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 March 31, 20182019
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
TERRA TECH CORP. |
(Exact Name of Registrant as Specified in its Charter) |
NEVADA | 26-3062661 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
2040 Main Street, Suite 225 Irvine, California | 92614 | |
(Address of Principal Executive Offices) | (Zip Code) |
(855) 447-6967 |
(Registrant’s Telephone Number, Including Area 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):
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ | Smaller reporting company |
|
Emerging growth company | ¨ |
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 May 3, 2018,April 30, 2019, there were 68,347,901103,168,106 shares of common stock outstanding, 812 shares of Series A Preferred Stock, convertible at any time into 812 shares of common stock, 0 shares of Series B Preferred Stock, 1,022,3061,052,615 shares of common stock issuable upon the exercise of all of our outstanding warrants and 763,6632,560,555 shares of common stock issuable upon the exercise of all vested options.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 20182019
| Page | |||||
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Item 1. | Financial Statements | |||||
| Consolidated Balance Sheets as of March 31, |
| 3 | |||
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| 4 | ||||
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| 5 | ||||
6-7 | ||||||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| 40 |
2 |
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TERRA TECH CORP. AND SUBSIDIARIES | ||||||||
(in thousands, except for Shares) | ||||||||
|
| |||||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
| (Unaudited) |
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| ||
ASSETS | ||||||||
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| ||
Current Assets: |
|
|
|
|
|
| ||
Cash |
| $ | 5,807 |
|
| $ | 7,193 |
|
Accounts Receivable |
|
| 1,862 |
|
|
| 1,247 |
|
Inventory |
|
| 4,505 |
|
|
| 2,280 |
|
Assets Held for Sale |
|
| 7,509 |
|
|
| 7,501 |
|
Prepaid Expenses and Other Current Assets |
|
| 923 |
|
|
| 741 |
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
|
| 20,606 |
|
|
| 18,963 |
|
|
|
|
|
|
|
|
|
|
Property, Equipment and Leasehold Improvements, Net |
|
| 46,432 |
|
|
| 34,139 |
|
Intangible Assets, Net |
|
| 25,708 |
|
|
| 18,466 |
|
Goodwill |
|
| 35,973 |
|
|
| 35,173 |
|
Other Assets |
|
| 11,115 |
|
|
| 897 |
|
Other Investments |
|
| 5,300 |
|
|
| 12,451 |
|
|
|
|
|
|
|
|
|
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TOTAL ASSETS |
| $ | 145,133 |
|
| $ | 120,088 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES: |
|
|
|
|
|
|
|
|
Current Liabilities: |
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|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses |
| $ | 9,222 |
|
| $ | 6,901 |
|
|
|
|
|
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|
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Total Current Liabilities |
|
| 9,222 |
|
|
| 6,901 |
|
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Long-Term Liabilities: |
|
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|
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|
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|
|
Long-Term Debt, Net of Discounts |
|
| 13,031 |
|
|
| 18,313 |
|
Long-Term Lease Liabilities |
|
| 7,786 |
|
|
| - |
|
Total Long-Term Liabilities |
|
| 20,817 |
|
|
| 18,313 |
|
|
|
|
|
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Total Liabilities |
|
| 30,039 |
|
|
| 25,214 |
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STOCKHOLDERS’ EQUITY: |
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Preferred Stock, Convertible Series A, Par Value 0.001: 100 Shares Authorized as of March 31, 2019 and December 31, 2018; 12 Shares Issued and Outstanding as of March 31, 2019 and December 31, 2018 |
|
| - |
|
|
| - |
|
Preferred Stock, Convertible Series B, Par Value 0.001: 41,000,000 Shares Authorized as of March 31, 2019 and December 31, 2018; 0 Shares Issued and Outstanding as of March 31, 2019 and December 31, 2018 |
|
| - |
|
|
| - |
|
Common Stock, Par Value 0.001: 990,000,000 Shares Authorized as of March 31, 2019 and December 31, 2018; 100,648,444 and 81,759,415 Shares Issued and Outstanding as of March 31, 2019 and December 31, 2018, respectively (1) |
|
| 101 |
|
|
| 82 |
|
Additional Paid-In Capital (1) |
|
| 253,066 |
|
|
| 236,543 |
|
Accumulated Deficit |
|
| (147,442 | ) |
|
| (142,754 | ) |
|
|
|
|
|
|
|
|
|
Total Terra Tech Corp. Stockholders’ Equity |
|
| 105,725 |
|
|
| 93,870 |
|
Non-Controlling Interest |
|
| 9,369 |
|
|
| 1,003 |
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity |
|
| 115,094 |
|
|
| 94,874 |
|
|
|
|
|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 145,133 |
|
| $ | 120,088 |
|
March 31, December 31, 2018 2017 (Unaudited) ASSETS Current Assets: Cash Accounts Receivable Notes Receivable Inventory Prepaid Expenses and Other Current Assets Total Current Assets Property, Equipment and Leasehold Improvements, Net Intangible Assets, Net Goodwill Other Assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Current Liabilities: Accounts Payable and Accrued Expenses Derivative Liabilities Total Current Liabilities Long-Term Liabilities: Long-Term Debt, Net of Discounts Total Long-Term Liabilities Total Liabilities COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY: Preferred Stock, Convertible Series A, Par Value $0.001: 100 Shares Authorized as of March 31, 2018 and December 31, 2017; 8 Shares Issued and Outstanding as of March 31, 2018 and December 31, 2017 - - Preferred Stock, Convertible Series B, Par Value $0.001: 49,999,900 Shares Authorized as of March 31, 2018 and December 31, 2017; 0 Shares Issued and Outstanding as of March 31, 2018 and December 31, 2017 - - Common Stock, Par Value $0.001: 990,000,000 Shares Authorized as of March 31, 2018 and December 31, 2017; 65,344,816 and 61,818,560 Shares Issued and Outstanding as of March 31, 2018 and December 31, 2017, respectively 65,345 61,819 Additional Paid-In Capital Accumulated Deficit Total Terra Tech Corp. Stockholders’ Equity Non-Controlling Interest Total Stockholders’ Equity TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (1) Adjusted to reflect the one-for-15 reverse stock split. See "Note 1 – Description of Business.”$ 4,510,769 $ 5,445,582 722,929 959,698 5,964,204 5,010,143 4,772,158 5,760,019 1,581,555 1,067,689 17,551,615 18,243,131 33,343,257 19,191,616 27,166,459 27,773,110 28,921,260 28,921,260 861,842 4,058,682 $ 107,844,433 $ 98,187,799 $ 4,840,730 $ 5,444,710 4,059,400 9,331,400 8,900,130 14,776,110 13,232,818 6,609,398 13,232,818 6,609,398 22,132,948 21,385,508 200,222,380 181,357,715 (115,580,522 ) (105,548,602 ) 84,707,203 75,870,932 1,004,282 931,359 85,711,485 76,802,291 $ 107,844,433 $ 98,187,799
The accompanying notes are an integral part of the unaudited consolidated financial statements.
3 |
Table of Contents |
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||
(UNAUDITED) | ||||||||
(in thousands, except for Shares & Per-Share info) | ||||||||
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|
| Three Months Ended March 31, |
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| 2019 |
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| 2018 |
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Total Revenues |
| $ | 7,358 |
|
| $ | 8,615 |
|
Cost of Goods Sold |
|
| 3,354 |
|
|
| 5,494 |
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|
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Gross Profit |
|
| 4,004 |
|
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| 3,122 |
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Selling, General and Administrative Expenses |
|
| 11,515 |
|
|
| 10,292 |
|
|
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|
|
|
|
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Loss from Operations |
|
| (7,511 | ) |
|
| (7,171 | ) |
|
|
|
|
|
|
|
|
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Other Income (Expense): |
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
| (2,928 | ) |
|
| (4,926 | ) |
Other Income/Loss |
|
| 48 |
|
|
| - |
|
Share of Gain / (Loss) in Joint Venture |
|
| 5,599 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense) |
|
| 2,719 |
|
|
| (4,926 | ) |
|
|
|
|
|
|
|
|
|
Net Loss |
|
| (4,792 | ) |
|
| (12,097 | ) |
Net Income (Loss) Attributable to Non-Controlling Interest |
|
| 277 |
|
|
| 79 |
|
|
|
|
|
|
|
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|
NET LOSS ATTRIBUTABLE TO TERRA TECH CORP. |
| $ | (5,069 | ) |
| $ | (12,175 | ) |
|
|
|
|
|
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|
Net Loss Per Common Share Attributable to Terra Tech Corp. Common Stockholders – Basic and Diluted (1) |
| $ | (0.05 | ) |
| $ | (0.19 | ) |
|
|
|
|
|
|
|
|
|
Weighted-Average Number of Common Shares Outstanding – Basic and Diluted (1) |
|
| 93,710,004 |
|
|
| 64,711,660 |
|
Three Months Ended March 31, 2018 2017 Total Revenues Cost of Goods Sold Gross Profit Selling, General and Administrative Expenses Loss from Operations Other Income (Expense): Amortization of Debt Discount Loss on Extinguishment of Debt Gain on Fair Market Valuation of Derivatives Interest Expense, Net Loss on Fair Market Valuation of Contingent Consideration Total Other Income (Expense) Net Loss Net Income (Loss) Attributable to Non-Controlling Interest NET LOSS ATTRIBUTABLE TO TERRA TECH CORP. Net Loss Per Common Share Attributable to Terra Tech Corp. Common Stockholders – Basic and Diluted Weighted-Average Number of Common Shares Outstanding – Basic and Diluted (1) Adjusted to reflect the one-for-15 reverse stock split. See "Note 1 – Description of Business."$ 8,615,366 $ 6,824,456 6,967,926 6,465,393 1,647,440 359,063 8,422,548 6,386,300 (6,775,108 ) (6,027,237 ) (468,317 ) (610,616 ) (4,731,246 ) (1,039,458 ) 2,281,000 1,610,750 (259,621 ) (157,833 ) - (4,348,761 ) (3,178,184 ) (4,545,918 ) (9,953,292 ) (10,573,155 ) 78,628 (461,167 ) $ (10,031,920 ) $ (10,111,988 ) $ (0.16 ) $ (0.27 ) 64,711,660 37,818,109
The accompanying notes are an integral part of the unaudited consolidated financial statements.
4 |
Table of Contents |
| ||||||
|
CONSOLIDATED STATEMENTS OF CASH FLOWS | CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||||||
(UNAUDITED) | (UNAUDITED) | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
|
| |||||||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| March 31, |
|
| March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
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| 2019 |
|
| 2018 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||||
Net Loss |
| $ | (9,953,292 | ) |
| $ | (10,573,155 | ) |
| $ | (4,792 | ) |
| $ | (12,097 | ) |
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: |
|
|
|
|
|
|
|
|
|
| ||||||
Gain on Fair Market Valuation of Derivatives |
| (2,281,000 | ) |
| (1,610,750 | ) | ||||||||||
Loss on Fair Market Valuation of Contingent Consideration |
| - |
| 4,348,761 |
| |||||||||||
Cancellation of Shares Issued |
| (117,831 | ) |
| - |
| ||||||||||
Loss on Extinguishment of Debt |
| 4,731,246 |
| 1,039,458 |
| |||||||||||
Amortization of Debt Discount |
| 468,317 |
| 610,616 |
| |||||||||||
Cancellation of shares issued |
| (58 | ) |
| (118 | ) | ||||||||||
Interest Expense |
| 2,928 |
| 4,926 |
| |||||||||||
Interest Income Accreted |
| (68,061 | ) |
| - |
|
| - |
| (68 | ) | |||||
Depreciation and Amortization |
| 1,137,221 |
| 892,598 |
|
| 1,565 |
| 1,533 |
| ||||||
Warrants Issued with Common Stock and Debt |
| - |
| 107,035 |
| |||||||||||
Stock Issued for Interest Expense |
| - |
| 129,639 |
| |||||||||||
Operating Lease Expense |
| 562 |
| - |
| |||||||||||
Stock Issued for Compensation |
| 288,450 |
| 1,061,506 |
|
| 315 |
| 288 |
| ||||||
Stock Issued for Director Fees |
| - |
| 37,500 |
| |||||||||||
Stock Issued for Services |
| 16,692 |
| 145,011 |
|
| 23 |
| 17 |
| ||||||
Stock Option Compensation |
| 474,198 |
| 47,589 |
| |||||||||||
Stock Option Expense |
| 1,282 |
| 474 |
| |||||||||||
Gain on Revaluation of Equity Interests |
| (5,597 | ) |
| - |
| ||||||||||
Other Noncash Gains |
| - |
| (175 | ) | |||||||||||
Changes in Operating Assets and Liabilities: |
|
|
|
|
|
| - |
| - |
| ||||||
Accounts Receivable |
| 236,769 |
| 328,510 |
|
| (615 | ) |
| 237 |
| |||||
Inventory |
| 987,861 |
| (208,527 | ) |
| (1,251 | ) |
| 988 |
| |||||
Prepaid Expenses and Other Current Assets |
| (864,938 | ) |
| (1,155,891 | ) |
| (102 | ) |
| (865 | ) | ||||
Other Assets |
| (203,160 | ) |
| (228,795 | ) |
| (221 | ) |
| (203 | ) | ||||
Accounts Payable and Accrued Expenses |
|
| (519,369 | ) |
|
| 1,274,929 |
|
| 742 |
| (604 | ) | |||
Payments on Operating Lease Liabilities |
|
| (497 | ) |
|
| - |
| ||||||||
|
|
|
|
|
|
|
|
|
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| ||||||
NET CASH USED IN OPERATING ACTIVITIES |
|
| (5,666,897 | ) |
|
| (3,753,966 | ) |
|
| (5,715 | ) |
|
| (5,667 | ) |
|
|
|
|
|
|
|
|
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| ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of Note Receivable |
| (886,000 | ) |
| - |
|
| - |
| (886 | ) | |||||
Purchase of Property, Equipment and Leasehold Improvements |
|
| (4,682,211 | ) |
|
| (523,740 | ) |
| (2,547 | ) |
| (4,682 | ) | ||
Purchase of Equity investment |
| (402 | ) |
| - |
| ||||||||||
Cash from Acquisition of Joint Venture Entities |
|
| 127 |
|
|
| - |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
NET CASH USED IN INVESTING ACTIVITIES |
|
| (5,568,211 | ) |
|
| (523,740 | ) |
|
| (2,822 | ) |
|
| (5,568 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||||
Proceeds from Issuance of Notes Payable |
| 10,000,000 |
| 3,000,000 |
|
| 6,000 |
| 10,000 |
| ||||||
Payments of Debt Principal |
| (1,000 | ) |
| - |
| ||||||||||
Cash Paid for Debt Discount |
| (495,000 | ) |
| - |
|
| (150 | ) |
| (495 | ) | ||||
Proceeds from Issuance of Common Stock, Warrants and Common Stock Subscribed |
| 750,000 |
| 1,700,000 |
| |||||||||||
Proceeds from Issuance of Common Stock |
| 2,300 |
| 750 |
| |||||||||||
Proceeds from Exercise of Warrants |
| 51,000 |
| - |
|
| - |
| 51 |
| ||||||
Cash (Distribution) Contribution from Non-Controlling Interest |
|
| (5,705 | ) |
|
| 80,834 |
|
|
| - |
|
|
| (6 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
| 10,300,295 |
|
|
| 4,780,834 |
|
|
| 7,150 |
|
|
| 10,300 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
NET CHANGE IN CASH |
| (934,813 | ) |
| 503,128 |
|
| (1,387 | ) |
| (935 | ) | ||||
NET CHANGE IN CASH CLASSIFIED WITHIN CURRENT ASSETS HELD FOR SALE |
| - |
| - |
| |||||||||||
Cash at Beginning of Period |
|
| 5,445,582 |
|
|
| 9,749,572 |
|
|
| 7,193 |
|
|
| 5,446 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
CASH AT END OF PERIOD |
| $ | 4,510,769 |
|
| $ | 10,252,700 |
|
| $ | 5,807 |
|
| $ | 4,511 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES: |
|
|
|
|
| |||||||||||
Cash Paid for Interest |
| $ | 50 |
|
| $ | 312 |
| ||||||||
|
|
|
|
|
| |||||||||||
SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
| |||||||||||
Financing Fees in Accounts Payable |
| $ | 25 |
|
| $ | - |
| ||||||||
Purchase of Land and Building with a Mortgage |
| $ | 6,500,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 6,500 |
|
Fair Value of Debt Discount and Derivative Liability Recorded |
| $ | 6,440,000 |
|
| $ | - |
| ||||||||
Issuance of Common Stock for Debt and Interest Expense |
| $ | 17,180,837 |
|
| $ | 3,688,963 |
| ||||||||
Derivative Debt Converted into Equity |
| $ | - |
|
| $ | 2,770,650 |
| ||||||||
Claw back of Escrow Shares From The Tech Center Drive Asset Acquisition |
| $ | 351,072 |
|
| $ | - |
| ||||||||
Issuance of Common Stock for Other Assets |
| $ | 100,000 |
|
| $ | - |
| ||||||||
Fair Value of Warrants Issued for Debt Discount |
| $ | 475,917 |
|
| $ | - |
| ||||||||
Claw Back of Escrow Shares |
| $ | - |
|
| $ | 351 |
| ||||||||
Warrants Issued in Conjunction with Debt |
| $ | 163 |
|
| $ | 466 |
| ||||||||
Stock Issued for Assets |
| $ | - |
|
| $ | 100 |
| ||||||||
Conversion of Dominion Debt |
| $ | 7,750 |
|
| $ | 9,400 |
| ||||||||
Deposits Applied to the Purchase of Property |
| $ | 3,500,000 |
|
| $ | - |
|
| $ | - |
|
| $ | 3,500 |
|
Beneficial Conversion Feature Recorded as Debt Discount |
| $ | 4,662 |
|
| $ | 3,811 |
| ||||||||
Consolidation of Joint Venture Net Assets |
| $ | 11,957 |
|
| $ | - |
|
The accompanying notes are an integral part of the unaudited consolidated financial statements.
