728|
|Supplemental disclosure of interest and income taxes paid|
|Interest paid for the period||$||882||$||34,288|
|Income taxes paid for the period||$||-||$||-|
|Non-cash financing transaction|
|Issuance of note payable for property, plant and equipment||$||8,761||$||-|
The accompanying notes are an integral part of these unaudited financial statements.
Vegalab, Inc. (formerly HPC Acqusitions, Inc.)
Notes to Financial Statements
September 30, 2017
Note A - Organization and Description of Business
Vegalab Inc. (formerly HPC Acqusitions, Inc.) (the “Company”) was initially formed under the laws of the State of Minnesota as Herky Packing Co. on July 17, 1968. The Company initially produced and marketed meat snack foods, principally beef jerky, smoked dried beef and snack sausages, through food brokers, distributors and wagon jobbers. Despite a 1970 restructuring, including the relocation to an approximate 12,500 square foot production facility, the Company’s efforts were unsuccessful and all operations were terminated by the end of 1970. On April 10, 1972, the Company changed its corporate name to H. P. C. Incorporated. In connection with this name change, the Company acquired Ed Stein’s Tire Center, Inc, a Minneapolis, Minnesota-based distributor of Gates tires. This acquisition was unsuccessful and reversed in 1973.
On August 7, 2006, the Company changed its state of incorporation from Minnesota to Nevada by means of a merger with and into HPC Acquisitions, Inc., a Nevada corporation formed on June 12, 2006 solely for the purpose of effecting the reincorporation. The Articles of Incorporation and Bylaws of the Nevada corporation are the Articles of Incorporation and Bylaws of the surviving corporation. Such Articles of Incorporation modified the Company’s capital structure to allow for the issuance of up to 50,000,000 shares of $0.001 par value common stock and up to 10,000,000 shares of $0.001 par value preferred stock.
On March 8, 2016, the Company sold 12,011,000 shares of its common stock to David Selakovic for a total cash purchase price of $303,100. This transaction effected a change in management and control of the Company. Mr. Selakovic assigned to the Company certain assets consisting of the exclusive right to distribute in the Western Hemisphere natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, certain state permits for the sale of ECOWIN agrochemicals, and the trademark “Vegalab” (the “DS Assets”). Our new plan of operation is to commence the business of selling ECOWIN products under the brand name “Vegalab”.
The Company is currently in the business of selling the ECOWIN products under the “Vegalab” name in the United States of America. The Company’s current sole source of supply of ECOWIN products is through Vegalab S. A., a Swiss company solely owned by David Selakovic, the Company’s controlling shareholder and sole officer and director.
On November 6, 2017, the Company amended its Articles of Incorporation to change its name to Vegalab, Inc.
Note B - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with generally accepted accounting principles and has a fiscal year-end of December 31.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
During interim periods, the Company follows the accounting policies set forth in its annual audited financial statements filed with the U. S. Securities and Exchange Commission on its Annual Report on Form 10-K for the year ended December 31, 2016.
In the opinion of management, the accompanying interim financial statements, prepared in accordance with the U.S. Securities and Exchange Commission’s instructions for Form 10-Q, should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report filed with the SEC on Form10-K for the year ended December 31, 2016, and are unaudited and contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows of the Company for the respective interim periods presented. The current period results of operations are not necessarily indicative of results which ultimately will be reported for the full fiscal year ending December 31, 2017.
Note C - Going Concern Uncertainty
The Company’s business plan is to distribute, in the Western Hemisphere, certain natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, under the brand name “Vegalab”. However, there is no assurance that the Company will be able to successfully penetrate its targeted market or implement its business plan.
The Company's continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis. The Company faces considerable risk in its business plan. If insufficient operating capital is available during the next twelve months, the Company will be forced to rely on existing cash in the bank and additional funds loaned by management and/or significant stockholders.
The Company’s former majority stockholder previously provided the necessary working capital to maintain the corporate status of the Company. It is the current intent of management and significant stockholders to provide sufficient working capital, if necessary, to support and preserve the integrity of the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding.
The Company anticipates offering future sales of equity securities. However, there is no assurance that the Company will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock and 50,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede potential takeover of the Company, which takeover may be in the best interest of stockholders. The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
In such a restricted cash flow scenario, the Company would be unable to complete its business plan steps, and would, instead, delay all cash intensive activities. Without necessary cash flow, the Company may become dormant during the next twelve months, or until such time as necessary funds could be raised in the equity securities market.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach its goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement any future business plan steps. These factors raise substantial doubt about the Company’s ability to continue to operate as a going concern for the twelve months following the issuance date of these financial statements.
