UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 20172018

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____________ to ____________

Commission File Number: 000-54258

2040 Main Street, Suite 225 Irvine, California		92614
(Address of Principal Executive Offices)		(Zip Code)

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 and 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 Exchange Act). Yes ¨ No x

As of August 4, 2017,6, 2018, there were 640,043,03672,189,614 shares of common stock outstanding, 1008 shares of Series A Preferred Stock, convertible at any time into 1008 shares of common stock, 33,146,1120 shares of Series B Preferred Stock, convertible into 178,469,458 shares of common stock, 15,668,2981,092,754 shares of common stock issuable upon the exercise of all of our outstanding warrants and 4,744,687884,207 shares of common stock issuable upon the exercise of all vested stock options.

TERRA TECH CORP. AND SUBSIDIARIES

INDEX TO FORM 10-Q FOR THE

QUARTERLY PERIOD ENDED JUNE 30, 20172018

INDEX

43

2

Table of Contents

TERRA TECH CORP. AND SUBSIDIARIES

TERRA TECH CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
		June 30,				December 31,
		2018				2017
		(Unaudited)
ASSETS
Current Assets:
Cash		$	5,153,608			$	5,445,582
Accounts Receivable			1,210,446				959,698
Notes Receivable			6,158,731				5,010,143
Inventory			3,840,773				5,760,019
Assets Held for Sale			904,352				-
Prepaid Expenses and Other Current Assets			1,086,989				1,067,689
Total Current Assets			18,354,899				18,243,131
Property, Equipment and Leasehold Improvements, Net			34,940,408				19,191,616
Intangible Assets, Net			26,696,348				27,773,110
Goodwill			28,921,260				28,921,260
Other Assets			878,098				4,058,682
TOTAL ASSETS		$	109,791,013			$	98,187,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Current Liabilities:
Accounts Payable and Accrued Expenses		$	4,076,973			$	5,444,710
Derivative Liabilities			1,891,400				9,331,400
Total Current Liabilities			5,968,373				14,776,110
Long-Term Liabilities:
Long-Term Debt, Net of Discounts			12,811,403				6,609,398
Total Long-Term Liabilities			12,811,403				6,609,398
Total Liabilities			18,779,776				21,385,508
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock, Convertible Series A, Par Value 0.001:			-				-
100 Shares Authorized as of June 30, 2018 and December 31, 2017; 8 Shares Issued and Outstanding as of June 30, 2018 and December 31, 2017
Preferred Stock, Convertible Series B, Par Value 0.001:			-				-
49,999,900 Shares Authorized as of June 30, 2018 and December 31, 2017; 0 Shares Issued and Outstanding as of June 30, 2018 and December 31, 2017
Common Stock, Par Value 0.001:			70,853				61,819
990,000,000 Shares Authorized as of June 30, 2018 and December 31, 2017; 70,852,978 and 61,818,560 Shares Issued and Outstanding as of June 30, 2018 and December 31, 2017, respectively
Additional Paid-In Capital			216,839,872				181,357,715
Accumulated Deficit			(127,008,525	)			(105,548,602	)
Total Terra Tech Corp. Stockholders’ Equity			89,902,200				75,870,932
Non-Controlling Interest			1,109,037				931,359
Total Stockholders’ Equity			91,011,237				76,802,291
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	109,791,013			$	98,187,799

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the unaudited consolidated financial statements.

