TRULEAF SUSTAINABLE AGRICULTURE LIMITED
RISK FACTORS
An investment in TruLeaf Sustainable Agriculture Limited, including its wholly owned subsidiaries, (collectively “TruLeaf” or the “Company”) is highly speculative, involves a high degree of risk and substantial dilution and is not an appropriate investment for persons who cannot afford the loss of their entire investment. A non-exhaustive summary of some of such risks are described below.
The Company has a limited operating history.
While the Company was incorporated in 2011 and has grown produce at its research and development facility since April 2012, the Company’s first commercial size farm was substantially completed in December 2015 and the Company first started selling produce in commercial quantities to its customers in March 2016. Early consumer satisfaction with, and demand for, the Company’s produce will be important for the Company’s future growth and viability.
The Company is a first mover in North America.
To the Company’s knowledge, there is no precedent in Canada for the kind of facility that the Company operates as its first commercial sized farm, being a multi-level indoor farm capable of producing 150,000 lbs+ per year of produce grown under LED lights. As a first mover, the Company may face additional technological and other challenges that follow on competitors may not face.
The Company intends in the short term to construct larger farms and will need to manage the challenges associated with larger facility sizes including those related to automation and distribution of product.
The Company may sell a significant amount of its product to a single purchaser.
Any such purchaser may use its leverage to reduce the price that the Company is paid for its product. If such purchaser ceased to purchase product from the Company, the Company may have to scale back its production, which would reduce the profitability of the farm or, in an extreme case, could have a material adverse effect on the viability of the farm and the Company to the extent that the Company is not successful in securing alternative purchasers.
The Company may experience a product recall due to safety concerns.
The Company’s product could become contaminated and consumers could become ill or die. The Company’s insurance may not be sufficient to cover all of the related costs and damages, including the costs of a public recall. The Company’s brand could become irreparably tarnished.
Indoor farming is capital intensive and profitability is sensitive to energy costs.
The Company will need to be successful in mitigating potential future increases to the cost of energy by continuing to reduce capital costs, innovate to increase yield (including automation) and develop or acquire technologies to generate or acquire cheaper energy. Lighting technology continues to improve. The Company could be comparatively less profitable than a competitor who purchases lights that are newer than those of the Company.
The Company will face heightened competition. The Company’s long term success requires it to grow.
The Company’s product will displace product that is not grown using lights. The Company is subject to greater energy cost risk than such competitors. Additionally, retailers of the Company’s product may be incented to promote their own in-house name brands to the extent that the Company’s product cannibalizes sales of such retailer’s own name brands.
The Company believes that existing competitors will grow and new competitors will enter the market in the short term. Additionally, through acquisition (including through purchase of targets such as the Company) or internal development, the Company believes that existing large scale conventional producers will begin to produce product using artificial light.
If and as the industry shifts to product grown under artificial light, large retailers may seek to enter into relationships with sellers of produce with a track record who have or are capable of scaling their operations throughout Canada and the United States. To position itself to take advantages of such opportunities the Company will have to scale.
The Company must manage its growth.
The Company is dependent on its key personal and its ability to transfer its existing know how and culture when establishing new facilities. Quality assurance must be maintained as failure could have consequences for all of the Company’s operations. The Company will need to be able to hire the talent it needs to be successful.
The Company must be sufficiently capitalized.
The Company must have sufficient capital and working capital to fund its expansion, applicable ramp up periods, research and development and unexpected contingencies. The Company anticipates that it will be able to operate on a break even basis, by covering the current costs of its research and development and other non-food production related costs, once it begins operation of its second large size commercial farm. Until such time the Company will be reliant on sources of capital other than revenues. Additionally, the Company intends to develop farms faster than what bootstrapping from revenues would otherwise allow.
Equity investors will be diluted as the Company’s accepts further equity investment and it is anticipated that each new farming facility will primarily be financed through debt. If the Company over leverages itself and is unable to maintain its debt, lenders would have recourse against the Company and its assets in accordance with the applicable lending agreements. To fund the Company’s growth strategy the Company does not intend on paying dividends in the foreseeable future.
Securities in the Company are subject to strict legal and contractual transfer restrictions.
The offer and sale of securities in the Company have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of Canada and the various states and provinces, and may not be resold unless subsequently registered under the Securities Act and such state and provincial laws, or exemptions from registration requirements are obtained. The Company has no obligation to register such securities and has no intention to do so. As a result, you must bear the economic risk of an investment in such securities for an indefinite period of time, have no need for liquidity in connection with the investment, and be able to afford to sustain a complete loss in the investment.