Note D - Summary of Significant Accounting Policies
|1.||Cash and Cash Equivalents|
The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
|2.||Concentrations of Credit Risk|
Sales to one customer comprised 84% of the Company's total revenues for the nine months ended September 30, 2017. The customer accounted for 94% of accounts receivable as of September 30, 2017. Sales to two customers comprised 28% of the Company's total revenues for the nine months ended September 30, 2016. The two customers accounted for 94% of accounts receivable as of December 31, 2016. The Company believes that, in the event that its primary customers are unable or unwilling to continue to purchase the Company’s good, there are a number of alternative customers at comparable prices.
In the normal course of business, the Company extends unsecured credit to virtually all of its customers which are located throughout the United States. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance.
Inventory consists of finished goods related to the sale of certain natural agrochemicals developed by ECOWIN Co., Ltd., a Korean company, under the brand name “Vegalab”. Inventory is valued at the lower of cost or market using the first-in, first-out method. A change in income is taken when factors that would result in a need for a reduction in the valuation, such as excess or obsolete inventory, are noted. At September 30, 2017 and December 31, 2016, there was no reserve for excess or obsolete inventory.
|5.||Property, plant and equipment|
Property plant and equipment are recorded at cost, net of accumulated depreciation. Depreciation is calculated by using the straight-line method over the estimated useful lives of the assets, which is five years for all categories.
Automobile, computer equipment, and leasehold improvements consisted of the following:
|September 30, 2017|
Depreciation expense for three and nine months ended September 30, 2017 was $958 and $1,824, respectively.
Revenue is recognized when the earnings process is completed, the risks and rewards of ownership have transferred to the customer, which is generally the same day as delivery or shipment of the product, the price to the buyer is fixed or determinable, and collection is reasonably assured. All sales are recorded when the goods are shipped.
The Company ships all product on an FOB-Plant, “as-is” basis. Accordingly, revenue is recognized by the Company at the point at which an order is shipped at a fixed price, collection is reasonably assured and the Company has no remaining performance obligations related to the sale. The Company sells all products with “no right of return” by the purchaser for any factor other than defects in the products’ development.
|7.||Income (Loss) per Share|
Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
As of September 30, 2017 and 2016, the Company had no outstanding stock warrants, options or convertible securities which could be considered as dilutive for purposes of the loss per share calculation.
|8.||Recent Accounting Pronouncements|
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard requires management to assess the company’s ability to continue as a going concern. Disclosures are required if there is substantial doubt as to the company’s continuation as a going concern within one year after the issue date of financial statements. The standard provides guidance for making the assessment, including consideration of management’s plans which may alleviate doubt regarding the company’s ability to continue as a going concern. ASU 2014-15 is effective for years ending after December 15, 2016. The Company adopted this standard for the year ending December 31, 2016.
In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard as of December 31, 2016. The adoption of this standard had no effect on our results of operation, cash flows, other than presentation, or financial condition.
In April 2016, the FASB issued ASU 2016–10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in this Update do not change the core principle of the guidance in Topic 606. Rather, the amendments in this Update clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. Topic 606 includes implementation guidance on (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended render more detailed implementation guidance with the expectation to reduce the degree of judgement necessary to comply with Topic 606. The Company is currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.
In April 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” ASU 2016 - provides guidance regarding the classification of certain items within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, with early adoption permitted. The Company does not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
On November 17, 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”, a consensus of the FASB’s Emerging Issues Task Force (the “Task Force”). The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. ASU No. 2016-18 is effective for public business entities for fiscal years beginning after December 15, 2017. The Company does not believe this ASU will have an impact on our results of operation, cash flows, other than presentation, or financial condition.
The Company does not expect the adoption of other recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.
Note E - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Note F - Related Party Transactions
The Company’s current sole source of supply of ECOWIN products is through Vegalab S. A., a Swiss company solely owned by David Selakovic, the Company’s controlling shareholder. All products are sold to the Company at VSA's cost for the products from the manufacturer. During the nine months ended September 30, 2017, the Company incurred $384,200 for product purchases for resale from Vegalab S. A.
As of September 30, 2017 and December 31, 2016, the Company had outstanding accounts payable – related party of $1,501,704 and $1,727,857, respectively, for purchases of inventory.
During the nine months ended September 30, 2017, the Company received a credit from Vegalab S.A. of $198,510 as reimbursement for marketing costs, promotion samples, and advertising expenses incurred by the Company. This amount was recorded as a reduction of general and administrative expenses.