3

Table of Contents

TERRA TECH CORP. AND SUBSIDIARIES

TERRA TECH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2018				2017				2018				2017
Total Revenues		$	8,718,177			$	7,842,873			$	17,333,543			$	14,667,329
Cost of Goods Sold			6,509,754				6,336,500				13,477,680				12,801,893
Gross Profit			2,208,423				1,506,373				3,855,863				1,865,436
Selling, General and Administrative Expenses			8,002,370				6,029,287				16,424,918				12,415,587
Loss from Operations			(5,793,947	)			(4,522,914	)			(12,569,055	)			(10,550,151	)
Other Income (Expense):
Amortization of Debt Discount			(417,363	)			(515,654	)			(885,680	)			(1,126,270	)
Loss on Extinguishment of Debt			(3,127,477	)			(1,639,137	)			(7,858,723	)			(2,678,595	)
Gain (Loss) on Fair Market Valuation of Derivatives			(1,653,000	)			987,200				628,000				2,597,950
Interest Expense, Net			(331,379	)			(130,510	)			(591,000	)			(288,343	)
Loss on Fair Market Valuation of Contingent Consideration			-				(77,286	)			-				(4,426,047	)
Gain on Settlement of Contingent Consideration			-				4,991,571				-				4,991,571
Total Other Income (Expense)			(5,529,219	)			3,616,184				(8,707,403	)			(929,734	)
Net Loss			(11,323,166	)			(906,730	)			(21,276,458	)			(11,479,885	)
Net Income (Loss) Attributable to Non-Controlling Interest			104,837				(452,961	)			183,465				(914,128	)
NET LOSS ATTRIBUTABLE TO TERRA TECH CORP.		$	(11,428,003	)		$	(453,769	)		$	(21,459,923	)		$	(10,565,757	)
Net Loss Per Common Share Attributable to Terra Tech Corp. Common Stockholders – Basic and Diluted		$	(0.17	)		$	(0.01	)		$	(0.32	)		$	(0.28	)
Weighted-Average Number of Common Shares Outstanding – Basic and Diluted			68,734,997				38,873,092				66,734,450				38,349,946

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

4

Table of Contents

TERRA TECH CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the unaudited consolidated financial statements.

5

Table of Contents

TERRA TECH CORP. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

NOTE 1 – DESCRIPTION OF BUSINESS

Organization

References in the Notes to Unaudited Consolidated Financial Statementsthis document to “the Company”, “Terra Tech”, “we”, “us”, or “our” are intended to mean Terra Tech Corp., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.

Through MediFarm, LLC, a Nevada limited liability company (“MediFarm”), MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”), and MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”), subsidiaries in which the Company owns interests, the Company operates and/or plans to operate medical marijuana dispensary facilities, cultivation, and production facilities in Nevada. Through IVXX, LLC, a Nevada limited liability company (“IVXX LLC”), and IVXX, Inc., a California corporation (“IVXX Inc.”; together with IVXX LLC, “IVXX”), the Company’s wholly-owned subsidiary, the Company produces and sells a line of cannabis flowers, as well as a line of cannabis pure concentrates. Most recently, the Company formed another subsidiary, MediFarm I Real Estate, LLC, a Nevada limited liability company (“MediFarm I RE”), which owns the real property on which a medical marijuana dispensary will be constructed. The dispensary will be operated by MediFarm I. Through Black Oak Gallery, a California corporation (“Black Oak”), we operate a medical marijuana retail dispensary, a medical marijuana cultivation facility, and have a second medical marijuana cultivation facility in the early stages of construction, all in Oakland, California. The Company is a wholesale sellervertically integrated retail, production and cultivation company, with an emphasis on providing the highest quality of locallymedical and adult use cannabis products. The Company also holds an exclusive patent on an organic antioxidant rich Superleaf lettuce and sells living herbs that are grown using classic Dutch hydroponic produce, herbsfarming methods.

The Company has a presence in three states (California, Nevada and floralNew Jersey), and currently has cannabis operations in California and Nevada. All the Company’s cannabis dispensaries operate under the name Blüm. The Company’s cannabis dispensaries offer a broad selection of medical and adult use cannabis products through its wholly-owned subsidiary, Edible Garden Corp., a Nevada corporation (“Edible Garden”).including flowers, concentrates and edibles.

On April 1, 2016,March 12, 2018, the Company acquired Black Oak. Black Oak operatesimplemented a medical marijuana retail dispensary1-for-15 reverse stock split of the Company’s common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in Oakland, California under the name Blüm, pursuantstock market upon commencement of trading on March 13, 2018. As a result of the Reverse Stock Split, every fifteen shares of the Company’s Pre-Reverse Stock Split common stock were combined and reclassified into one share of the Company’s common stock. The number of shares of common stock subject to that certain Agreementoutstanding options, warrants and Planconvertible securities were also reduced by a factor of Merger, dated December 23, 2015 (the “Merger Agreement”), with Generic Merger Sub, Inc., a California corporationfifteen as of March 13, 2018. All historical share and our wholly-owned subsidiary, and Black Oak.