5 |
Table of Contents |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (1) | |||||||||||||||||||||||||||||
(in thousands, except for Shares) |
|
| Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Convertible Series A |
|
| Convertible Series B |
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated |
|
| Non- Controlling |
|
|
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total |
| ||||||||||
Balance at December 31, 2017 |
|
| 8 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 61,818,560 |
|
| $ | 62 |
|
| $ | 181,358 |
|
| $ | (105,549 | ) |
| $ | 931 |
|
| $ | 76,802 |
|
Opening Balance Sheet Adjustment - ASU 2017-11 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,238 |
|
|
| 2,548 |
|
|
| - |
|
|
| 7,786 |
|
Beneficial Conversion Feature - Convertible Notes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,811 |
|
|
| - |
|
|
| - |
|
|
| 3,811 |
|
Issuance of Common Stock for Compensation |
|
| 4 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 81,506 |
|
|
| 0 |
|
|
| 288 |
|
|
| - |
|
|
| - |
|
|
| 288 |
|
Issuance of Common Stock for Services |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 6,410 |
|
|
| 0 |
|
|
| 17 |
|
|
| - |
|
|
| - |
|
|
| 17 |
|
Stock Cancellation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (24,510 | ) |
|
| (0 | ) |
|
| (118 | ) |
|
| - |
|
|
| - |
|
|
| (118 | ) |
Reverse Stock Split round up shares |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 46,688 |
|
|
| 0 |
|
|
| (0 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
TCD Acquisition Clawback |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (101,083 | ) |
|
| (0 | ) |
|
| (351 | ) |
|
| - |
|
|
| - |
|
|
| (351 | ) |
Warrant Exercise |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 197,125 |
|
|
| 0 |
|
|
| 51 |
|
|
| - |
|
|
| - |
|
|
| 51 |
|
Debt Conversion - Common Stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,133,025 |
|
|
| 3 |
|
|
| 9,485 |
|
|
| - |
|
|
| - |
|
|
| 9,488 |
|
Stock issued for Cash |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 160,430 |
|
|
| 0 |
|
|
| 750 |
|
|
| - |
|
|
| - |
|
|
| 750 |
|
Stock issued for Assets |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 26,666 |
|
|
| 0 |
|
|
| 100 |
|
|
| - |
|
|
| - |
|
|
| 100 |
|
Stock Option Expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 474 |
|
|
| - |
|
|
| - |
|
|
| 474 |
|
Issuance of warrants |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 466 |
|
|
| - |
|
|
| - |
|
|
| 466 |
|
Net Income Attributable to Non-Controlling Interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 79 |
|
|
| 79 |
|
Net Loss Attributable to Terra Tech Corp. |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (12,175 | ) |
|
| - |
|
|
| (12,175 | ) |
Balance at March 31, 2018 |
|
| 12 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 65,344,816 |
|
| $ | 65 |
|
| $ | 201,570 |
|
| $ | (115,176 | ) |
| $ | 1,010 |
|
| $ | 87,469 |
|
(1) Adjusted to reflect the 1 for 15 reverse stock split. See Note 15.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
6 |
Table of Contents |
TERRA TECH CORP. AND SUBSIDIARIES | |||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 (1) | |||||||||||||||||||||||||||||
(in thousands, except for Shares) |
|
| Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Convertible Series A |
|
| Convertible Series B |
|
| Common Stock |
|
| Additional Paid-In |
|
| Accumulated |
|
| Non- Controlling |
|
|
|
| |||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interest |
|
| Total |
| ||||||||||
Balance at December 31, 2018 |
|
| 12 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 81,759,415 |
|
| $ | 82 |
|
| $ | 236,543 |
|
| $ | (142,754 | ) |
| $ | 1,003 |
|
| $ | 94,874 |
|
Opening Balance Sheet Adjustment - ASC 842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 381 |
|
|
|
|
|
|
| 381 |
|
Stock Compensation - Employees |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 385,536 |
|
|
| 0 |
|
|
| 315 |
|
|
| - |
|
|
| - |
|
|
| 315 |
|
Stock Compensation - Services Expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 26,376 |
|
|
| 0 |
|
|
| 23 |
|
|
| - |
|
|
| - |
|
|
| 23 |
|
Stock Cancellation |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (60,000 | ) |
|
| (0 | ) |
|
| (58 | ) |
|
| - |
|
|
| - |
|
|
| (58 | ) |
Debt Conversion - Common Stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 15,038,949 |
|
|
| 15 |
|
|
| 7,839 |
|
|
| - |
|
|
| - |
|
|
| 7,854 |
|
Stock issued for Cash |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,498,168 |
|
|
| 3 |
|
|
| 2,297 |
|
|
| - |
|
|
| - |
|
|
| 2,300 |
|
Stock Option Expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,282 |
|
|
| - |
|
|
| - |
|
|
| 1,282 |
|
Issue of warrants to Aegis |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,825 |
|
|
| - |
|
|
| - |
|
|
| 4,825 |
|
Consolidation of NuLeaf Joint Venture |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,089 |
|
|
| 8,117 |
|
Net Income Attributable to Non-Controlling Interest |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 277 |
|
|
| 277 |
|
Net Loss Attributable to Terra Tech Corp. |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,069 | ) |
|
| - |
|
|
| (5,069 | ) |
Balance at March 31, 2019 |
|
| 12 |
|
| $ | - |
|
|
| - |
|
| $ | - |
|
|
| 100,648,444 |
|
| $ | 101 |
|
| $ | 253,066 |
|
| $ | (147,442 | ) |
| $ | 9,369 |
|
| $ | 115,094 |
|
(1) Adjusted to reflect the 1 for 15 reverse stock split. See Note 15.
The accompanying notes are an integral part of the unaudited consolidated financial statements.
7 |
Table of Contents |
TERRA TECH CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
Organization
References in this 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.
The Company isWe are a vertically integrated retail, production and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. The Company also holds an exclusive patent on anWe grow organic antioxidant rich Superleaf lettuce and sells living herbs that are grown using classic Dutch hydroponic farming methods. We have licensed an exclusive patent on the Superleaf lettuce.
The Company hasWe have a presence in three states (California, Nevada and New Jersey), and currently hashave a concentrated cannabis operationsinterest in California and Nevada. All of the Company’sour cannabis dispensaries operate under the name Blüm. The Company’sOur cannabis dispensaries in California operate as MediFarm SoCal in Santa Ana, Black Oak Gallery in Oakland and Blum San Leandro in San Leandro and offer a broad selection of medical and adult useadult-use cannabis products including flowers, concentrates and edibles.
In Nevada, we have three dispensaries, two under MediFarm in Las Vegas and one under MediFarm I in Reno, which sell quality medical and adult use cannabis products. We jointly own real property in Reno under MediFarm I RE, on which MediFarm I operates its dispensary.
Founded on the importance of providing consumers with healthy and natural products, Edible Garden is a wholesale seller of organic and locally grown hydroponic produce and herb products. EG Transportation supports the distribution of Edible Garden products to major grocery stores such as ShopRite, Walmart, Ahold, Aldi, Meijer, Kroger, and others throughout New Jersey, New York, Delaware, Maine, Maryland, Connecticut, Pennsylvania and the Midwest.
On March 12, 2018, the Company implemented a 1-for-15 reverse stock split of the Company’s common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the stock 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 shares subject to outstanding options, warrants and convertible securities were also reduced by a factor of fifteen as of March 13, 2018. All historical share and per share amounts reflected throughout unaudited consolidated financial statements have been adjusted to 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 (“GAAP”) for interim financial information and with the instructions to Securities Exchange Commission (“SEC”) Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1933 and reflect the accounts and operations of the Company and those of our subsidiariesentities in which we have a controlling financial interest. In accordance with the provisions of FASBthe Financial Accounting Standards Board (“FASB”) or ASCAccounting Standards Codification (“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.
Table of Contents |
All intercompany accounts and transactions have been eliminated in consolidation. Accordingly, the accompanying interim unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the unaudited consolidated financial position of the Company as of March 31, 2018, the unaudited consolidated results of operations for the three months ended March 31, 2018 and 2017, and the unaudited consolidated results of cash flows for the three months ended March 31, 2018 and 2017 have been included. These interim unaudited consolidated financial statements do not include all of the information and footnotesdisclosures required by GAAP for complete financial statements and, therefore, should be read in conjunction with the more detailed audited consolidated financial statements and related notes contained infor the Company’s most recent Annual Report on Form 10-K filed with the SEC.year ended December 31, 2018. The December 31, 20172018 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 16, 2018. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
Liquidity
As of March 31, 2019, the Company’s principal sources of liquidity consisted of approximately $5.81 million of cash, future cash generated from operations, and available financing. The Company believes its current cash balances coupled with anticipated cash flow from operating activities will be sufficient to meet its working capital requirements for at least one year from the date of the issuance of the accompanying financial statements. The Company continues to control its cash expenses as a percentage of expected revenue on an annual basis and thus may use its cash balances in the short-term to invest in revenue growth. Based on current internal projections, the Company believes it has and/or will generate sufficient cash for its operational needs. The company believes that it has sufficient capital and liquidity to fund its operations for at least one year from the date of issuance of the accompanying financial statements.
Non-Controlling Interest
Non-controlling interest is shown as a component of 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 accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. 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 of 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 these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications did not affect net loss, revenues or stockholders’ equity.
Trade and other Receivables
The Company extends noninterest bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable.
Inventory
Inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and reserves. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods.
9 |
Table of Contents |
Prepaid Expenses and Other Current Assets
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 or other contracts requiring upfront payments.
Property, Equipment and Leasehold Improvements, Net
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: thirty-two years for buildings; three to eight years for furniture and equipment; three to five years for computer and software; five years for vehicles 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.
Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See “Note 9 – Property, Equipment and Leasehold Improvements, Net” for further information.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are accounted for under the cost or the equity method of accounting, as appropriate. The Company accounts for investments in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5% of the investee's outstanding voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company's investment and adjusted each period for the Company's share of the investee's income or loss, and dividends paid. As investments accounted for under the cost method do not have readily determinable fair values, the Company only estimates fair value if there are identified events or changes in circumstances that could have a significant adverse effect on the investment's fair value.
Assets Held for Sale
Assets 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 carrying value or fair value less costs to sell. Fair value is based on the estimated proceeds from the sale of the facility utilizing recent purchase offers, market comparables and/or data. Our estimate as to fair value is regularly reviewed and subject to changes in the commercial real estate markets and our continuing evaluation as to the facility’s acceptable sale price. The reclassification takes place when the assets are available for immediate sale and the sale is highly probable. These conditions are usually met from the date on which a letter of intent or agreement to sell is ready for signing.
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. In accordance with ASC 350, “Intangibles—Goodwill and Other,” goodwill and other intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired.
The Company reviews the goodwill allocated to each of our reporting units for possible impairment annually as of September 30 and whenever events or changes in circumstances indicate carrying amount may not be recoverable. In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry, and market considerations, cost factors, overall financial performance and share price trends, and making the assessment as to whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.
10 |
Table of Contents |
The carrying amount of each reporting unit is determined based upon the assignment of our assets and liabilities, including existing goodwill and other intangible assets, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. Where the Company has had an acquisition that benefited more than one reporting unit, The Company has assigned the goodwill to our reporting units as of the acquisition date such that the goodwill assigned to a reporting unit is the excess of the fair value of the acquired business, or portion thereof, to be included in that reporting unit over the fair value of the individual assets acquired and liabilities assumed that are assigned to the reporting unit.
If the carrying amount of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of the impairment analysis to measure the amount of the impairment loss, by allocating the reporting unit’s fair value to its assets and liabilities other than goodwill, comparing the carrying amount of the goodwill to the resulting implied fair value of the goodwill, and recording an impairment charge for any excess.
Intangible Assets
Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses 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:
Customer Relationships | 3 to 5 Years | |
Trademarks | 2 to 8 Years | |
Dispensary Licenses | 14 Years | |
Patent | 2 Years | |
Management Service Agreement | 15 Years |
Business Combinations
The Company accounts for its business acquisitions in accordance with ASC 805-10, “Business Combinations.” The Company allocates the total cost of the acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, the Company identifies and attributes values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models, and therefore require considerable judgment. The Company’s estimates and assumptions are based, in part, on the availability of listed market prices or other transparent market data. These determinations affect the amount of amortization expense recognized in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain.
Revenue Recognition and Performance Obligations
On January 1, 2018, the Company adopted Accounting Standards Update (ASU)(“ASU”) 2014-09, “Revenue from Contracts with CustomersCustomers” and all the related amendments, which are also codified into Accounting Standards Codification (ASC)ASC 606. The Company elected to adopt this guidance using the modified retrospective method. The adoption of this standardguidance did not have a material impacteffect on the Company’s financial position, or results of operations. The Company did not restate prior period information for the effects of the new standard, nor did the Company adjust the opening balance of its’ retained deficit to account for the implementation of the new requirements of this standard. The Company does not expect the adoption of this guidance to have a material effect on its’ results of operations in future periods.or cash flows.