Note G - Note Payable to Investor
On August 24, 2016, the Company’s new controlling stockholder, David Selakovic, agreed to loan the Company up to $300,000 at a rate of 4% per annum. As of December 31, 2016, Mr. Selakovic loaned the Company a total of $175,000, due on 60 days demand. During the nine months ended September 30, 2017, the Company repaid $173,682. The Company recorded accrued interest of $4,395 and $2,474 as of September 30, 2017 and December 31, 2016, respectively, related to this note payable.
Note H - Common Stock Transactions
During the nine months ended September 30, 2017, the Company sold a total of 916,225 shares of common stock to third parties for total cash proceeds of $824,600.
Note I – Commitment and Contingencies
On July 20, 2016, the Company entered into a lease agreement for warehouses located at 2542 Business Parkway Suite 1 and 2, Minden, Nevada. The facility is 24,276 square feet with a lease term of 36 months at a current cost of $14,554 per month. The Company was also required to make a security deposit of $14,500. During the nine months ended September 30, 2017, the Company incurred rent expense of $143,555.
Future minimum obligations on the lease are:
Note K – Subsequent Events
Subsequent to September 30, 2017, the Company sold 383,335 shares of its common stock for total cash proceeds of $345,000.
On October 18, 2017, the Company purchased substantially all the assets of a produce packaging business conducted under the name M&G Packing, Inc. located in Tulare County, California. The acquisition consisted of purchasing the real property and building used in the business from M & G Farms, Inc., a California corporation, and all of the equipment, inventory, customers, suppliers, contract rights, and intangible property from M&G Packing, Inc., a California corporation.
The total purchase price for the business plus closing costs is $854,452, which was paid $429,452 in cash and $425,000 in the form of a promissory note secured by the real property that bears interest at the rate of 6.0% per annum with interest only payable monthly and all principal and interest due 18 months from the close of escrow on October 24, 2017.
On November 6, 2017, the Company filed an amendment to its Articles of Incorporation with the Secretary of Nevada to change its name to "Vegalab, Inc." and approved the Company's 2017 Equity Incentive Plan and the reservation of 2,000,000 shares of common stock for the issuance thereunder. The name change and the 2017 Equity Incentive Plan were previously approved by its majority shareholders via a special meeting held on November 6, 2017.
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution Regarding Forward-Looking Information
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited December 31, 2016 Consolidated Financial Statements and notes thereto, along with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2016 Annual Report on Form 10-K, filed separately with the Securities and Exchange Commission.
This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as expansion and growth of our operations and other such matters are forward-looking statements. Any one or a combination of factors could materially affect our operations and financial condition. These factors include competitive pressures, success or failure of marketing programs, changes in pricing and availability of products offered to customers, legal and regulatory initiatives affecting our products, and conditions in the capital markets. Forward-looking statements made by us are based on knowledge of our business and the environment in which we operate as of the date of this report. Because of the factors discussed in our 2016 Annual Report on Form 10-K and factors disclosed in subsequent reports filed with the Securities and Exchange Commission, actual results may differ from those in the forward-looking statements.
Vegalab, Inc., formerly HPC Acquisitions, Inc. (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. The Company 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.
On October 18, 2017, we purchased substantially all the assets of a produce packaging business conducted under the name M&G Packing, Inc. (the “Business”) located in Tulare County, California. The acquisition consisted of purchasing the real property and building used in the Business from M & G Farms, Inc., a California corporation, and all of the equipment, inventory, customers, suppliers, contract rights, and intangible property from M&G Packing, Inc., a California corporation. The total purchase price for the business plus closing costs is $854,452, which was paid $429,452 in cash and $425,000 in the form of a promissory note secured by the real property that bears interest at the rate of 6.0% per annum with interest only payable monthly and all principal and interest due 18 months from the close of escrow on October 24, 2017.
Results of Operations
Revenues for the three months ended September 30, 2017, were $180,454 compared to $154,574 for the three months ended September 30, 2016. Cost of goods sold were $167,322 for the three-month period ended September 30, 2017, compared to $104,355 for the same period in 2016. Revenues increased by 16.7% for the three-month period in 2017 compared to 2016, but cost of goods sold increased 60.3% for the period in 2017 compared to 2016, which resulted in a decrease in gross profit for the three months ended September 30, 2017, to $13,132, compared to $50,219 for the same period in 2016.