Since the Merger was completed on April 1, 2016, Black Oak’s financial results are included in ourper share amounts reflected throughout unaudited consolidated financial statements subsequenthave been adjusted to that date.reflect the Reverse Stock Split. The authorized number of shares and the par value per share of the Company’s common stock were not affected by the Reverse Stock Split.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States(“GAAP”) for interim financial information and with the instructions to Securities Exchange Commission (“SEC”) Form 10-Q and Article 10 of Regulation S-X. Accordingly, theyS-X of the Securities Act of 1933 and reflect the accounts and operations of the Company and those entities in which we have a controlling financial interest. In accordance with the provisions of FASB or ASC 810, “Consolidation”, we consolidate any variable interest entity (“VIE”), of which we are the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We have determined that we are the primary beneficiary of certain VIEs. We evaluate our relationships with all the VIEs on an ongoing basis to reassess if we continue to be the primary beneficiary.

6

Table of Contents

All intercompany accounts and transactions have been eliminated in consolidation. The accompanying interim unaudited consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principlesGAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operatingof the unaudited consolidated financial position of the Company as of June 30, 2018, the unaudited consolidated results of operations for the three and six months ended June 30, 2018 and 2017, are not necessarily indicativeand the unaudited consolidated results of the results that may be expectedcash flows for the year ending December 31, 2017.

The consolidated balance sheet at December 31, 2016 hasthree and six months ended June 30, 2018 and 2017 have been derived from the auditedincluded. These interim unaudited consolidated financial statements at that date but doesdo not include all of the information and footnotes required by generally accepted accounting principlesGAAP for complete financial statements. For further information, refer tostatements and, therefore, should be read in conjunction with the consolidated financial statements and footnotes theretorelated notes contained in the Company’s most recent Annual Report on Form 10-K filed with the SEC. The December 31, 2017 balances reported herein are derived from the audited consolidated financial statements included in Terra Tech’s annual reportthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

6

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)2017, filed with the SEC on March 16, 2018. The results for the interim periods are not necessarily indicative of results to be expected for the full year.

Non-Controlling Interest

Non-controlling interest is shown as a component of shareholders’stockholders’ equity on the consolidated balance sheets and the share of net income (loss) attributable to non-controlling interest is shown as a component of net income (loss) in the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformityaccordance with United States generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as ofat the datedates of the financial statements and the reported amounts of revenuestotal net revenue and expenses duringin the reporting period. Actualperiods. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, sales returns, inventory valuation, stock-based compensation expense, goodwill and purchased intangible asset valuations, derivative liabilities, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results couldof which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from thosethese estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected. The Company continues to evaluate the impact of adult use legalization in California on its sales forecasts. Certain of the Company’s assets, such as goodwill, may be negatively impacted if the Company were to decrease its California sales forecasts.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not affect net loss and shareholders’or stockholders’ equity.

InventoryAssets Held for Sale

We value our inventoryAssets held for sale represent furniture, equipment, and leasehold improvements less accumulated depreciation as well as any other assets that are held for sale in conjunction with the sale of a business. The Company recorded assets held for sale in accordance with ASC 360, “Property, Plant, and Equipment,” at the lower of the actualcarrying value or fair value less cost of our inventory, as determined using the first-in, first-out method, or its current estimated net realizableto sell. Fair value (“NRV”). ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, defines NRV as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete is based on expected future use. Our reserve estimates have historically been consistent with our actual experience as evidenced by actualthe estimated proceeds from the sale or disposal of the goods.

Prepaid Expenses

Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include advertising, insurance and service contracts requiring up-front payments.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The approximate useful lives for depreciation of our property, equipment and leasehold improvements are as follows: 32 years for buildings; three to eight years for furniture and equipment; and the shorter of the estimated useful life or the underlying lease term for leasehold improvements. Repairs and maintenance expenditures that do not extend the useful lives of related assets are expensed as incurred.

Goodwill

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired and liabilities assumed in a business acquisition. Goodwill is not amortized for accounting purposes.

7

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

We review the goodwill allocated to each of our reporting units for possible impairment annually as of August 1 and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. When assessing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform a two-step impairment test. If we conclude otherwise, then no further action is taken. We also have the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, we measure the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit.

Intangibles

Intangible assets are stated at historical cost and amortized over their estimated useful lives. We use a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. The approximate useful lives for amortization of our intangible assets are as follows:

We review intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the reporting unit exceeds its fair value.