Under the new standard, the Company recognizes a sale as follows:
Cannabis Dispensary, Cultivation and Production
The Company recognizes revenue from manufacturing and distribution product sales when our customers obtain control of our products. Revenue from our retail dispensaries is recorded at the time customers take possession of the 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. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.
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Revenue related to distribution customers is recorded when the customer is determined to have taken control of the product. ThatThis determination is based on the customer specific terms of the arrangement and gives consideration to factors including, but not limited 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 revenueRevenue is net of any discounts, rebates, promotional adjustments and returns, andrecorded 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.
Herbs and Produce Products
The Company recognizes revenue from products grown in its greenhouses net of variable consideration such as estimated returns upon delivery of the product to the customer at which time control passes to the customer. Upon transfer of control, the Company has no further performance obligations.
For sales for which the Company uses an outside grower, the Company evaluates whether it is appropriate to record the gross amount of product sales and related 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 and services to provide the products to the customer.
In 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 whether it has the ability to set the selling prices for the products.
Disaggregation of Revenue
See “Note 18 – Segment Information” for revenues disaggregated by type as required by ASC Topic 606.
Contract Balances
Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC Topic 606.
Contract Estimates and Judgments
The Company’s revenues accounted for under ASC Topic 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts are included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
Fair Value of Financial Instruments
The Company applies fair value accounting for all financial 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 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, the 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 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. The Company has not elected the fair value option forto measure any eligible financial instruments.
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Recently IssuedAdopted Accounting Standards
FASB ASU 2017-12No. 2018-07 (Topic 815)718), “Derivatives and Hedging (Topic 815), Targeted“Compensation—Stock Compensation: Improvements to Accounting for Hedging Activities”Nonemployee Share-Based Payment Accounting” – Issued in August 2017,June 2018, ASU 2017-12 eliminates2018-07 expands the requirementscope of Topic 718 to separately measureinclude share-based payment transactions for acquiring goods and report hedge ineffectiveness. For qualifying cash flow and net investment hedges, the change in the fair value of the hedging instrument will be recorded in Other Comprehensive Income (OCI), and amounts deferred in OCI will be reclassifiedservices from nonemployees. The amendments also clarify that Topic 718 does not apply to earnings in the same income statement line item that isshare-based payments used to presenteffectively provide (1) financing to the earnings effectissuer or (2) awards granted in conjunction with selling goods or services to customers as part of the hedged item This guidance will be effectivea contract accounted for the Company in the annual periods beginning after December 15, 2018 on a prospective basis, and early adoption is permitted.under Topic 606. The Company is currently evaluatingadopted ASU 2018-07 on January 1, 2019. Adoption of this guidance did not have a material impact on the effect this will have on ourCompany’s consolidated financial position,condition or results of operations and related disclosures.operations.
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. TheAs early adoption is permitted, the Company is currently evaluating the effect thatadopted ASU 2017-04 willon January 1, 2019. Adoption of this guidance did not have a material impact on ourthe Company’s consolidated financial statements and related disclosures.condition or results of operations.
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 liabilitiesestablished ASC Topic 842, “Leases,” as amended by subsequent ASUs on the balance sheettopic, which sets out the principles for the rightsrecognition, measurement, presentation and obligations created bydisclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases including operating leases, with terms of morea term greater than 12 months. The new standard also requires additional disclosuresLeases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the amount, timing, and uncertainty of cash flows arisingeffective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from leases. These disclosures include qualitative and quantitative information. The newthat applied under the existing lease standard. We adopted this standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is2019 using the modified retrospective approach. In transitioning to ASC 842, we elected to use the practical expedient package available to us and did not elect to use hindsight. These elections have been applied consistently to all of our leases. On January 1, 2019 we recorded a right-of-use asset of $9.91 million (included in the process“other assets”) and a lease liability of evaluating the impact the adoption of this standard will have on its statements and related disclosures.$9.91 million (included in “other liabilities”) (see “Note 16 – Leases”).
NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions that are insured by either the Federal Deposit Insurance Corporation or the National Credit Union Association up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations and it maintains significant cash on hand at certain of its locations. The Company has not historically experienced any material loss from carrying cash on hand. The amount in excess of insured limitations was $2.64 million and $4.83 million as of March 31, 2019 and December 31, 2018, respectively.
The Company provides credit in the normal course of business to customers located throughout the U.S. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10.0% of the Company’s revenue for the three months ended March 31, 2019 and 2018.
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The Company sources cannabis products for retail, cultivation and production from various vendors. However, as a result of the new regulations in the State of California, the Company’s California retail, cultivation and production operations must use vendors licensed by the State effective January 1, 2018.State. As a result, the Company will beis dependent upon the licensed vendors in California to supply products as of that date.products. If the 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 months ended March 31, 2018 and 2017,2019, 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.
NOTE 4 – ASSETS HELD FOR SALE
As of March 31, 2019, there was one asset group in the Cannabis Dispensary, Cultivation and Production segment that met the criteria to be recorded 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 have been classified as held for sale on the unaudited March 31, 2019 consolidated balance sheet.
The components of assets held for sale are as follows:
|
| (in thousands) |
| |
Components Of Assets Held for Sale: |
| March 31, 2019 |
| |
|
|
|
| |
Property, Equipment and Leasehold Improvements, Net |
| $ | 7,503 |
|
Other Assets |
|
| 6 |
|
|
|
|
|
|
Assets Held for Sale |
| $ | 7,509 |
|
NOTE 45 – VARIABLE INTEREST ENTITY ARRANGEMENTS
MediFarm I and MediFarm I RE
The Company has a shared interest in the two entities, MediFarm I and MediFarm I RE, with another investor for the operation of a cultivation operation and dispensary in Nevada. The Company has determined these entities are considered to be VIE’s andvariable interest entities in which the Company is considered to be the primary beneficiary by reference to the power and benefits criterion under ASC 810, “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.entities.
As the primary beneficiary of MediFarm I and MediFarm I RE, the Company consolidates the accounts and operations of these entities. All intercompany transactions are eliminated in the unaudited consolidated financial statements.
The aggregate carrying values of MediFarm I and MediFarm I RE assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows (in thousands):follows:
March 31, December 31, 2018 2017 Current Assets: Cash Accounts Receivable, Net Inventory Prepaid Expenses and Other Current Assets Total Current Assets Property, Equipment and Leasehold Improvements, Net TOTAL ASSETS Current Liabilities: Accounts Payable and Accrued Expenses TOTAL LIABILITIES $ 536,175 $ 409,029 5,707 - 478,972 232,231 267,842 302,186 1,288,696 943,446 1,906,395 1,965,103 $ 3,195,091 $ 2,908,549 231,845 319,853 $ 231,845 $ 319,853
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NOTE 5 – NOTES RECEIVABLE
(in thousands) March 31, December 31, 2019 2018 Current Assets: Cash Accounts Receivable, Net Inventory Prepaid Expenses and Other Current Assets Total Current Assets Property, Equipment and Leasehold Improvements, Net Other Assets Intercompany Accounts TOTAL ASSETS Current Liabilities: Accounts Payable and Accrued Expenses Long-Term Debt TOTAL LIABILITIES $ 219 $ 894 513 28 601 556 5 8 1,338 1,487 1,699 1,799 34 - (48 ) (927 ) $ 3,023 $ 2,359 $ 520 $ 342 - - $ 520 $ 342
NuLeaf, Inc.
On October 26, 2017, the Company entered into operating agreements with NuLeaf, Inc. and formed NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC (“NuLeaf”(collectively “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements arewere subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. As partUnder the terms of the agreements, the Company maderemitted to NuLeaf an upfront investment of $4.50 million in the form of 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. IfOn June 28, 2018, the agreements are not approved by May 2018,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 are due in equal quarterly payments beginning August 2018. See Note 16 – “Subsequent Events” for amendment to the maturity date of the note. The convertible loans will automatically convertbalance was converted into a 50% ownership interest in NuLeaf. The investment in NuLeaf was recorded at cost and accounted for using the equity method as of December 31, 2018.
In February 2019, we amended and restated the NuLeaf agreements and obtained control of the operations of NuLeaf. The Company has determined these entities are variable interest entities in which the Company is the primary beneficiary by reference to the power and benefits criterion under ASC 810, “Consolidation.” The provisions within the amended agreement grant the Company the power to manage and make decisions that affect the operation of these entities. As the primary beneficiary of NuLeaf Sparks Cultivation, LLC and NuLeaf Reno Production, LLC, the Company consolidates the accounts and operations of these entities beginning March 1, 2019. All intercompany transactions are eliminated in the unaudited consolidated financial statements. Effective as of March 1, 2019, we consolidate the results of NuLeaf entities upon approval byin our consolidated financial statements and report its results in our cannabis segment. We remeasured our equity method investment in NuLeaf to estimated fair value, which resulted in a non-cash gain of $5.60 million that was recorded in operating income; recognized redeemable noncontrolling interest for NuLeaf, Inc.’s interest in NuLeaf at an estimated fair value of $13.20 million; and recognized $12.08 million of net assets, including cash acquired, at fair value. As part of our purchase price allocation, we recorded $0.80 million of goodwill, primarily related to the Statevalue of Nevada whichthe existing workforce, and $8.00 million of intangible assets, primarily related to licenses with a weighted-average life of 10 years. The measurement period is expected to be closed in the second quarter of 2018. 2019.
Pro Forma table was omitted as amounts are not material.
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The notes receivable, including accrued interest, dueaggregate carrying values of Sparks Cultivation, LLC and NuLeaf Reno Production, LLC assets and liabilities, after elimination of any intercompany transactions and balances, in the consolidated balance sheets were as follows:
(in thousands) March 31, 2019 Current Assets: Cash Accounts Receivable, Net Inventory Prepaid Expenses and Other Current Assets Total Current Assets Property, Equipment and Leasehold Improvements, Net Other Assets Intercompany Accounts TOTAL ASSETS Liabilities Accounts Payable and Accrued Expenses Other Liabilities TOTAL LIABILITIES $ 212 39 1,503 79 1,833 11,472 92 - $ 13,397 $ 167 533 $ 699
NOTE 6 – INVESTMENTS IN UNCONSOLIDATED AFFILIATES
Hydrofarm
On August 28, 2018, the Company entered into a Subscription Agreement with Hydrofarm Holdings Group, Inc. (“Hydrofarm”), one of the leading independent providers of hydroponic products in North America, pursuant to which the Company agreed to purchase from Hydrofarm and Hydrofarm agreed to sell to the Company 2,000,000 Units, each Unit consisting of one share of common stock and one warrant to purchase one-half of a share of common stock for an initial exercise price of $5.00 per share, for $2.50 per unit for an aggregate purchase price of $5.00 million. The $5.00 million investment in Hydrofarm was recorded at cost and is included in other investments on the unaudited consolidated balance sheet as of March 31, 2019.
NOTE 7 – ACQUISITIONS
Tech Center Drive
On September 13, 2017, MediFarm So Cal Inc. (“MediFarm So Cal”), a wholly-owned subsidiary of the Company acquired all assets of Tech Center Drive LLC (“Tech Center Drive”) and majority control of 55 OC Community Collective Inc. (“55 OC”). The acquisition of Tech Center Drive and 55 OC was accounted for in accordance with ASC 805-10, “Business Combinations.” 55 OC is a mutual benefit corporation which holds a cannabis license with the City of Santa Ana in the State of California. MediFarm So Cal manages the dispensary under the license of 55 OC. Control of 55 OC was obtained by the Company’s CEO and President holding two of the three Board seats of 55 OC and through the management contract held by MediFarm So Cal. The Company acquired inventory, property, equipment and leasehold improvements and a management service agreement which allows for MediFarm So Cal to purchase the medical marijuana dispensary license of 55 OC.
As consideration for entering into the Asset Purchase Agreement, the Company paid $4.12 million in cash, issued 633,348 shares of the Company’s common stock with a value of $2.10 million on the closing date and issued 192,758 shares of the Company’s common stock with a value of $0.64 million into an escrow account. The shares held in escrow were to be paid six months after the acquisition date subject to any amounts to be withheld related to working capital adjustments. As a result of the working capital adjustments, the Company withheld and cancelled 101,083 shares with an approximate value of $0.35 million in March 2018.
On November 6, 2018, MediFarm So Cal Inc. was converted from a Nonprofit Mutual Benefit Corporation to a General Stock Corporation. During the third quarter of 2018, the Company recorded a $6.30 million adjustment to reflect the fair value of the management services agreement. The adjustment resulted in an increase to goodwill, a decrease in other intangible assets and December 31, 2017 is $5,964,204a $0.43 million decrease in amortization expense.
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The measurement period was closed during the third quarter of 2018. The following table summarizes the fair value of the assets at the date of acquisition:
|
| (in thousands) |
| |
Assets Acquired |
|
|
| |
Inventory |
| $ | 114 |
|
Property, Equipment and Leasehold Improvements: |
|
|
|
|
Furniture and Equipment |
|
| 53 |
|
Leasehold Improvements |
|
| 47 |
|
Security Deposits |
|
| 5 |
|
Management Service Agreement |
|
| 370 |
|
Goodwill |
|
| 6,258 |
|
Total Assets Acquired |
| $ | 6,847 |
|
NOTE 8 – INVENTORY
Raw materials consist of Edible Garden’s herb product lines and $5,010,143, respectively.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 Gallery (“Black Oak”). Finished goods consists of IVXX’s line of cannabis packaged products to be sold into dispensaries and Black Oak cannabis products sold in retail, and Edible Garden’s products to be sold via food, drug, and mass channels.
Inventory consists of the following:
|
| (in thousands) |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Raw Materials |
| $ | 1,781 |
|
| $ | 1,213 |
|
Work-in-Progress |
|
| 1,611 |
|
|
| 882 |
|
Finished Goods |
|
| 2,123 |
|
|
| 1,203 |
|
Inventory Reserve |
|
| (1,011 | ) |
|
| (1,018 | ) |
|
|
|
|
|
|
|
|
|
Total Inventory |
| $ | 4,505 |
|
| $ | 2,280 |
|
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NOTE 69 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
|
| (in thousands) |
| |||||||||||||
|
| March 31, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Land and Building |
| $ | 20,719,158 |
| $ | 9,047,201 |
|
| $ | 22,401 |
| $ | 22,401 |
| ||
Furniture and Equipment |
| 3,579,954 |
| 3,553,587 |
|
| 5,156 |
| 3,652 |
| ||||||
Computer Hardware and Software |
| 602,098 |
| 486,176 |
|
| 642 |
| 531 |
| ||||||
Leasehold Improvements |
| 9,324,686 |
| 9,316,665 |
|
| 21,253 |
| 8,525 |
| ||||||
Construction in Progress |
|
| 4,064,491 |
|
|
| 1,204,547 |
|
|
| 11,581 |
|
|
| 12,288 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Subtotal |
| 38,290,387 |
| 23,608,176 |
|
| 61,032 |
| 47,398 |
| ||||||
Less Accumulated Depreciation |
|
| (4,947,130 | ) |
|
| (4,416,560 | ) |
| (7,098 | ) |
| (5,807 | ) | ||
Less Assets Held for Sale |
|
| (7,503 | ) |
|
| (7,451 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Property, Equipment and Leasehold Improvements, Net |
| $ | 33,343,257 |
|
| $ | 19,191,616 |
|
| $ | 46,432 |
|
| $ | 34,139 |
|
Depreciation expense related to property, equipment and leasehold improvements for the three months ended March 31, 2019 and 2018 was $0.64 million and 2017 was $530,570 and $463,073,$0.53 million, respectively.