The Company began its distribution business in the second calendar quarter of 2016. Customer prospects with a strong commitment to eco-friendly agriculture that had shown an interest in the Company’s products placed large orders in the second quarter of 2016 to establish inventory, which led to a large sales volume and revenues for the nine-month period ended September 30, 2016, of $1,587,649 compared to revenues for the same period in 2017 of $555,592. It was not expected that the initial inventory purchases by distributors in 2016 would recur in 2017, and that purchases in 2017 would be to replenish inventory. Cost of goods sold for the nine month-periods ended September 30, 2017 and 2016, were $477,752 and $1,156,534, respectively. As a result of the large sales volume in 2016 that did not recur, gross profit decreased to $78,200 for the nine months ended September 30, 2017, compared to $431,115 for the same period in 2016.
Total operating expenses for the three-month period ended September 30, 2017, were $222,978 compared to $86,589 for the three-month period ended September 30, 2016. Total operating expenses for the nine-month period ended September 30, 2017, were $780,361 compared to $257,108 for the nine-month period ended September 30, 2016. The increase was due to additional professional fees, consulting expenses and rent incurred for the three and nine months ended September 30, 2017.
For the three-month period ended September 30, 2017, loss from operations was $209,846 compared to a loss from operations of $36,370 for the same period in 2016. For the nine-month period ended September 30, 2017, loss from operations was $702,161 compared to income from operations in the amount of $174,007 for the same period in 2016.
After interest and provision (benefit) for income taxes, net loss for the three-month and nine-month periods ended September 30, 2017, were $209,954 and $688,946, respectively. Net loss for the three-month period ended September 30, 2017, was $37,080, and net income for the nine-month period ended September 30, 2016, was $107,296.
Net loss per common share on a fully diluted basis for the three-month and nine-month periods ended September 30, 2017, were $0.01 and $0.03, respectively. Net loss per common share on a fully diluted basis for the three-month ended September 30, 2016, was nil, and net income per common share on a fully diluted basis for the nine-month periods ended September 30, 2016, was $0.01.
Liquidity and Capital Resources
At September 30, 2017 and December 31, 2016, the Company had a working capital surplus of approximately $710,668 and $591,463, respectively.
At the present time, our sole source of supply is VSA. At September 30, 2017, we held inventory at a cost of $1,471,668, and outstanding accounts payable to VSA in the amount of $1,501,704. Our payment terms on the account payable are “payable upon sale to consumer”.
Between December 31, 2016 and September 30, 2017, the Company sold 916,225 shares of its common stock to nine subscribers for cash of $824,600.
We believe our current funding is sufficient to meet our needs described above over the next 9 to 12 months. Nevertheless, our goal is to increase product sales as quickly as we can within the constraints of our managerial and financial resources. If sales opportunities exceed our expectations, we will need additional debt or equity financing to seize these opportunities and there is no assurance financing will be available or available at terms we would find acceptable. If we are unable to raise additional capital at a level adequate to support our sales opportunities, we would need to curtail marketing efforts, which would adversely affect growth and results of operations and could prevent us from succeeding in implementing our new operating business. These factors raise substantial doubt about the Company’s ability to continue to operate as a going concern for the 12 months following the issuance date of these financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note D to our unaudited financial statements appearing elsewhere in this report.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Not required of a smaller reporting company.
Item 4 - Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Exchange Act as of the end of the period covered by this report on Form 10-Q. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Certifying Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, our Certifying Officer concluded that as of such date, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in our reports is recorded, processed, summarized and reported within the time periods specified by the SEC due to certain weaknesses in our internal control over financial reporting described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2016, which we view as an integral part of our disclosure controls and procedures.
There have been no changes in our internal control over financial reporting during the quarterly period ended September 30, 2017, which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II - Other Information
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
On or about March 17, 2017, the Company commenced a limited offering of up to 3,333,334 shares of restricted common stock at a price of $0.90 per share. The common stock offered has not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United Stated absent registration or an applicable exemption from registration under the Securities Act. The shares are offered and sold in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D adopted thereunder. Shares will only be sold to persons the Company reasonably believes are “accredited investors” as that term is defined in Rule 501 of Regulation D. During the quarter ended September 30, 2017, 200,001 shares of the Company’s common stock were sold to two accredited investors at a total purchase price of $180,000.
Item 6 - Exhibits
|31.1||Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002|
|32.1||Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002|
|101||Interactive data files pursuant to Rule 405 of Regulation S-T.|
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|Dated: November 17, 2017||By:||/s/ David D. Selakovic|
|David D. Selakovic, Chief Executive Officer and|
|Chief Financial Officer|