Impairment of Long-Lived Assets

We have adopted paragraph 360-10-35-17 of FASB Accounting Standards Codification (“ASC”) for our long-lived assets. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We assess the recoverability of our long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

Other Assets

Other assets are comprised primarily of security deposits for leased properties in California, Nevada and New Jersey. The deposits will be returned at the end of the lease term.

8

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Revenue Recognition

We recognize revenue in accordance with ASC 605,On January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, “Revenue Recognition”,from Contracts with Customers” by recognizing as revenueand all the fees we charge customers because persuasive evidencerelated amendments, which are also codified into Accounting Standards Codification (ASC) 606. The Company elected to adopt this guidance using the modified retrospective method. The adoption of an arrangement exists,this standard did not have a material impact on the fees we charge are substantially fixedCompany’s financial position or determinable duringresults of operations. The Company did not restate prior period information for the period that we provide the goods or services, we and our customers understand the specific nature and termseffects of the agreed upon transactions, and payment is madenew standard, nor did the Company adjust the opening balance of its’ retained deficit to account for the goods or services when theyimplementation of the new requirements of this standard. The Company does not expect the adoption of this guidance to have been rendered.a material effect on its’ results of operations in future periods.

Under the new standard, the Company recognizes a sale as follows:

Cannabis Dispensary, Cultivation and Production

We recognizeThe Company recognizes revenue from manufacturing and distribution product sales and upon transferwhen our customers obtain control of title and risk toour products. Revenue from our retail dispensaries is recorded at the customer, which occurs either at shipping (F.O.B. terms), or upon sell through, depending ontime customers take possession of the arrangement.

product. Revenue from our retail dispensaries is recognized net of discounts, rebates, promotional adjustments, price adjustments and returns, and net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Revenue is recorded upon transfer of title and risk to the customer, which occurs at the time customers take delivery of our products at our retail dispensaries. Upon purchase, we havethe Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.

Revenue related to distribution customers is recorded when the salecustomer is determined to have taken control of consignment inventorythe product. That determination is based on the customer specific terms of the arrangement and gives consideration to factors including, but not recognizedlimited to, whether the customer has an unconditional obligation to pay, whether a time period or event is specified in the arrangement and whether the Company can mandate the return or transfer of the products. Recorded revenue is net of any discounts, rebates, promotional adjustments and returns, and net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until the product is pulled from inventory and sold directly to end-customers. We recognize revenue from the sale of consignment inventory on a gross basis, as we have determined that: 1) we are the primary obligorremitted to the customer; 2) we have latitude in establishing the sales prices and profit margins of our products; 3) we have discretion in selecting our suppliers; 4) we are responsible for loss or damage to consigned inventory; and 5) our customer validation process performs an important part of the process of providing such products to authorized customers. We believe that these factors outweigh the fact that we do not have title to the consigned inventory prior to its sale.relevant government authority.

Herbs and Produce Products

We recognizeThe Company recognizes revenue from products grown in ourits greenhouses and sold net of discounts, rebates, promotional adjustments, price adjustments, andvariable consideration such as estimated returns and upon transferdelivery of title and riskthe product to the customer at which occurs at shipping (F.O.B. terms).time control passes to the customer. Upon shipment, we havetransfer of control, the Company has no further performance obligations, selling price is fixed, and collection is reasonably assured.obligations.

CostFor sales for which the Company uses an outside grower, the Company evaluates whether it is appropriate to record the gross amount of Goods Sold

Cannabis Dispensary, Cultivation and Production

Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finishedrelated costs or the net amount earned as commissions. The evaluation considers whether the Company takes control of the products of the outside grower, whether it has the ability to direct the outside grower to provide the product to the customer on its behalf or whether it combines products from the outside grower with its own goods such as flower, edibles, and concentrates, as well as packaging and other supplies, fees for services and processing, other expenses for services, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs. It also includesto provide the cost incurred in producingproducts to the oils, waxes, shatters, and clears sold by IVXX.customer.

HerbsIn evaluating whether it takes control of the products of the outside grower, the Company considers whether it has primary responsibility for fulfilling the promise to provide the products, whether the Company is subject to inventory risk related to the products and Produce Products

Cost of goods sold arewhether it has the ability to set the selling prices for the plants grown, packaging, other supplies and purchased plants that are sold into the retail marketplace by Edible Garden. Other expenses include freight, allocations of rent, repairs and maintenance, and utilities.products.