NOTE 10 – NOTES PAYABLE
Notes payable consists of the following:
|
| (in thousands) |
| |||||
|
| March 31, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Promissory note dated November 22, 2017, issued for the purchase of real property. Matures December 1, 2020, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%. In the event of default, the note is convertible at the holder's option. |
| $ | 4,500 |
|
| $ | 4,500 |
|
Promissory note dated January 18, 2018, issued for the purchase of real property. The promissory note is collateralized by the land and building purchased and matures February 1, 2021, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.0%. The full principle balance and accrued interest are due at maturity. In the event of default, the note is convertible at the holder's option. |
|
| 6,500 |
|
|
| 6,500 |
|
Senior convertible promissory note dated July 25, 2018, issued to accredited investors under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures January 25, 2020 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment. |
|
| 150 |
|
|
| 150 |
|
Senior convertible promissory note dated September 6, 2018, issued to accredited investors under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures March 7, 2020 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment. |
|
| - |
|
|
| 1,200 |
|
Promissory note dated October 5, 2018 , issued for the purchase of real property. Matures October 5, 2021. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%. In the event of default, the note is convertible at the holder's option. |
|
| 1,600 |
|
|
| 1,600 |
|
Securities Purchase Agreement dated December 3, 2018, issued to accredited investors, which matures June 3, 2020 and bears interest at a rate of 3.0% per annum. The conversion price is 5.0% discount to the average of the three (3) lowest VWAPs in the five (5) trading days prior to the conversion date. |
|
| 450 |
|
|
| 7,000 |
|
Senior convertible promissory note dated March 12, 2019, issued to accredited investors under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures September 12, 2020 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment. |
|
| 5,000 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Long-Term Debt |
| $ | 18,200 |
|
| $ | 20,950 |
|
Less: Debt Discount |
|
| (5,169 | ) |
|
| (2,637 | ) |
Net Long Term Debt |
|
| 13,031 |
|
|
| 18,313 |
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NOTE 7 – NOTES PAYABLE
Notes payable consists of the following:
March 31, December 31, 2018 2017 Senior convertible promissory note dated August 21, 2017, issued to accredited investors, which matures February 21, 2019 and bears interest at a rate of 12% per annum. The conversion price is $4.50, subject to adjustment. The balance of the note and accrued interest was converted into common stock in January 2018. Senior convertible promissory note dated December 26, 2017, issued to accredited investors, which matures June 26, 2019 and bears interest at a rate of 12% per annum. The conversion price is $4.50, subject to adjustment. The balance of the note and accrued interest was converted into common stock in January 2018. Promissory note dated November 22, 2017, issued for the purchase of real property. Matures December 1, 2020, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%. Promissory note dated January 18, 2018, issued for the purchase of real property. Matures February 1, 2021, with an option to extend the maturity date 1 year. The promissory note bears interest at 12.0% for year one and escalates 0.5% per year thereafter up to 13.5%. Senior convertible promissory note dated January 25, 2018, issued to accredited investors under the 2017 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures July 25, 2019 and bears interest at a rate of 12% per annum. The conversion price is $6.00, subject to adjustment. Senior convertible promissory note dated March 12, 2018, issued to accredited investors under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement, which matures September 12, 2019 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment. Long-Term Debt, Net of Discounts $ - $ 640,010 - 1,469,388 4,500,000 4,500,000 6,160,001 - 916,867 - 1,655,950 - $ 13,232,818 $ 6,609,398
Total debt as of March 31, 2018 and December 31, 2017 was $13,232,818 and $6,609,398, respectively, net of unamortized debt discount of $5,267,182 and $4,790,601, respectively. The senior convertible promissory notes are secured by shares of common stock. There was accrued interest payable of $41,459 and $21,767 as of March 31, 2018 and December 31, 2017, respectively. See “Note 16 – Subsequent Events” for additional disclosure regarding changes in notes payable subsequent to March 31, 2018.
Scheduled Maturities of Long-Term Debt
Scheduled maturities of long-term debt, including the unamortized debt discounts of $5,267,182, are as follows:
Nine Months Ending December 2018 Year Ending December 31, 2020 2021 2022 2023 and thereafter Total Total Debt 2019 $ - $ 2,572,817 $ 4,500,000 $ 6,160,001 $ - $ - $ 13,232,818
Promissory Notes
On January 18, 2018,March 4, 2019, Terra Tech Corp. (the “Company”) issued a Promissory Note (the “Note”) in the Company entered into a $6,500,000 promissory note forprincipal amount of $1.00 million to an accredited investor (the “Purchaser”). The Note is due on the purchaseearlier of land and a building in California with a third-party creditor. As part of(i) April 4, 2019 or (ii) the closing of a financing with gross proceeds equal to or greater than $1.00 million (the “Maturity Date”). The Note accrues interest at a rate of 1.5% per month, payable on the purchaseMaturity Date or prepayment of land, the Company issued warrantsNote, with a value30-days of approximately $164,000 andinterest guaranteed. The note was paid a cash fee of $195,000. The unamortized balancein full as of March 31, 2018 was $339,999. The warrants and cash fee were recorded as a debt discount. The promissory note is collateralized by the land and building purchased and matures on February 1, 2021. The interest rate for the first year is 12.0% and increases 0.5% per year, up to 13.5%, through 2021. Payments of interest only are due monthly. The full principle balance and accrued interest are due at maturity.2019.
2018 Master Securities Purchase and Convertible Promissory Notes Agreement
In March 2018, the Company entered into athe 2018 Master Securities Purchase Agreement with an accredited investor pursuant to which the Company sells to the accredited investor 7.5% Senior Convertible Promissory Notes. During the period ended March 31, 2018, the Company issued one 7.5% convertible noteNotes in eight tranches of $5.00 million, for an aggregate valuea total of $5,000,000. As of March 31, 2018, $5,000,000 gross of the unamortized debt discount of $3,344,050 remains due. There were no fees or expenses deducted from the net proceeds received by the Company in the offerings. The Company paid $150,000 in cash and issued approximately $116,000 of warrants in connection with the notes. The cash fee and warrant was recorded as a debt discount.$40.00 million.
For each note issued under the 2018 Master Securities Purchase Agreement, the principal and interest due and owed under the note is convertible into shares of Common Stock at any time at the election of the holder at a conversion price per share equal to the lower of (i) the original conversion price as defined in each note issuance or (ii) 87% of the average of the two lowest daily volume weighted average price of the Common Stock in the thirteen (13) trading days prior to the conversion date (“Conversion Price”), which. The Conversion Price is subject to adjustment for (i) stock splits, stock dividends, combinations, or similar events and (ii) full ratchet anti-dilution protection. Upon certain events of default, the conversion price will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect.
In addition, at any time that (i) the daily volume weighted average price of the Common Stock for the prior ten (10) consecutive trading days is $10.50 or more and (ii) the average daily trading value of the Common Stock is greater than $2,500,000$2.50 million for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) day’s notice, that the holder convert the notes at the Conversion Price.
The Company may prepay in cash any portion of the outstanding principal amount of the notes and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of the notes plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of the notes; (ii) 115% of the sum of the then-outstanding principal amount plus accrued but unpaid interest, if the prepayment date is between 91 days and 180 days of the issuance date of the notes; or (iii) 125% of the sum of the then-outstanding principal amount of the notes plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of the notes.
During the three months ended March 31, 2019, the Company converted debt and accrued interest into 15,038,949 shares of the Company’s common stock.
2017 Master Securities Purchase and Convertible Promissory Notes Agreement
The Company hashad a Securities Purchase Agreement with an accredited investor pursuant to which the Company sells to the accredited investor Senior Convertible Promissory Notes. During the year ended December 31, 2017, the Company issued five 12%12.0% convertible notes for an aggregate value of $20,000,000$20.00 million due at various dates through June 2019. Of the $20,000,000$20.00 million convertible notes issued during 2017, the Company converted $13,100,000$13.10 million and $6.90 million of the convertible notes into shares of the Company’s common stock during the yearyears ended December 31, 2017. As of December 31, 2017 $6,900,000 gross of the unamortized debt discount of $4,790,602 remained due. During the period ended March 31,and 2018, the convertible notes outstanding as of December 31, 2017 were all converted in January 2018. During the period ended March 31, 2018, the Company issued one 12% convertible note for an aggregate value of $5,000,000. Of the $5,000,000 convertible note issued during 2018, the Company converted $2,500,000 of the convertible note during the period ended March 31, 2018. As of March 31, 2018, $2,500,000 gross of the unamortized debt discount of $1,583,133 remains due. There were no fees or expenses deducted from the net proceeds received by the Company in the offerings.respectively. The Company paid $150,000$0.60 million in cash and issued approximately $196,000$0.56 million of warrants in connection with the notes. The cash fee and warrants issued were recorded as a debt discount.
Conversion of Notes Payable and Related Loss on Extinguishment of Debt
During the three months ended March 31, 2018 and 2017, the Company converted debt and accrued interest into 3,133,025 and 1,805,406 shares of the Company’s common stock, respectively. The value of the common stock issued in conversion of debt are detailed below.
The table below details the conversion of the notes payable into equity and the loss on extinguishment of debt for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31, 2018 2017 Fair market value of common stock issued upon conversion Principal amount of debt converted Accrued interest converted Fair value of derivative at conversion date Debt discount value at conversion date Loss on extinguishment of debt $ 17,180,837 $ 5,014,661 (9,400,000 ) (3,559,324 ) (84,612 ) (129,639 ) (9,431,000 ) (2,770,650 ) 6,466,021 2,484,410 $ 4,731,246 $ 1,039,458
Table of Contents |
NOTE 811 – FAIR VALUE MEASUREMENTS
Financial AssetsAs of March 31, 2019 and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth2018, the Company did not hold any financial assets or liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:basis.
Fair Value at March 31, Fair Value Measurement Using Description 2018 Level 1 Level 2 Level 3 Derivative Liabilities – Conversion Feature $ 4,059,400 $ - $ - $ 4,059,400 $ 4,059,400 $ - $ - $ 4,059,400
Fair Value at December 31, Fair Value Measurement Using Description 2017 Level 1 Level 2 Level 3 Derivative Liabilities – Conversion Feature $ 9,331,400 $ - $ - $ 9,331,400 $ 9,331,400 $ - $ - $ 9,331,400
The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
Balance at December 31, 2017 Change in Fair Market Value of Conversion Feature Derivative Debt Converted into Equity Fair Value of Derivative Liability Recorded Upon Issuance of Convertible Debt Balance at March 31, 2018 $ 9,331,400 (2,281,000 ) (9,431,000 ) 6,440,000 $ 4,059,400
The Company estimates the fair value of the derivative liabilities using the Black-Scholes-Merton option pricing model using the following assumptions for issuances during the period ended:
March 31, March 31, 2018 2017 Stock Price $2.52 - $6.90 $3.81 - $5.04 Conversion and Exercise Price $2.06 - $6.60 $2.06 - $6.60 Annual Dividend Yield - - Expected Life (Years) 1.12 - 2.66 0.70 - 3.42 Risk-Free Interest Rate 1.77% - 2.27% 1.05% - 2.50% Expected Volatility 62.36% - 134.84% 61.88% - 123.56%
Volatility is based on historical volatility of our common stock. Historical volatility was computed using weekly pricing observations for our common stock that correspond to the expected term. This method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion features.
No financial assets were measured on a recurring basis as of March 31, 2018 and December 31, 2017.
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
Non-financialNonfinancial assets, such as property, equipment and leasehold improvements, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. See “Note 9 Property,Equipment and Leasehold Improvements, Net” for further information on fixed assets.
NOTE 912 – TAX EXPENSE
For the three months ended March 31, 20182019 and 2017,2018, the Company had no income tax expense (benefit).
The components of deferred income tax assets and (liabilities) are as follows:
|
| (in thousands) |
| |||||||||||||
|
| March 31, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Deferred Income Tax Assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Options expense |
| $ | 1,400 |
| $ | 1,018 |
| |||||||||
Allowance for Doubtful Accounts |
| 33 |
| 33 |
| |||||||||||
Net Operating Losses |
| $ | 9,293,518 |
|
| $ | 8,023,000 |
|
|
| 14,350 |
|
|
| 13,409 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| 9,293,518 |
| 8,023,000 |
|
| 15,783 |
| 14,460 |
| ||||||
Deferred Income Tax Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation |
|
| (939,256 | ) |
|
| (850,000 | ) |
|
| (2,112 | ) |
|
| (829 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| 8,354,262 |
| 7,173,000 |
|
| 13,671 |
| 13,631 |
| ||||||
|
|
|
|
|
| |||||||||||
Valuation Allowance |
|
| (8,354,262 | ) |
|
| (7,173,000 | ) |
|
| (13,671 | ) |
|
| (13,631 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Deferred Tax |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
The U.S. government enacted comprehensive tax legislation commonly referred to asOn December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”). was signed into law, making significant changes to taxation of U.S. business entities. The Tax Act makes broadreduced the U.S. corporate income tax rate from 35% to 21%, provided for accelerated deductions for capital asset additions, imposed limitations on certain tax deductions (e.g., meals & entertainment, executive compensation, interest, etc.), eliminated the corporate alternative minimum tax, and complex changesincluded numerous other provisions.
In connection with the Tax Act, the SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to provide guidance to companies that had not completed their accounting for the income tax effects of the Tax Act. Under SAB 118, companies were permitted to record provisional amounts to the U.S.extent reasonable estimates could be made. Additionally, upon obtaining, preparing, or analyzing additional information (including computations), companies were permitted to record additional tax code that affects revaluationeffects and adjustments to previously recorded provisional amounts within one year from the enactment date of the Tax Act.
20 |
Table of Contents |
As of December 31, 2017, the Company had recorded a provisional income tax benefit of $3.30 million, which was primarily associated with the remeasurement of certain deferred tax assets and liabilities to reflectin the federal tax rate reductionU.S. from 35.0% to 21.0%. As of December 31, 2017, a full valuation allowance was recorded against all net deferred tax assets, as these assets are more likely than not to be unrealized. As of December 31, 2018, the Company completed its accounting for the income tax effects of the Tax Act and concluded that no adjustment to the provisional estimate was required.
For the three months ended March 31, 20182019 and 2017,2018, the Company had subsidiaries that produced and sold cannabis or cannabis pure concentrates, subjecting the Company to the limits of Internal Revenue Code (“IRC”) Section 280E. Pursuant to IRC Section 280E, the Company is allowed only to deduct expenses directly related to sales of product. The State of California does not conform to IRC Section 280E and, accordingly the Company is allowed to deduct all operating expenses on its California income tax returns. As the Company files consolidated federal income tax returns, the taxable income generated from its subsidiaries subject to IRC Section 280E has been offset by losses generated by operations not subject to IRC Section 280E. During 2017, Company amended income tax returns of our subsidiary Black Oak Gallery, a California Corporation (“Black Oak”) for the periods prior to acquisition, which resulted in a net tax refund in 2017.
Permanent tax differences include ordinary and necessary business expenses deemed by the Company as non-allowablenonallowable deductions under IRC Section 280E; non-deductible280E; nondeductible expenses for interest, derivatives and warrant expense related to debt financings and non-deductiblenondeductible losses related to various acquisitions.
As of March 31, 20182019, and December 31, 2017,2018, the Company had net operating loss carryforwards of approximately $30,273,379$49.56 million and $26,333,000,$42.78 million, respectively, which, if unused, will expire beginning in the year 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under IRC Section 382, which will limit their utilization. The Company has assessed the effect of these limitations and doesdid not believe thesethe losses through December 31, 2017 to be substantially limited. The Company also has deferred tax liabilities from the excess carrying amountsnot completed a study through March 31, 2019 to assess whether an ownership change under Section 382 of the basisCode has occurred since December 31, 2017, due to the costs and complexities associated with such a study. The Company may have experienced various ownership changes, as defined by the Code, as a result of depreciable assetsfinancing transactions. Accordingly, the Company's ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be applied against future taxes. Therefore, the Company may not be able to take full advantage of these carryforwards for financial reportingfederal or state income tax purposes.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred through the three monthsperiod ended March 31, 2018.2019. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of March 31, 2018,2019, a valuation allowance of has been recorded against all net deferred tax assets as these assets are more likely than not to be unrealized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years from 20132014 to 20162017 are subject to examination.
NOTE 1013 – EQUITY
Common Stock
During the three months ended March 31, 2018,2019, senior secured convertible promissory notes and accrued interest in the amount of $17,180,837$5.27 million were converted into 3,133,02515,038,949 shares of common stock.
During the three months ended March 31, 2018, the Company sold 160,430 shares of common stock for the net amount of $750,000 pursuant to an equity financing facility with an accredited investor.
During the three months ended March 31, 2018,2019, the Company cancelled 24,51060,000 shares of common stock valued at $117,831, issued 6,410 shares of common stock for services performed in the amount of $16,692$0.01 million and issued 81,506373,631 shares of common stock for compensation in the amount of $288,446.$0.30 million.
During the three months ended March 31, 2018,2019, the Company issued 197,125sold 1,314,345 shares of common stock for cashlessthe net amount of $0.80 million pursuant to an equity financing facility with an accredited investor and cash exercises of warrants. The cash received from the cash exercise of warrants was $51,000.
During the three months ended March 31, 2018, the Company purchased an asset worth $300,000. $100,000 was paid in cash during March 2018, the remaining $200,000 was to be paid by issuing 53,332 shares of the Company’s common stock. The Company issued 26,666 shares of the 53,332 shares. The remaining 26,666sold 2,183,823 shares of common stock due was issued in April 2018.for the net amount of $1.50 million to other accredited investors.
As part of the stock split in March 2018, the Company issued 46,687 shares of common stock to round up fractional shares to all shareholders of the Company.
21 |
Table of Contents |
As part of the acquisition of Tech Center Drive in September 2017, the Company issued shares held in escrow which were to be paid six months after the acquisition date subject to any amounts to be withheld related to working capital type adjustments. As a result of the working capital adjustments, in March 2018, approximately $351,000 on the six month anniversary date, the Company withheld and cancelled 101,083 shares.
NOTE 1114 – STOCK-BASED COMPENSATION
2016 & 2018 Equity Incentive PlanPlans
In the first quarter of 2016, the Company adopted the 2016 Equity Incentive Plan. In the fourth quarter of 2018, the Company adopted the 2018 Equity Incentive Plan. The following table contains information about the 2016 and the 2018 Equity Incentive PlanPlans as of March 31, 2018:2019:
Awards Reserved for Issuance Awards Issued Awards Available for Grant 2016 Equity Incentive Plan 30,000,000 1,977,732 28,022,268
|
| Awards Reserved for Issuance |
|
| Awards Issued |
|
| Awards Available for Grant |
| |||
|
|
|
|
|
|
|
|
|
| |||
2016 Equity Incentive Plan |
|
| 2,000,000 |
|
|
| 1,541,064 |
|
|
| 458,936 |
|
2018 Equity Incentive Plan |
|
| 6,600,000 |
|
|
| 5,100,000 |
|
|
| 1,500,000 |
|
Stock Options
The following table summarizes the Company’s stock option activity and related information for the three months ended March 31, 2018:2019:
|
| Number of Shares |
|
| Weighted- Average Exercise Price Per Share |
|
| Weighted-Average Remaining Contractual Life |
| Aggregate Intrinsic Value of In-the-Money Options |
|
| Number of |
|
| Weighted-Average Exercise Price Per Share |
|
| Weighted-Average Remaining Contractual Life |
| (in thousands) Aggregate Intrinsic Value of In-the-Money Options |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Options Outstanding as of Janury 1, 2018 |
| 1,177,732 |
| $ | 2.17 |
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Options Outstanding as of January 1, 2019 |
| 8,400,629 |
| $ | 1.56 |
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Options Granted |
| 800,000 |
| $ | 4.41 |
|
|
|
|
|
| 442,292 |
| $ | 0.84 |
|
|
|
|
| ||||||||
Options Exercised |
| - |
| $ | - |
|
|
|
|
|
| - |
| $ | - |
|
|
|
|
| ||||||||
Options Forfeited |
| - |
| $ | - |
|
|
|
|
|
| (80,000 | ) |
| $ | 2.09 |
|
|
|
|
| |||||||
Options Expired |
|
| - |
|
| $ | - |
|
|
|
|
|
|
| - |
|
| $ | - |
|
|
|
|
|
| |||
Options Outstanding as of March 31, 2018 |
|
| 1,977,732 |
|
| $ | 3.08 |
|
| 9.1 Years |
| $ | 522,600 |
| ||||||||||||||
Options Exercisable as of March 31, 2018 |
|
| 659,774 |
|
| $ | 2.20 |
|
| 8.5 Years |
| $ | 391,950 |
| ||||||||||||||
Options Outstanding as of March 31, 2019 |
| 8,762,921 |
| $ | 1.52 |
| 9.4 years |
| $ | 35.4 |
| |||||||||||||||||
Options Exercisable as of March 31, 2019 |
|
| 2,623,889 |
|
| $ | 1.77 |
|
| 9.0 years |
| $ | 35.4 |
|
The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price of $2.52$0.92 on March 31, 20182019, and the exercise price of options, multiplied by the number of options. As of March 31, 2018,2019, there was $4,239,445$7.63 million total unrecognized stock-based compensation. Such costs are expected to be recognized over a weighted-average period of approximately 1.982.36 years.
The Company recognizes compensation expense for stock option awards on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period. The following assumptions were used to calculate stock-based compensation for issuances during the periodthree months ended March 31, 2018. There were no stock options issued during the period ended March 31, 2017.2019:
|
| March 31, |
| |
|
|
|
| |
Expected |
|
|
| |
Volatility |
|
| 111.8 | % |
Risk-Free Interest Rate |
|
| 2.4 | % |
Dividend Yield |
|
| 0 | % |
The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. Hence, the Company uses the “simplified method” described in Staff Accounting Bulletin 107 to estimate the expected term of share option grants.
The expected stock price volatility assumption was determined by examining the historical volatilities for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.
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Table of Contents |
The risk-free interest rate assumption is based on the U.S. treasury instruments whose term was consistent with the expected term of the Company’s stock options.
The expected dividend assumption is based on the Company’s history and expectation of dividend payouts. The Company has never paid dividends on its common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Accordingly, the Company has assumed no dividend yield for purposes of estimating the fair value of the Company stock-based compensation.
The Company estimates the forfeiture rate at the time of grant and revisions, if necessary, were estimated based on management’s expectation through industry knowledge and historical data.
Stock-Based Compensation Expense
The following table sets forth the total stock-based compensation expense resulting from stock options and restricted grants of common stock to employees, directors and non-employee consultants in the consolidated statement of operations which are included in selling, general and administrative expenses:
|
| (in thousands except for shares / options) |
| |||||||||||||
|
| For the Three Months Ended |
| |||||||||||||
|
| March 31, 2019 |
|
| March 31, 2018 |
| ||||||||||
Type of Award |
| Number of Shares or Options Granted |
|
| Stock-Based Compensation Expense |
|
| Number of Shares or Options Granted |
|
| Stock-Based Compensation Expense |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock Options |
|
| 442,292 |
|
| $ | 1,282 |
|
|
| 800,000 |
|
| $ | 474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees (Common Stock) |
|
| 385,536 |
|
|
| 315 |
|
|
| 81,506 |
|
|
| 288 |
|
Non–Employee Consultants (Common Stock) |
|
| 26,376 |
|
|
| 23 | * |
|
| 6,410 |
|
|
| 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock–Based Compensation Expense |
|
|
|
|
| $ | 1,620 |
|
|
|
|
|
| $ | 779 |
|
For the Three Months Ended March 31, 2018 March 31, 2017 Type of Award Number of Shares or Options Granted Stock-Based Compensation Expense Number of Shares or Options Granted Stock-Based Compensation Expense Stock Options Stock Grants: Employees (Common Stock) Employees (Series B Preferred Stock) Directors (Common Stock) Non–Employee Consultants (Common Stock) Total Stock–Based Compensation Expense ______800,000 $ 474,198 - $ 47,589 81,506 288,450 6,667 26,100 - - 40,000 1,035,406 - - 8,333 37,500 6,410 16,692 31,176 145,011 $ 779,340 $ 1,291,606
* Excludes adjustments for shares cancelled.
NOTE 1215 – WARRANTS
The Company has the following shares of common stock reserved for exercise of the warrants outstanding as of March 31, 2018:2019:
|
| Shares |
|
| Weighted-Average Exercise Price |
| ||
|
|
|
|
|
|
| ||
Warrants Outstanding as of January 1, 2019 |
|
| 1,053,252 |
|
| $ | 4.28 |
|
Warrants Exercised |
|
| - |
|
|
| - |
|
Warrants Granted |
|
| 131,460 |
|
|
| 1.14 |
|
Warrants Expired |
|
| (132,097 | ) |
|
| 1.35 |
|
Warrants Outstanding as of March 31, 2019 |
|
| 1,052,615 |
|
| $ | 3.28 |
|
Shares Weighted-Average Exercise Price Warrants Outstanding as of January 1, 2018 Warrants Exercised Warrants Granted Warrants Expired Warrants Outstanding as of March 31, 2018 1,191,367 $ 2.85 (283,697 ) $ 2.17 114,636 $ 4.05 - $ - 1,022,306 $ 3.80
23 |
Table of Contents |
The following weighted-average assumptions were used to calculate the fair value of warrants issued in during the period ended March 31, 20182019 and 20172018 using the Black ScholesBlack-Scholes option pricing model:
|
| March 31, |
| March 31, |
|
| March 31, |
| March 31, | |||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
| 2018 |
| |||||||
Stock Price on Date of Grant |
| $ | 3.75 |
| $ | 4.94 |
|
| $ | 1.32 |
| $ | 3.75 |
| ||||
Exercise Price |
| $ | 4.05 |
| $ | 3.74 |
|
| $ | 1.41 |
| $ | 4.05 |
| ||||
Volatility |
| 120.71 | % |
| 140.09 | % |
| 111.80 | % |
| 120.71 | % | ||||||
Term |
| 5-Years |
| 5-Years |
|
| 5.00 | Yrs |
| 5.00 | Yrs | |||||||
Risk-Free Interest Rate |
| 2.49 | % |
| 2.24 | % |
| 2.40 | % |
| 2.49 | % | ||||||
Expected Dividend Rate |
| 0 | % |
| 0 | % |
| 0 | % |
| 0 | % |
There were no warrants recognized as an expense for the three months periodmonth periods ended March 31, 2018. Warrant expense2019 and 2018, respectively.
NOTE 16 – LEASES
A lease provides the lessee the right to control the use of $107,035 was recorded duringan identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets (“ROU assets”) and lease liabilities are included in other assets and other liabilities on the three months ended March 31, 2017. ForCompany's Condensed Consolidated Balance Sheets.
ROU assets represent the three months ended March 31, 2018, $475,917Company's right to use an underlying asset for the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at the lease commencement date based on the present value of warrantslease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The lease term used to calculate the ROU asset includes any renewal options or lease termination that the Company expects to exercise.
The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company's lease agreements do not contain significant residual value guarantees, restrictions or covenants.
The Company occupies office facilities under lease agreements that expire at various dates. In addition, office, production and transportation equipment is leased under agreements that expire at various dates. The Company does not have any significant finance leases.
The components of total lease cost were issued in connectionas follows:
|
| (in thousands) |
| |
|
| Three Months Ended March 31, 2019 |
| |
Short-term lease cost (a) |
| $ | 33 |
|
Operating lease cost |
|
| 562 |
|
Total lease cost |
| $ | 595 |
|
_________
(a) Includes leases with debt and recorded as a debt discount. For the period ended March 31, 2017, there were no warrants issued in connection with debt and recorded as a debt discount.terms of one year or less.
Table of Contents |
Cash paid for amounts included in operating lease liabilities was $0.50 million for the three months ended March 31, 2019. The table below presents operating lease ROU assets and lease liabilities as of March 31, 2019:
|
| (in thousands) |
| |
|
| Three Months Ended March 31, 2019 |
| |
Operating lease ROU assets |
| $ | 9,603 |
|
Operating lease liabilities |
|
| 9,673 |
|
The table below presents the maturities of operating lease liabilities as of March 31, 2019:
|
| (in thousands) |
| |
|
| Operating |
| |
|
| Leases |
| |
2019 (Excluding the three months ended March 31, 2019) |
| $ | 1,488 |
|
2020 |
|
| 1,857 |
|
2021 |
|
| 1,812 |
|
2022 |
|
| 1,794 |
|
2023 |
|
| 1,819 |
|
Thereafter |
|
| 6,540 |
|
Total lease payments |
|
| 15,309 |
|
Less: Discount |
|
| 5,636 |
|
Total operating lease liabilities |
| $ | 9,673 |
|
The table below presents the weighted average remaining lease term for operating leases and weighted average discount rate used in calculating operating lease right-of-use assets:
Three Months Ended | ||||
2019 | ||||
Weighted average remaining lease term (years) | 7.42 | |||
Weighted average discount rate | 11.2 | % |
The table below presents the expected future minimum lease payments to be made under non-cancelable operating leases as of December 31, 2018:
|
| Scheduled |
| |
Year Ending December 31 |
| Payments |
| |
|
|
|
| |
2019 |
| $ | 1,851 |
|
2020 |
|
| 1,717 |
|
2021 |
|
| 1,667 |
|
2022 |
|
| 1,645 |
|
2023 |
|
| 1,666 |
|
Thereafter |
|
| 6,496 |
|
Total Future Minimum Lease Payments |
| $ | 15,042 |
|
25 |
Table of Contents |
NOTE 13 –COMMITMENTS17 – COMMITMENTS AND CONTINGENCIES
California Operating Licenses
Effective January 1, 2018 the State of California allowed for adult use cannabis sales. California’s cannabis licensing system is being implemented in two phases. First, beginning on January 1, 2018, the State began issuing temporary licenses that expired on May 1, 2018 for retail and distribution permits and will expire on May 20, 2018 for cultivation permits. In April 2018, the State issued an extension for the retail and distribution permits, which will expire in July 2018 and August 2018, respectively. The Company’s prior licenses obtained from the local jurisdictions it operated in have been continued by such jurisdictions and are necessary to obtain state licensing. The Company has received a temporary license for each local jurisdiction which it had active operations. The temporary permits maywere to be extendedissued and the state anticipated issuing annual licenses by May of 2018. Licensees were eligible for an additional periodseveral 90 days extensions to their temporary licenses. Throughout 2018 Terra Tech subsidiaries operated compliantly and were eligible for all of time. The Company submitted its applications for the annual permits in April 2018. Although the Company believes it will receive the necessary licenses from the State to conduct its business in a timely fashion, there is no guarantee the Company will be able to do so and any failure to do so may have a negative effect on its business and results of operations.extensions.
AlthoughAs of April 2019, the possession, cultivationState of California has issued provisional licenses for Blum San Leandro, Blum Oakland, Blum Santa Ana, and distributionBlack Oak Distribution. Provisional licenses are an intermediate step before the issuance of marijuanaan annual license. Like annual licenses Provisional’s require the licensee to be Metrc compliant and are valid for medical1 year, or until an annual license is issued. Provisional Licenses are typically issued if the licensee has submitted all appropriate documentation and adult usedocumentation is permitted in California and Nevada, marijuanaorder but some aspect remains to be reviewed, most commonly CEQA approval at the local jurisdictional level. The Company now expects to receive an annual license at some later point this year once the remaining review process is a Schedule-I controlled substance and its usecompleted by the state. Black Oak Cultivation remains a violationtemporary licensee although he California Department of federal law. Since federal law criminalizingFood and Agriculture has advised the use of marijuana preempts state lawsCompany that legalize its use, strict enforcement of federal law regarding marijuana would likely resultthe application has reached final review process. The company expects either a provisional or annual license will be issued in our inability to proceed with our business plan, especially in respect of our marijuana cultivation, production and dispensaries. In addition, our assets, including real property, cash, equipment and other goods, could be subject to asset forfeiture because marijuana is still federally illegal.the third quarter.
NOTE 1418 – SEGMENT INFORMATION
The Company’sDuring 2018, the Company acquired additional real property and determined that a previously insignificant operating segment “Real Estate and Construction” is now significant and is a reportable segmentssegment requiring disclosure in accordance with ASC 280. Prior period information below has been revised to conform to current period presentation. We are currentlynow organized around the following products that it offers as part of its core business strategy:into three reportable segments:
· | Herbs and Produce Products – Includes herbs and leafy greens that are grown using classic Dutch hydroponic farming methods. | |
· | Cannabis Dispensary, Cultivation and Production – Includes cannabis-focused retail, cultivation and production. | |
· | Real Estate and Construction – Includes building ownership where cannabis dispensary and/or cultivation operations are currently in development. |
Summarized financial information concerning the Company’s reportable segments is shown in the following tables.
Total asset amounts at March 31, 20182019 and March 31, 20172018 exclude intercompany receivable balances eliminated in consolidation.
|
| For the Three Months Ended March 31, 2018 (Unaudited) |
|
| For the Three Months Ended March 31, 2019 (Unaudited) (in thousands) |
| ||||||||||||||||||||||||||||||
|
| Herbs and Produce Products |
| Cannabis Dispensary, Cultivation and Production |
| Eliminations and Other |
| Total |
|
| Herbs and Produce Products |
|
| Cannabis Dispensary, Cultivation and Production |
|
| Real Estate |
|
| Eliminations and Other |
|
| Total |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Revenues |
| $ | 1,283,901 |
| $ | 7,314,554 |
| $ | 16,911 |
| $ | 8,615,366 |
|
| $ | 1,304 |
| $ | 6,813 |
| $ | 207 |
| $ | (966 | ) |
| $ | 7,358 |
| ||||||
Cost of Goods Sold |
|
| 1,263,117 |
|
|
| 5,704,809 |
|
|
| - |
|
|
| 6,967,926 |
|
|
| 903 |
|
|
| 3,151 |
|
|
| 92 |
|
|
| (792 | ) |
|
| 3,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gross Profit |
| 20,784 |
| 1,609,745 |
| 16,911 |
| 1,647,440 |
|
| 401 |
| 3,662 |
| 114 |
| (174 | ) |
| 4,004 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Selling, General and Administrative Expenses |
|
| 942,367 |
|
|
| 4,003,707 |
|
|
| 3,476,474 |
|
|
| 8,422,548 |
|
|
| 1,081 |
|
|
| 4,236 |
|
|
| 592 |
|
|
| 5,539 |
|
|
| 11,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Loss from Operations |
|
| (921,583 | ) |
|
| (2,393,962 | ) |
|
| (3,459,563 | ) |
|
| (6,775,108 | ) |
|
| (680 | ) |
|
| (574 | ) |
|
| (478 | ) |
|
| (5,713 | ) |
|
| (7,445 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Amortization of Debt Discount |
| - |
| - |
| (468,317 | ) |
| (468,317 | ) |
| - |
| - |
| - |
| - |
| - |
| |||||||||||||||
Loss on Extinguishment of Debt |
| - |
| - |
| (4,731,246 | ) |
| (4,731,246 | ) |
| - |
| - |
| - |
| - |
| - |
| |||||||||||||||
Gain on Fair Market Valuation of Derivatives |
| - |
| - |
| 2,281,000 |
| 2,281,000 |
| |||||||||||||||||||||||||||
Interest Expense |
|
| - |
|
|
| (397 | ) |
|
| (259,224 | ) |
|
| (259,621 | ) | ||||||||||||||||||||
Gain/(Loss) on Fair Market Valuation of Derivatives |
| - |
| - |
| - |
| - |
| - |
| |||||||||||||||||||||||||
Interest Income (Expense) |
| - |
| (141 | ) |
| (278 | ) |
| (2,508 | ) |
| (2,928 | ) | ||||||||||||||||||||||
Other Income / (Loss) |
| - |
| 36 |
| - |
| 11 |
| 48 |
| |||||||||||||||||||||||||
Gain on Interest in Joint Venture |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,599 |
|
|
| 5,599 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Other Income (Expense) |
|
| - |
|
|
| (397 | ) |
|
| (3,177,787 | ) |
|
| (3,178,184 | ) |
|
| - |
|
|
| (105 | ) |
|
| (278 | ) |
|
| 3,102 |
|
|
| 2,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Loss Before Provision for Income Taxes |
| $ | (921,583 | ) |
| $ | (2,394,359 | ) |
| $ | (6,637,350 | ) |
| $ | (9,953,292 | ) | ||||||||||||||||||||
Net Loss |
| $ | (680 | ) |
| $ | (679 | ) |
| $ | (756 | ) |
| $ | (2,611 | ) |
| $ | (4,725 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Assets at March 31, 2018 |
| $ | 6,086,415 |
|
| $ | 72,403,323 |
|
| $ | 29,354,695 |
|
| $ | 107,844,433 |
| ||||||||||||||||||||
Total Assets at March 31, 2019 |
| $ | 5,954 |
|
| $ | 99,344 |
|
| $ | 18,120 |
|
| $ | 16,116 |
|
| $ | 139,534 |
|
Table of Contents |
|
| For the Three Months Ended March 31, 2017 (Unaudited) |
|
| For the Three Months Ended March 31, 2018 (Unaudited) (in thousands) |
| ||||||||||||||||||||||||||||||
|
| Herbs and Produce Products |
| Cannabis Dispensary, Cultivation and Production |
| Eliminations and Other |
| Total |
|
| Herbs and Produce Products |
| Cannabis Dispensary, Cultivation and Production |
| Real Estate |
| Eliminations and Other |
| Total |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Revenues |
| $ | 917,143 |
| $ | 5,887,038 |
| $ | 20,275 |
| $ | 6,824,456 |
|
| $ | 1,284 |
| $ | 7,315 |
| $ | - |
| $ | 17 |
| $ | 8,615 |
| |||||||
Cost of Goods Sold |
|
| 969,815 |
|
|
| 5,495,578 |
|
|
| - |
|
|
| 6,465,393 |
|
|
| 1,263 |
|
|
| 4,231 |
|
|
| - |
|
|
| - |
|
|
| 5,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gross Profit |
| (52,672 | ) |
| 391,460 |
| 20,275 |
| 359,063 |
|
| 21 |
| 3,084 |
| - |
| 17 |
| 3,122 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Selling, General and Administrative Expenses |
|
| 659,063 |
|
|
| 2,627,005 |
|
|
| 3,100,232 |
|
|
| 6,386,300 |
|
|
| 942 |
|
|
| 5,478 |
|
|
| - |
|
|
| 3,476 |
|
|
| 9,897 |
|
|
|
|
|
|
| . |
|
|
|
|
|
|
|
|
|
| . |
|
|
| ||||||||||||||||
Loss from Operations |
|
| (711,735 | ) |
|
| (2,235,545 | ) |
|
| (3,079,957 | ) |
|
| (6,027,237 | ) |
|
| (922 | ) |
|
| (2,394 | ) |
|
| - |
|
|
| (3,460 | ) |
|
| (6,775 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Amortization of Debt Discount |
| - |
| - |
| (610,616 | ) |
| (610,616 | ) |
| - |
| - |
| - |
| (468 | ) |
| (468 | ) | ||||||||||||||
Loss on Extinguishment of Debt |
| - |
| - |
| (1,039,458 | ) |
| (1,039,458 | ) |
| - |
| - |
| - |
| (4,731 | ) |
| (4,731 | ) | ||||||||||||||
Gain on Fair Market Valuation of Derivatives |
| - |
| - |
| 1,610,750 |
| 1,610,750 |
| |||||||||||||||||||||||||||
Interest Expense |
| - |
| - |
| (157,833 | ) |
| (157,833 | ) | ||||||||||||||||||||||||||
Loss on Fair Market Valuation of Contingent Consideration |
|
| - |
|
|
| (4,348,761 | ) |
|
| - |
|
|
| (4,348,761 | ) | ||||||||||||||||||||
Gain/(Loss) on Fair Market Valuation of Derivatives |
| - |
| - |
| - |
| 2,281 |
| 2,281 |
| |||||||||||||||||||||||||
Interest Income (Expense) |
| - |
| (0 | ) |
| - |
| (259 | ) |
| (260 | ) | |||||||||||||||||||||||
Other Income / (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Other Income (Expense) |
|
| - |
|
|
| (4,348,761 | ) |
|
| (197,157 | ) |
|
| (4,545,918 | ) |
|
| - |
|
|
| (0 | ) |
|
| - |
|
|
| (3,178 | ) |
|
| (3,178 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Loss Before Provision for Income Taxes |
| $ | (711,735 | ) |
| $ | (6,584,306 | ) |
| $ | (3,277,114 | ) |
| $ | (10,573,155 | ) | ||||||||||||||||||||
Net Loss |
| $ | (922 | ) |
| $ | (2,394 | ) |
| $ | - |
|
| $ | (6,637 | ) |
| $ | (9,953 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total Assets at March 31, 2017 |
| $ | 7,133,499 |
|
| $ | 59,367,012 |
|
| $ | 11,077,191 |
|
| $ | 77,577,702 |
| ||||||||||||||||||||
Total Assets at March 31, 2018 |
| $ | 6,086 |
|
| $ | 72,403 |
|
| $ | - |
|
| $ | 29,355 |
|
| $ | 107,844 |
|
NOTE 1519 – LITIGATION AND CLAIMS
The Company is the subject of lawsuits and claims arising in the ordinary course of business from time to time. The Company reviews any such legal proceedings and claims on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and it discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued if such disclosure is necessary for the Company’s financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, the Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of the loss. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated. Based upon present information, the Company determined that there were no matters that required an accrual as of March 31, 2018 nor were there any asserted or unasserted material claims for which material losses are reasonably possible.2019.
On April 11, 2018, the Company filed a lawsuit in the United States District Court, Central District of California against Kenneth VandeVrede,Vande Vrede, Michael VandeVrede,Vande Vrede, Steven VandeVrede,Vande Vrede, Daniel VandeVrede,Vande Vrede, Greda VandeVrede,Vande Vrede, Beverly Willekes, Brian VandeVrede, Gro-Rite,Vande Vrede, GroRite, Inc. (“Gro-Rite”GroRite”) and Naturally Beautiful Plant Products, LLC (“Naturally Beautiful”) alleging breach of contract, breach of fiduciary duties, conversion, fraud, breach of covenant of good faith and fair dealing, misappropriation of trade secrets, and conspiracy related to, among other things, the Share Exchange Agreement, dated as of April 24, 2013 among the Company, the Company’s wholly-owned subsidiary, Edible Garden Corp. (“Edible Garden”), and the individual defendants (the “Share Exchange Agreement”). The Company is seeking monetary damages, including attorneys’ fees and expenses, return of shares of the Company’s common stock issued to the individual defendants under the Share Exchange Agreement, return of stock options issued to the individual defendants, and return of the Company’s intellectual property. As of February 25, 2019, the Court has dismissed all defendants except for Kenneth Vande Vrede based on the other defendants’ lack of contacts with the State of California. The Company intends to appeal this decision and still seeks monetary damages, including attorneys’ fees and expenses, return of shares of the Company’s common stock issued to the individual defendants under the Share Exchange Agreement, return of stock options issued to the individual defendants, and return of the Company’s intellectual property in this case and in other cases discussed herein.
27 |
Table of Contents |
On April 10, 2018, Gro-Rite,GroRite, Naturally Beautiful and Whitetown Realty (“Whitetown Realty” and collectively, the “Whitetown Realty Plaintiffs”Plai.jpgs”) filed a lawsuit in the Superior Court of New Jersey Law Division, Morris County against the Company and Edible Garden alleging, among other things, that Edible Garden owes certain amounts to Gro-RiteGroRite under a Marketing and Distribution Agreement between Edible Garden and Gro-Rite,GroRite, dated May 7, 2013, and Naturally Beautiful under a Marketing and Distribution Agreement between Edible Garden and Naturally Beautiful, dated May 13, 2013 (collectively, the “Marketing and Distribution Agreements”), and that Edible Garden owes certain amounts to Whitetown Realty under the Lease between Whitetown Realty and Edible Garden, dated January 1, 2015 (the “Lease”). The Whitetown Realty PlaintiffsPlai.jpgs are seeking, among other things, compensatory damages for the amounts claimed are owed and attorneys’ fees and costs. The Company believesdisputes that Edible Garden does not oweowes any payments under the Marketing and Distribution Agreements or the Lease. The Company disputes the Whitetown Realty Plaintiffs’ allegations in the lawsuitLease and intends to vigorously defend itself.
On April 13, 2018, Edible Garden Corp. filed a lawsuit in the Superior Court of New Jersey Chancery Division, Warren County against Whitetown Realty in response to a letter from a law firm representing Whitetown Realty alleging Edible Garden was in default of the Lease. Edible Garden is seeking declaratory and equitable relief to prevent Whitetown Realty from terminating the Lease and for attorneys’ fees and costs. The Company believes that Edible Garden has made all payments due to Whitetown Realty under the Lease and maintains Edible Garden is not in default of the Lease. On April 23, 2018, by order of the assignment judge of Warren County, the lawsuit was transferred to Morris County and consolidated with the April 10, 2018 lawsuit previously filed by GroRite, Naturally Beautiful and Whitetown Realty in the Superior Court of New Jersey, Law Division, Morris County. On June 13, 2018, Whitetown Realty filed its answer to the Edible Garden Complaint. In that answer, Whitetown Realty denies that Edible Garden is entitled to the declaratory and equitable relief that Edible Garden requested. No counterclaim was filed by Whitetown Realty.
On April 11, 2018, Kenneth VandeVrede,Vande Vrede, Michael VandeVredeVande Vrede and Steven VandeVredeVande Vrede (collectively, the “VandeVredes”“Vande Vrede Brothers”) filed a lawsuit in the Superior Court of New Jersey Law Division, Warren County against the Company and Edible Garden alleging, among other things, that the Company and Edible Garden improperly suspended the VandeVredesVande Vrede Brothers from their positions with the Company and Edible Garden. The VandeVredes areVande Vrede Brothers were seeking, among other things, a declaratory judgementjudgment that the they did not violate their fiduciary duties owed to the Company or Edible Garden and reinstating the VandeVredesVande Vrede Brothers to their status with the Company and Edible Garden prior to their suspensions and attorneys’ fees and costs. The original complaint in this matter was never served, and on June 12, 2018, the Vande Vrede Brothers, and now David Vande Vrede, Daniel Vande Vrede, Beverly Willekes, and Whitetown Realty filed an amended complaint against Terra Tech, Edible Garden, Derek Peterson, Michael James, and Michael Nahass. The Company filed a pre-answer motion to dismiss the amended complaint, arguing that any of the plai.jpgs’ claims that relate to the Share Exchange Agreement, belong in the already existing lawsuit in California, and any of the plai.jpgs’ claims that relate to the lease, belong in the already existing lawsuits in New Jersey. The Company disputes the VandeVrede’sVande Vredes’ allegations in the lawsuit and intends to vigorously defend itself. On September 19, 2018, the Superior Court of New Jersey, Warren County denied the Company’s pre-answer motion to dismiss without prejudice and transferred the matter to Morris County to be consolidated with the other two matters already pending in Morris County, and the Company renewed its pre-answer motion to dismiss in Morris County. On December 17, 2018, the Superior Court of New Jersey, Morris County denied the Company’s motion to dismiss. On January 22, 2019, the Company filed its answer and asserted counterclaims for breach of contract, breach of fiduciary duty, conversion, fraud, misappropriation of trade secrets, and conspiracy in Superior Court of New Jersey, Morris County against the Vande Vredes. On February 28, 2019, the court held a case management conference for all the three consolidated matters in Morris County and set a discovery end date of October 15, 2019.
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On April 15, 2019, the Vande Vrede Brothers, David VandeVrede, Daniel Vande Vrede, Beverly Willekes, and Whitetown Realty filed a motion to dismiss certain aspects of the Company’s counterclaims. The Company filed its opposition to this motion on May 2, 2019. The motion to dismiss is returnable on May 10, 2019.
On September 15, 2017, through our wholly-owned subsidiary, IVXX, Inc., we filed a lawsuit against Callow Distribution, LLC, a California limited liability company controlled by David Weidenbach, in the Superior Court of the State of California, County of Orange. In the Complaint for Breach of Contract, Conversion, and Injunctive Relief, we requested that the Court award to us, among other things, damages according to proof, attorneys’ fees, and costs of suit. On December 3, 2018, we appeared for trial and provided sufficient evidence to the Court to prove our case in full to its satisfaction. The judge ruled from the bench in our favor. We then prepared the form of Judgment, which the Court entered on December 10, 2018, and made publicly available on December 13, 2018.
The judgment in our favor and against Callow Distribution, LLC is in the amount of $0.95 million. We intend to pursue our post-judgment collection rights vigorously, although there is no assurance as to the timing of collection and the amount that we will collect.
On November 21, 2018, Heidi Loeb Hegerich, Forever Green NV, and Forever Young Investments, L.L.C. filed a lawsuit against the Company, certain of its subsidiaries and affiliates, and certain unrelated parties in the Second Judicial District of the County of Washoe, State of Nevada, alleging, among other things, breach of fiduciary duty, breach of contract, and fraud, and seeking monetary damages and equitable relief. On February 26, 2019, the Company, MediFarm I, MediFarm II, MediFarm I RE and other parties (collectively, the “Terra Tech Parties”) entered into a Settlement Agreement and Release (the “Settlement Agreement”) with Heidi Loeb Hegerich, Forever Green and Forever Young (collectively, the “Loeb Parties”) pursuant to which the Terra Tech Parties and the Loeb Parties agreed to settle and dismiss with prejudice the lawsuit filed by the Loeb Parties against the Terra Tech Parties in the Second Judicial District of the County of Washoe, State of Nevada, Case Number CV1802322 on November 21, 2018 (the “Lawsuit”). Entering into the Settlement Agreement is not an admission or acknowledgement of liability or responsibility on the part of the Company in connection with the Lawsuit. The only material relationship between the Company and Ms. Hegerich, Forever Green and Forever Young, other than in respect of the SPA and the Settlement Agreement, was their membership in MediFarm I, MediFarm II and MediFarm I RE.
In conjunction with the settlement, the Company entered into a Securities Purchase Agreement (the “SPA”) with Forever Green NV (“Forever Green”) and Forever Young Investments, L.L.C. (“Forever Young”) pursuant to which the Company agreed to purchase Forever Green’s 50% membership interest in MediFarm I LLC (“MediFarm I”), Forever Green’s 15% membership interest in MediFarm II, LLC (“MediFarm II”), and Forever Young’s 50% membership interest in MediFarm I Real Estate, LLC (“MediFarm I RE”) for aggregate consideration of $6.30 million. MediFarm I owns the Company’s Blüm dispensary located at 1085 S. Virginia St. Suite A, Reno, NV 89502, and MediFarm I RE owns the building which houses the dispensary. Closing of the SPA is subject to the approval of the Nevada Department of Taxation, which the Company expects to receive in approximately 60-90 days. Following closing, the Company will own 100% of MediFarm I, 100% of MediFarm RE and 70% of MediFarm II.
NOTE 1620 – SUBSEQUENT EVENTS
Equity Financing Facility
Subsequent to March 31, 2018, the Company issued 366,909 shares of common stock for cash in the amount of $1,000,000 pursuant to an equity financing with an accredited investor.
Debt and Interest Converted into Equity
Subsequent to March 31, 2018,2019, senior convertible promissory notes and accrued interest in the amount of $5,500,000$1.20 million and $88,126,$0.05 million, respectively, were converted into 2,791,8041,809,611 shares of common stock.
Other
In April 2018,On May 8, 2019, the Company amended the note receivable with NuLeaf to extend the maturity date to August 1, 2018. In the event the State of Nevada does not approve theand Picksy LLC agreed upon an asset purchase agreement where the Company entered into with NuLeaf, see Note 5 – “Notes Receivable”,would sell the note receivable must be repaid by quarterly payments beginning November 1, 2018.assets of the Company related to its dispensary located at 1130 Desert Inn Road, Las Vegas, NV 89109 for $10.00 million.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which provides a “safe harbor” for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as “might,” “will,” “may,” “should,” “estimates,” “expects,” “continues,” “contemplates,” “anticipates,” “projects,” “plans,” “potential,” “predicts,” “intends,” “believes,” “forecasts,” “future,” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates, and projections will occur or can be can achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties, and other important factors that could cause actual results to differ include, among others, the risk, uncertainties and factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 and in other filings we make from time to time with the U.S. Securities and Exchange Commission (“SEC”).
We caution you that the risks, uncertainties, and other factors set forth in our periodic filings with the SEC may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that: (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of the report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise.
Our corporate headquarters is located at 2040 Main Street, Suite 225, Irvine, California 92614 and our telephone number is (855) 447-6967. Our website addresses are as follows: www.terratechcorp.com, www.blumoak.com, www.letsblum.com, www.ivxx.com, and www.ediblegarden.com. No information available on or through our websites shall be deemed to be incorporated into this Annual Report on Form 10-K. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc.’s OTCQX tier under the symbol “TRTCD.“TRTC.”
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On March 12, 2018, we implemented a 1-for-15 reverse stock split of our common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective in the stock market upon commencement of trading on March 13, 2018. As a result of the Reverse Stock Split, every fifteen shares of our Pre-Reverse Stock Split common stock were combined and reclassified into one share of our common stock. No fractional shares were issued in connection with the Reverse Stock Split, and any fractional shares were rounded up to the nearest whole share. The number of shares of common stock subject to outstanding options, warrants and convertible securities were also reduced by a factor of fifteen as of March 13, 2018. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the Reverse Stock Split. The authorized number of shares and the par value per share of our common stock were not affected by the Reverse Stock Split.
History and Background
On February 9, 2012, we completed a reverse-triangular merger with GrowOp Technology whereby we acquired all of the issued and outstanding shares of GrowOp Technology. As a result of the merger, GrowOp Technology became our wholly-owned subsidiary. Following the merger, we ceased our prior operations and are now solely a holding company with wholly-owned subsidiaries. We also own interests in four other subsidiaries.
Our Business
We are a vertically integrated retail, production and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. We also hold an exclusive patent on anThe Company grows organic antioxidant rich Superleaf rich lettuce and sell living herbs that are grown using classic Dutch hydroponic farming methods. We have licensed an exclusive patent on the Superleaf lettuce.
We have a presence in three states (California, Nevada and New Jersey) and currently have cannabis operations in California and Nevada. All of ourOur cannabis dispensaries operate under the name Blüm. Our cannabis dispensaries in California operate as MediFarm SoCal in Santa Ana, Black Oak Gallery in Oakland and Blum San Leandro in San Leandro and offer a broad selection of medical and adult useadult-use cannabis products including flowers, concentrates and edibles.
In California, we have two dispensaries, one under Black Oak in Oakland, California and one under MediFarm So Cal in Santa Ana, California, which sell quality medical and adult use cannabis products. We are currently in various stages of construction in both states as we are rapidly expanding our commercial footprint focusing on building additional retail, cultivation and production locations for medical and adult use cannabis. The Hegenberger cultivation facility in Oakland under Black Oak is expected to be complete by the third quarter of 2018, with additional medical and adult use locations under Dyer and Carnegie in which we own the real property. We have received provisional permits to operate a dispensary and production facility in the city of San Leandro, California under Blüm San Leandro; and upon project completion and inspection, to receive final operating permits.
In Nevada, we have fourthree dispensaries, threetwo under MediFarm in Las Vegas and one under MediFarm I in Reno, which sell quality medical and adult use cannabis products. We jointly own real property in Reno under MediFarm I RE, on which MediFarm I operates its dispensary. Under MediFarm II, we are constructing a state of the art cultivation and production facility, which will produce our IVXX proprietary brand of cannabis flowers and cannabis extracted products available throughout Nevada.
We have access to wide consumer markets for cannabis in both Nevada and California for which our focus is on building a brand portfolio of a line of quality IVXX cannabis products. Within our highly advanced and custom designed extraction labs, we produce the purest concentrates and cannabis extracted products including cartridges and vape pens. Our IVXX cannabis flowers are grown under meticulous standards ensuring exceptional quality and consistency.
Founded on the importance of providing consumers with healthy andpremium natural products, Edible Garden is a wholesale sellernational grower of organic and locally grown hydroponic produce and herb products.herbs. EG Transportation supports the distribution of Edible Garden products to major grocery stores such as ShopRite, Walmart, Ahold, Aldi, Meijer, Kroger, Hannaford, Stop & Shop, Weis and others throughout New Jersey, New York, Delaware, Maine, Maryland, Connecticut, Pennsylvania and the Midwest.United State.
We have a “rollup” growth strategy, which includes the following components:
· | With our brand recognition and experienced management team, maximize productivity, provide economies of scale, and increase profitability through our public market vehicle; | |
· | Acquire unique products and niche players where barriers to entry are high and margins are robust, providing them with a broader outlet for their products; and | |
· | Acquire multiple production facilities to capture the market vertically from manufacturing to production up to retail. |
Our business also represents our operating segments. See our Part I, Item 1. Business, “Company Overview” and “Note 1418 – Segment Information” to our unaudited consolidated financial statements for further discussion of our operating segments.
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Our Operations
We are organized into twothree reportable segments:
| · | Herbs and Produce Products – Includes herbs and leafy greens that are grown using classic Dutch hydroponic farming methods; |
| · | Cannabis Dispensary, Cultivation and Production – Includes cannabis-focused retail, cultivation and |
· | Real Estate – Includes building ownership and construction operations where cannabis dispensary and/or cultivation operations are currently in development |
Our segment net revenue and contributions to consolidated net revenue for each of the three months ended March 31, 20182019 and 20172018 were as follows:
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| Three Months Ended March 31, |
| Three Months Ended March 31, |
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| Three Months Ended March 31, |
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| 2017 |
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| 2018 |
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| 2019 |
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| 2018 |
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| 2018 |
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| 2017 |
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Herbs and Produce Products |
| $ | 1,283,901 |
| $ | 917,143 |
| 14.9 | % |
| 13.4 | % |
| $ | 1,304 |
| $ | 1,284 |
| 17.7 | % |
| 14.9 | % | ||||||||
Cannabis Dispensary, Cultivation and Production |
| 7,314,554 |
| 5,887,038 |
| 84.9 | % |
| 86.3 | % |
| 6,813 |
| 7,315 |
| 92.6 | % |
| 84.9 | % | ||||||||||||
Real Estate |
| 207 |
| - |
| 2.8 | % |
| -% |
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Other and Eliminations |
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| 16,911 |
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| 20,275 |
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| 0.2 | % |
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| 0.3 | % |
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| (966 | ) |
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| 17 |
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| (13.1 | )% |
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| 0.1 | % |
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Total |
| $ | 8,615,366 |
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| $ | 6,824,456 |
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| 100.0 | % |
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| 100.0 | % |
| $ | 7,358 |
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| $ | 8,615 |
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| 100.0 | % |
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| 100.0 | % |
See “Note 2 – Summary of Significant Accounting Policies” to our unaudited consolidated financial statements for financial information about our segments. See also “Item 1A. Risk Factors” below for a discussion of certain risks associated with our operations.
Herbs and Produce Products
Either independently or in conjunction with third parties, we are a retail seller of locally grown hydroponic herbs and produce, which are distributed through major grocery stores throughout the East, West and Midwest regions of the U.S.
Cannabis Dispensary, Cultivation and Production
Either independently or in conjunction with third parties, we operate medical marijuana retail and adult use dispensaries, and a medical marijuana and adult use cultivation in California. In addition, we operate four retail medical and adult use marijuana dispensary facilities in Nevada, and have in various stages of construction, medical marijuana and adult use cultivation and production facilities in Nevada. We own real property in Nevada on which we plan to build a medicalCalifornia and adult use marijuana dispensary.Nevada. All of our retail dispensaries in California and Nevada offer a broad selection of medical and adult use cannabis products including flowers, concentrates and edibles. We also produce and sell a line of medical and adult use cannabis flowers, as well as a line of medical and adult use cannabis-extracted products, which include concentrates, cartridges, vape pens and wax products.
Real Estate and Construction Operations
We own real property in Nevada on which we plan to build a medical and adult use marijuana dispensary. Additionally, we own properties in California that are in various stages of construction for medical marijuana and adult use cultivation and production facilities and dispensaries.
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Employees
As of the date of this Quarterly Report on Form 10-Q, we had approximately 260237 employees.
Three Months Ended March 31, 20182019 Compared to Three Months Ended March 31, 20172018
Revenues
For the three months ended March 31, 2018,2019, we generated revenues of $8.62$7.36 million, compared to $6.82$8.62 million for the three months ended March 31, 2017, an increase2018, a decrease of $1.79$1.26 million or 26.214.6 percent. The increasedecrease was primarily due to higherto: (i) $0.94 million, or 12.9 percent, decrease in Cannabis revenues generated by the Nevada MediFarm dispensaries primarily due to the implementationcontinued impact of adult use sales in July 2017, and higher revenue generated by Edible Garden resulting from the sales of its produce and herbs. At this stage in our development, revenues are not yet sufficient to cover ongoing operating expenses. The production facilities of IVXX are currently being relocated to an upgraded facility that will facilitate the increase in production and achieve greater distribution throughout California. Project completion is estimated to be in the second quarter of 2018.
Gross Profit
Our gross profit for the three months ended March 31, 20182019 was $1.65$4.00 million, compared to a gross profit of $359,000$3.12 million for the three months ended March 31, 2017,2018, an increase of $1.29$0.88 million or 359.628.2 percent. Our gross margin percentage for the three months ended March 31, 20182019 was 19.154.4 percent, compared to 5.336.2 percent for the three months ended March 31, 2017.2018. The increase in gross margin percentage was primarily attributable toto: (i) the cannabis segment, which increased by $1.22had $3.92 million and $3.08 million gross profit, or 55.2 percent and 42.2 percent gross margin, for the three months ended March 31, 2019 and 2018, respectively; (ii) the herbs and produce segment, which had $0.40 million and $0.24 million gross profit, or 30.8 percent and 1.6 percent gross margin for the three months ended March 31, 2019 and 2018, respectively. Both the cannabis segment and herbs and produce segment percentage increases were primarily resulting from higher level of revenuedue to cover fixed overhead included in cost of goods sold.operational improvements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 20182019 were $8.42$11.52 million, compared to $6.39$10.29 million for the three months ended March 31, 2017,2018, an increase of $2.04$1.22 million or 31.911.9 percent. The increase was primarily due to: (i) a $1.43$1.28 million increase in salaries andstock options expense related payroll taxes;to employee bonuses (ii) a $0.22$0.32 million increase in licensingsecurity expense; and fees in connection with the cannabis business resulting from California adult use going into effect January 1, 2018; (iii) a $0.17$0.23 million increase in health insurance; andmarketing/advertising expense offset by (iv) a $0.15$0.51 million increasedecrease in rent.office supplies expenses.
Operating Income (Loss)
We realized an operating loss of $6.78$7.51 million for the three months ended March 31, 2019, compared to an operating loss of $7.17 million for the three months ended March 31, 2018, compared to an operatingincrease in loss of $6.03approximately $0.34 million for the three months ended March 31, 2017, an increase of approximately $748,000 or 12.44.8 percent.
Other Income (Expense)
Other income for the three months ended March 31, 2019 was $2.72 million, compared to other expense of $4.93 million for the three months ended March 31, 2018, was $3.18 million, compared to $4.55 million for the three months ended March 31, 2017, a decreasean increase of $1.37$7.65 million or 30.1155.0 percent. This decreaseimprovement was primarily attributable to: (i)to a loss$5.60 million increase in Gain on fair market valuation of the contingent consideration related to the Black Oak Gallery acquisition, which was $4.3Interest in Joint Venture and a $2.00 million for the three months ended March 31, 2017 and zero for the three months ended March 31, 2018; (ii) an increase of $0.67 milliondecrease in gain on fair market valuation of derivatives.; (iii) offset by an increase of approximately $3.69 million in loss on extinguishment of debt.Interest Expense.
Net Loss Attributable to Terra Tech Corp.
We incurred a net loss of $10.03$5.07 million, or $0.16$0.05 per share, for the three months ended March 31, 2018,2019, compared to a net loss of $10.11$12.18 million, or $0.27$0.19 per share, for the three months ended March 31, 2017.2018.
Management will continue its efforts to lower operating expenses and increase revenue. We will continue to invest in further expanding our operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting our name and our products. Given the fact that most of the operating expenses are fixed or have a quasi-fixed character, management expects that, as revenue increases, those expenses, as a percentage of revenue, will significantly decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in succeeding quarters.
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DISCLOSURE ABOUT OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section discusses our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described in “Note 2 - Summary of Significant Accounting Policies” of the notes to unaudited consolidated financial statements included in this report.
LIQUIDITY AND CAPITAL RESOURCES
We have never reported net income. We incurred net losses for the three months ended March 31, 20182019 and 20172018 and have an accumulated deficit of approximately $115.58$152.07 million and $105.55$142.75 million at March 31, 20182019 and December 31, 2017,2018, respectively.
As of March 31, 2018,2019, we had working capital of $8.65$11.38 million, including $4.51$5.81 million of cash compared to working capital of $3.47$12.06 million, including $5.45$7.19 million of cash as of December 31, 2017.2018. Current assets were approximately 2.02.23 times current liabilities as of March 31, 2018,2019, compared to approximately 1.22.75 times current liabilities as of December 31, 2017.2018.
We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Additional requirements for inventory will continue to increase. Prior to 2017, Black Oak had been purchasing inventory on a consignment basis. Accordingly, title did not pass to us until we ultimately sold the inventory. During 2017 the terms of our purchase of inventory changed with the various vendors we purchased from. The vendors required that title passes to us upon delivery to us. Accordingly, this increased our cash requirements for operational purposes as we are now required to pay with normal terms. Since our inception, we have raised capital through private sales of preferred stock, common stock, and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.
We anticipate requiring additional capital for the commercial development of our facilities. Blüm San Leandro and theThe Hegenberger facility together, will require approximately $2.5$0.80 million in capital to complete. Construction for the completion of the packaging facility for Edible Garden will require approximately $1.4 million. The estimated construction budget for the development of the cultivation and production facilities under MediFarm II is approximately $2.0$0.80 million.
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the fourth quarter of 2020. However, we continue to evaluate various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. Subsequent to December 31, 2017,In March 2018 we entered into a $40.0 million 2018 Master Security Purchase Agreement with an accredited investor. Through IVXXAs of March 31, 2019, the Company hadhas received $5.0$31.9 million under the Security Purchase Agreement.this agreement. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations, or if we are able to raise capital, that it will be available to us on acceptable terms, on an acceptable schedule, or at all.
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The issuance of additional securities may result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.
Operating Activities
Cash used in operating activities for the three months ended March 31, 20182019 was $5.67$5.72 million, compared to $3.75$5.67 million for the three months ended March 31, 2017,2018, an increase of $1.91$0.05 million, or approximately 51.00.9 percent. IncreasesThe small increase in cash used in operating activities werewas due to: (i) an increase of $3.69 millionto primarily to the change in net loss on extinguishment of debt; (ii) a decrease of $1.20 million in inventory; (iii) a decrease of $4.35 million loss on fair market valuation of contingent consideration; (iv) an increase of $0.67 millionbeing offset by the change in gain on fair value market valuationrevaluation of derivatives; and (v) a decrease of $1.79 million in accounts payable and accrued expenses.
Investing Activities
Cash used in investing activities for the three months ended March 31, 20182019 was $5.57$2.82 million, compared to cash used in investing activities of $0.52$5.57 million for the three months ended March 31, 2017, an increase2018, a decrease of $5.04$2.75 million, or 963.249.3 percent. During the first three months of 2018,ended March 31, 2019, cash used in investing activities was primarily comprised of expenditures related to: (i)to the construction of the San Leandro and Oakland facilities; (ii) capital expenditures at Edible Garden in Belvidere, N.J.; and (iii) payment for acquisition of land in Santa Ana, California.facilities.
Financing Activities
Cash provided by financing activities for the three months ended March 31, 20182019 was $10.30$7.15 million, compared to $4.78$10.30 million for the three months ended March 31, 2017, an increase2018, a decrease of $5.52$3.15 million, or 115.530.6 percent. The increasedecrease in cash provided by financing activities for the three months ended March 31, 20182019 was primarily due to: $7.0$4.00 million less proceeds from the issuance of debt;debt partially offset by a decrease$1.55 million increase in proceeds from issuance of $0.95 million from the sale of common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our primary market risks are attributable to fluctuations in commodity prices and interest rates. These fluctuations can affect revenues and cash flow from operating, investing and financing activities.
Commodity Price Risk
Our most significant market risk relates to fluctuations in marijuana prices. Management expects the prices of these commodities to remain volatile and unpredictable. As these prices decline or rise significantly, revenues and cash flow will also decline or rise significantly.
Interest Rate Risk
As of March 31, 2018,2019, we had no outstanding variable-rate debt and $18.5$18.20 million of principal fixed-rate debt.
Credit Risk
Our exposure to non-payment or non-performance by our customers and counterparties presents a credit risk. Generally, non-payment or non-performance results from a customer’s or counterparty’s inability to satisfy obligations. We may also be exposed to credit risk due to the concentration of our customers in the medical marijuana industry, as our customers may be similarly affected by changes in regulatory and legal conditions in the states and municipalities in which we operate.
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ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, our principal executive officer and our principal financial officer are responsible for conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2018.2019. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective as of March 31, 2018.2019.
AsWe regularly assesses the adequacy of December 31, 2017, management assessed the effectiveness of our internal controls over financial reporting. Management concluded, as of the year ended December 31, 2017, that our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP rules. Management concluded that our internal controls were adversely affected by deficiencies in the design or operation of our internal controls, which management considered to be material weaknesses. These material weaknesses include the following:
Risk Assessment – We did not have an effective risk assessment process. From a governance perspective, our formal process to identify, update and assess risks, including changes in our business practices that significantly impact our consolidated financial statements as well as the system ofits internal control over financial reporting was incomplete.
Control Environment – We did not maintain an effective control environment as evidenced by:
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Control Activities – We did not have control activities that were designed and operating effectively to identify and address all likely sources of material misstatements, including non-standard transactions. In addition, management review controls were not sufficient or in place to identify all potential accounting errors.
Information and Communications – We had not implemented appropriate information technology controls related to access rights for certain financial spreadsheets that are relevant to the preparation of the consolidated financial statements and our system of internal control over financial reporting. In addition, we did not implement the appropriate information technology disaster recovery controlsassessments and internal and external audit and regulatory recommendations. No changes in place to ensure the completeness of financial information surrounding revenues and inventory.
Monitoring – We did not maintain effective monitoring of controls related to the financial close and reporting process. In addition, we did not maintain the appropriate level of review and remediation of internal control over financial reporting deficiencies throughout interimhave been identified in connection with the evaluation of disclosure controls and annualprocedures during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial periods.reporting.
The failure to implement and maintain proper and effective internal controls and disclosure controls could result in material weaknesses in our financial reporting, such as errors in our financial statements and in the accompanying footnote disclosures that could require restatements. Investors may lose confidence in our reported financial information and disclosure, which could negatively impact our stock price.
We do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Plan for Remediation of the Material Weaknesses
We are implementing and are continuing to implement a number of measures to address the material weaknesses identified. The remediation activities undertaken by the Company included the following:
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There are no assurances that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underduring the Exchange Act) as of March 31, 2018quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as disclosed in Remediation of Material Weakness above.reporting.
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On April 11, 2018, the Company filed a lawsuit in the United States District Court, Central District of California against Kenneth VandeVrede, Michael VandeVrede, Steven VandeVrede, Daniel VandeVrede, Greda VandeVrede, Beverly Willekes, Brian VandeVrede, Gro-Rite, Inc. (“Gro-Rite”) and Naturally Beautiful Plant Products, LLC (“Naturally Beautiful”) alleging breach of contract, breach of fiduciary duties, conversion, fraud, breach of covenant of good faith and fair dealing, misappropriation of trade secrets, and conspiracy related to, among other things, the Share Exchange Agreement, dated as of April 24, 2013 among the Company, the Company’s wholly-owned subsidiary, Edible Garden Corp. (“Edible Garden”), and the individual defendants (the “Share Exchange Agreement”). The Company is seeking monetary damages, including attorneys’ feesthe subject of lawsuits and expenses, return of shares of the Company’s common stock issued to the individual defendants under the Share Exchange Agreement, return of stock options issued to the individual defendants, and return of the Company’s intellectual property.
On April 10, 2018, Gro-Rite, Naturally Beautiful and Whitetown Realty (“Whitetown Realty” and collectively, the “Whitetown Realty Plaintiffs”) filed a lawsuitclaims arising in the Superior Courtordinary course of New Jersey Law Division, Morris County against the Company and Edible Garden alleging, among other things, that Edible Garden owes certain amounts to Gro-Rite under a Marketing and Distribution Agreement between Edible Garden and Gro-Rite, dated May 7, 2013, and Naturally Beautiful under a Marketing and Distribution Agreement between Edible Garden and Naturally Beautiful, dated May 13, 2013 (collectively, the “Marketing and Distribution Agreements”), and that Edible Garden owes certain amounts to Whitetown Realty under the Lease between Whitetown Realty and Edible Garden, dated January 1, 2015 (the “Lease”). The Whitetown Realty Plaintiffs are seeking, among other things, compensatory damages for the amounts claimed are owed and attorneys’ fees and costs. The Company believes that Edible Garden does not owe any payments under the Marketing and Distribution Agreements or the Lease. The Company disputes the Whitetown Realty Plaintiffs’ allegations in the lawsuit and intends to vigorously defend itself.
On April 13, 2018, Edible Garden Corp. filed a lawsuit in the Superior Court of New Jersey Chancery Division, Warren County against Whitetown Realty in response to a letterbusiness from a law firm representing Whitetown Realty alleging Edible Garden was in default of the Lease. Edible Garden is seeking declaratory and equitable relief to prevent Whitetown Realty from terminating the Lease and for attorneys’ fees and costs. The Company believes that Edible Garden has made all payments due to Whitetown Realty under the Lease and maintains Edible Garden is not in default of the Lease.
On April 11, 2018, Kenneth VandeVrede, Michael VandeVrede and Steven VandeVrede (collectively, the “VandeVredes”) filed a lawsuit in the Superior Court of New Jersey Law Division, Warren County against the Company and Edible Garden alleging, among other things, that the Company and Edible Garden improperly suspended the VandeVredes from their positions with the Company and Edible Garden. The VandeVredes are seeking, among other things, a declaratory judgement that the they did not violate their fiduciary duties owed to the Company or Edible Garden and reinstating the VandeVredes to their status with the Company and Edible Garden prior to their suspensions and attorneys’ fees and costs. The Company disputes the VandeVrede’s allegations in the lawsuit and intends to vigorously defend itself.
From time to time, we also may become subject to other litigation or proceedings in connection with our business, as either a plaintiff or defendant.time. See Note 19 – Litigation and Claims for further information about legal activity
There have been no material changes to the risk factors disclosed in Part I, Item 1A, “Risk Factors”, of our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Please refer to that section for disclosures regarding the risk and uncertainties relating to our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
None.
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101.INS |
| XBRL Instance Document * |
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101.SCH |
| XBRL Taxonomy Extension Schema Document * |
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101.CAL |
| XBRL Taxonomy Extension Calculations Linkbase Document * |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document * |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document * |
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101.PRE |
| XBRL Taxonomy Presentation Linkbase Document * |
____________________________
* | Filed herewith |
(1) | Incorporated by reference to Current Report on Form 8-K (File No. 000-54258), filed with the SEC on February 10, 2012 |
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(2) |
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(3) | Incorporated by reference to Annual Report on Form 10-K filed with the SEC on March 29, 2016 |
(4) | Incorporated by reference to Registration Statement on Form S-1 (File No. 333-156421), filed with the SEC on December 23, 2008. |
(5) | Incorporated by reference to Current Report on Form 8-K (File No. 000-54258), filed with the SEC on August 2, 2018. |
(6) | Incorporated by reference to Registration Statement on Form S-1 (File No. 333-191954), filed with the SEC on October 28, 2013. |
(7) | Incorporated by reference to Current Report on Form 8-K filed with the SEC on |
(8) |
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(9) | Incorporated by reference to Current Report on Form 8-K filed with the SEC on |
(10) |
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(11) | Incorporated by reference to Current Report on Form 8-K filed with the SEC on June 22, 2018 |
(12) | Incorporated by reference to Amendment No. 3 to Current Report on Form 8-K (File No. 000-54258), filed with the SEC on April 19, 2012. |
(13) | Incorporated by reference to Current Report on Form 8-K filed with the SEC on March |
(14) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TERRA TECH CORP. | |||
Date: May | By: | /s/ Michael C. James | |
Michael C. James | |||
Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) |
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