 

98

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Stock-Based CompensationFair Value of Financial Instruments

The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation”, which requiresapplies fair value measurement on the grant date and recognition of compensation expenseaccounting for all share-based payment awards madefinancial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to employees and directors, including restricted stock awards. For stock options,transfer a liability in an orderly transaction between market participants at the Company estimatesmeasurement date. When determining the fair value using a closed option valuation (Black-Scholes) model. Themeasurements for assets and liabilities that are required to be recorded at fair value, of restricted stock awardsthe Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is basedestimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 –Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market pricedata for substantially the full term of the common shares onassets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the date of grant. Theasset or liability.

In accordance with the fair value is then expensed overaccounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has elected the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.fair value option to measure any eligible financial instruments.

WarrantsDerivative Financial Instruments

ASC 815-40, “Contracts in Entity’s Own Equity”Derivatives and Hedging”, requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of ASC 815-40, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period.

ASC 815, “Derivatives and Hedging”, requires all derivatives to be recorded on the balance sheet at fair value. Furthermore, ASC 815 precludes contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders’ equity in its statement of financial position from being treated as derivative instruments.

ResearchThe Company estimates the fair value of any new derivative liabilities using the Monte Carlo Simulation (“MCS”) technique because it provides for the necessary assumptions and Development

Researchinputs. The MCS technique, which is an option-based model, is a generally accepted valuation technique for valuing embedded conversion features in convertible notes, because it is an open-ended valuation model that embodies all significant assumption types, and development costs are expensed as incurred.

Income Taxes

We provide for income taxes based on enacted tax law and statutory tax rates at which itemsranges of income and expense are expected toassumption inputs that the Company agrees would likely be settledconsidered in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assetsconnection with the arms-length negotiation related to the amount expectedtransference of the instrument by market participants. In addition to the typical assumptions in a closed-end option model, such as volatility and a risk-free rate, MCS incorporates assumptions for interest risk, credit risk and redemption behavior. In addition, MCS breaks down the time to expiration into potentially a large population of time intervals and steps. However, there may be realized. We have incurred net operating losses for financial-reportingother circumstances or considerations, other than those addressed herein, that relate to both internal and tax-reporting purposes. At June 30, 2017 and December 31, 2016, such net operating losses were offset entirelyexternal factors that would be considered by a valuation allowance.

The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained,market participants as it relates specifically to the Company recognizesand the largest amountsubject financial instruments. The effects, if any, of tax benefit that is greater than 50% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.

Loss Per Common Share

In accordance with the provisions of ASC 260, “Earnings Per Share”, net loss per share is computed by dividing net loss by the weighted-average shares of common stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock, and convertible debt are not considered in the diluted loss per share calculation since the effect wouldthese considerations cannot be anti-dilutive. The results of operations were a net loss for the three and six months ended June 30, 2017 and 2016. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for both periods.reasonably measured, quantified or qualified.

 

109

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Fair Value of Financial Instruments

We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. We have not elected the fair value option for any eligible financial instruments.

Recently Issued Accounting Standards

FASB ASU No. 2018-07 (Topic 718), “Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting” – Issued in June 2018, ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact the adoption of this standard will have on its statements and related disclosure.

FASB ASU 2017-04 (Topic 350), “Intangibles - Goodwill and Others” – Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 including interim periods within those periods. We areThe Company is currently evaluating the effect that ASU 2017-04 will have on our consolidated financial statements and related disclosures.

FASB ASU 2017-01 (Topic 805), “Business Combinations: Clarifying the Definition of a Business” – Issued in January 2017, ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for the Company in the first fiscal quarter of 2018 on a prospective basis, and early adoption is permitted. The Company does not expect the standard to have a material impact on our consolidated financial statements.

FASB ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” – Issued in August 2016, the amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, “Statement of Cash Flows”. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial statements.

11

Table of Contents

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

FASB ASU No. 2016-02 (Topic 842), “Leases” – Issued in February 2016, ASU No. 2016-02 will require entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new standard also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.

FASB ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers” – Issued in May 2014, ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016- 08, “Principal versus Agent Considerations (Reporting Gross versus Net)”, which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016-12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently in the process of evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on our consolidated financial statements.

NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK

The Company maintains cash balances in several financial institutions that are insured by the Federal Deposit Insurance Corporation up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations.California Licensed Vendors Requirement

The Company provides creditsources cannabis products for retail, cultivation and production from various vendors. However, as a result of the new regulations in the normal courseState of businessCalifornia, the Company’s California retail, cultivation and production operations must use vendors licensed by the State effective January 1, 2018. As a result, the Company will be dependent upon the licensed vendors in California to customers located throughoutsupply products as of that date. If the U.S. Company is unable to enter into a relationship with sufficient members of properly licensed vendors, the Company's sales may be impacted. During the three and six months ended June 30, 2018 and 2017, we did not have any concentration of vendors for inventory purchases. However, this may change depending on the number of vendors who receive appropriate licenses to operate in the State of California.

California Phase-In of Laboratory Testing Requirements

The Bureau of Cannabis Control (“BCC”) is the lead agency in developing regulations for medical and adult-use cannabis in California. The BCC is responsible for licensing retailers, distributors, testing labs and microbusinesses. Prior to July 1, 2018, the BCC allowed for a “transition period” in which they allowed exceptions from specific regulatory provisions. However, beginning July 1, 2018, cannabis goods must meet all statutory and regulatory requirements. A licensee can only sell cannabis goods that have been tested by a licensed testing laboratory and have passed all statutory and regulatory testing requirements. In order to be sold, cannabis goods harvested or manufactured prior to January 1, 2018, must be tested by a licensed testing laboratory and must comply with all testing requirements in section 5715 of the BCC’s regulations. Cannabis goods that do not meet all statutory and regulatory requirements must be destroyed in accordance with the rules pertaining to destruction.

10

Table of Contents

The laboratory testing requirements are being phased-in three tiers. Tiers 1, 2 and 3 have compliance deadlines of January 1, 2018, July 1, 2018 and December 31, 2018, respectively. With each phased-in tier there are specific laboratory testing requirements for different types of cannabis products as outlined below:

	Phase-In of Required Laboratory Testing	Inhalable Cannabis		Inhalable Cannabis Products		Other Cannabis & Cannabis Products
Tier 1	January 1, 2018
	Cannabinoids Testing	x		x		x
	Moisture Content Testing	x
	Category II Residual Solvents and Processing Chemicals Testing			x		x
	Category I Residual Pesticides Testing	x		x		x
	Microbial Impurities Testing (A. fumigatus, A. flavus, A. niger, A. terreus)	x		x
	Microbial Impurities Testing (Escherichia coli and Salmonella spp.)	x		x		x
	Homogeneity Testing of Edible Cannabis Products					x
Tier 2	July 1, 2018
	Category I Residual Solvents and Processing Chemicals Testing			x		x
	Category II Residual Pesticides Testing	x		x		x
	Foreign Material Testing	x		x		x
Tier 3	December 31, 2018
	Terpenoids Testing	x		x		x
	Mycotoxins Testing	x		x		x
	Heavy Metals Testing	x		x		x
	Water Activity Testing of Solid or Semi-Solid Edibles	x				x

On June 8, 2018 the BCC issued new guidance regarding the completion of the transition period from an unregulated to regulated state market.  This guidance was provided to issue direction on how licensees should treat inventory from 2017 and 2018, which was not completely compliant with the BCC regulations that commenced on January 1, 2018. One of these components was that, in addition to tier 1 testing, all products must meet tier 2 testing by July 1, 2018 and tier 3 testing by December 31, 2018.  While testing has not been a barrier to product availability for the Company, performs ongoing credit evaluationsit is possible that as the market transitions from tier 2 to tier 3 testing, that products meeting all three tier testing requirements will be limited in nature.  Through industry discussions, the Company believes that cultivators and manufacturers are aware of its customersthe new requirements and maintains allowances for doubtful accounts basedare taking great measures to meet these requirements.  Considering that other states have similar testing requirements, the Company does not expect that these new testing standards will be an actual barrier to product availability. However, the limited number of testing labs licensed by the state to perform all required tier testing may cause a backlog or delay in testing results, which could have an impact on factors surrounding the credit risk of specific customers, historical trends, and other information.product availability.

11

Table of Contents

NOTE 4 – INVENTORYASSETS HELD FOR SALE

Raw materials consistAs of Edible Garden’s herb product linesJune 30, 2018, there was one asset group in the Cannabis Dispensary, Cultivation and material for IVXX’s line of cannabis pure concentrates. Work-in-progress consists of live plants grown for Edible Garden’s herb product lines and live plants grown at Black Oak. Finished goods consists of IVXX’s line of cannabis packaged productsProduction segment that met the criteria to be soldrecorded as held for sale under ASC 360: (1) Management, having the authority to approve the action, committed to a plan to sell the asset, (2) The asset group was available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets, (3) An active program to locate a buyer and other actions required to complete the plan to sell the asset group have been initiated, (4) The sale of the asset group was probable, and transfer of the asset group was expected to qualify for recognition as a completed sale, within one year, (5) The asset group was being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (6) Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The assets related to this asset group has been classified as held for sale on the Consolidated Balance Sheets. On July 6, 2018, MediFarm LLC, a wholly-owned subsidiary of the Company, entered into dispensaries,an Asset Purchase Agreement (the “Purchase Agreement”) with Exhale Brands Nevada III, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and Edible Garden’s productsthe Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1921 Western Ave., Las Vegas, NV 89102 (the “Business”). The aggregate consideration to be sold via food, drug,paid for the Business is $6,250,000 in cash plus the value of any inventory of the Business on the closing date. The transaction is subject to approval by the Nevada Department of Taxation and mass channels.

CostThe components of goods sold is calculated using the average costing method. The Company reviews its inventory periodically to determine NRV. The Company writes down inventory, if required, based on forecasted demand. These factorsassets held for sale are impacted by market and economic conditions, new products introductions, and require estimates that may include uncertain elements.as follows:

 

		June 30, 2018
Cash		$	34,519
Inventory			199,323
Prepaid Expenses and Other Assets			41,700
Other Assets			775
Property, Equipment and Leasehold Improvements, Net			628,035
Assets Held for Sale		$	904,352

 

12

Table of Contents

NOTE 45 – INVENTORYVARIABLE INTEREST ENTITY ARRANGEMENTS

The Company has a shared interest in two entities, MediFarm I and MediFarm I RE, with another investor for the operation of a cultivation operation and dispensary in Nevada. The entities are considered to be VIE’s and the Company is considered to be the primary beneficiary by reference to the power and benefits criterion under ASC 810, (Continued)“Consolidation.” The Company has reviewed the provisions within the operating agreements and other factors which would grant the Company the power to manage and make decisions that affect the operation of these VIEs.

As the primary beneficiary of June 30, 2017MediFarm I and December 31, 2016, inventory consistedMediFarm I RE, the Company consolidates the accounts and operations of these entities. All intercompany transactions are eliminated in the following:

NOTE 5 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTSunaudited consolidated financial statements.

AsThe aggregate carrying values of June 30, 2017MediFarm I and December 31, 2016, property, equipmentMediFarm I RE assets and leasehold improvements at cost, less accumulated depreciation, consistedliabilities, after elimination of any intercompany transactions and balances, in the following:consolidated balance sheets were as follows (in thousands):

Depreciation expense related to property, equipment and leasehold improvements for the three months ended June 30, 2017 and 2016 was $456,659 and $222,939, respectively, and for the six months ended June 30, 2017 and 2016 was $919,732 and $373,668, respectively.

		June 30,				December 31,
		2018				2017
Current Assets:
Cash		$	251,508			$	409,029
Accounts Receivable, Net			224,259				-
Inventory			582,657				232,231
Prepaid Expenses and Other Current Assets			94,889				302,186
Total Current Assets			1,153,313				943,446
Property, Equipment and Leasehold Improvements, Net			1,890,709				1,965,103
TOTAL ASSETS		$	3,044,022			$	2,908,549
Current Liabilities:
Accounts Payable and Accrued Expenses		$	269,843			$	319,853
TOTAL LIABILITIES		$	269,843			$	319,853

NOTE 6 – INTANGIBLE ASSETSNOTES RECEIVABLE

On October 26, 2017, the Company entered into agreements with NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (collectively, “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements are subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. As part of the agreements, the Company made convertible loans at the time of the agreement of $4.5 million in aggregate to the NuLeaf entities bearing an interest rate of 6% per annum. In April 2018, the Company amended the note receivable with NuLeaf to extend the maturity date to August 1, 2018. Upon approval the loans will automatically convert into a 50% ownership in the NuLeaf entities. On June 28, 2018 the Company received approval from the State of Nevada. The remaining required approvals from local authorities were received in July 2018. As a result, the notes receivable balance at June 30, 2017 and December 31, 2016, intangible assets consisted of the following: