ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 be 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, 2016, filed with the Securities and Exchange Commission (the “SEC”), and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov.
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.
COMPANY OVERVIEW
Terra Tech is a holding company with the following subsidiaries:
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Edible Garden Corp., a Nevada corporation (“Edible Garden”);
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MediFarm, LLC, a Nevada limited liability company (“MediFarm”);
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MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”);
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MediFarm I Real Estate, LLC, a Nevada limited liability company (“MediFarm I RE”);
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MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”);
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IVXX, LLC, a Nevada limited liability company (“IVXX LLC”);
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IVXX, Inc., a California corporation (“IVXX Inc.”; together with IVXX LLC, “IVXX”);
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Blüm San Leandro, a California corporation (“Blüm San Leandro”);
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Black Oak Gallery, a California corporation (“Black Oak”);
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GrowOp Technology Ltd., a Nevada corporation (“GrowOp Technology”); and
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EG Transportation, LLC, a Nevada limited liability company (“EG Transportation”).
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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 Quarterly Report on Form 10-Q. Our common stock, par value $0.001 (the “Common Stock”), is quoted on the OTC Markets Group, Inc.’s OTCQX tier under the symbol “TRTC.”
History and Background
Our original business was developing a software program that would allow for automatic call processing through voice-over-Internet protocol, or “VoIP”, technology. Our operations were limited to capital formation, organization, and development of our business plan and target customer market. We generated no revenue.
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 seven wholly-owned subsidiaries. We also own interests in four other subsidiaries.
Our Business
We are a vertically integrated cannabis-focused agriculture company that is committed to cultivating and providing the highest quality medical cannabis, as well as other agricultural products, such as herbs and leafy greens that are grown using classic Dutch hydroponic farming methods.
Through Black Oak, we operate a medical marijuana retail dispensary, a medical marijuana cultivation, and have a second medical marijuana cultivation facility under construction (the “Hegenberger facility”), all in Oakland, California. Through MediFarm, MediFarm I, and MediFarm II (together “MediFarm”), we operate four retail medical marijuana dispensary facilities in Nevada, and have in various stages of construction medical marijuana cultivation and production facilities in Nevada. Through MediFarm I RE, we own the real property in Nevada on which we plan to build a medical marijuana dispensary of which we are in the planning phase. All of our retail dispensaries in California and Nevada operate under the name Blüm, which offer a broad selection of medical cannabis products including flowers, concentrates and edibles. Through IVXX, we produce and sell a line of medical cannabis flowers, as well as a line of medical cannabis-extracted products, which include concentrates, cartridges, vape pens and wax products. Through Edible Garden, we are a retail seller of locally grown hydroponic produce, herbs and floral products, which are distributed through major grocery stores such as ShopRite, Walmart, Winn-Dixie, Raley’s, Meijer, Kroger, and others throughout New Jersey, New York, Delaware, Maryland, Connecticut, Pennsylvania and the Midwest. EG Transportation is a company in good standing and no operations to date.
We have a “rollup” growth strategy, which includes the following components:
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With our brand recognition and experienced management team, maximize productivity, provide economies of scale, and increase profitability through our public market vehicle;
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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
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Acquire multiple production facilities to capture the market vertical from manufacturing to production up to retail.
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Marijuana Industry Overview
Marijuana cultivation refers to the planting, tending, improving and harvesting of the flowering plant Cannabis, primarily for the production and consumption of cannabis flowers, often referred to as “buds”. The cultivation techniques for marijuana cultivation differ than for other purposes such as hemp production and generally references to marijuana cultivation and production do not include hemp.
Cannabis belongs to the genus Cannabis in the family Cannabaceae and for the purposes of production and consumption, includes three species, C. sativa (“Sativa”), C. indica (“Indica”), and C. ruderalis (“Ruderalis”). Sativa and Indica generally grow tall with some varieties reaching approximately four meters. The females produce flowers rich in tetrahydrocannabinol (“THC”). Ruderalis is a short plant and produces trace amounts of THC, but is very rich in cannabidiol (“CBD”) and which is an antagonist (inhibits the physiological action) to THC.
As of May 2017, there are a total of 29 states, plus the District of Columbia, with legislation passed as it relates to medicinal cannabis. These state laws are in direct conflict with the United States Federal Controlled Substances Act (21 U.S.C. § 811) (“CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug, which is viewed as having a high potential for abuse, has no currently-accepted use for medical treatment in the U.S., and lacks acceptable safety for use under medical supervision.
These 29 states, and the District of Columbia, have adopted laws that exempt patients who use medicinal cannabis under a physician’s supervision from state criminal penalties. These are collectively referred to as the states that have de-criminalized medicinal cannabis, although there is a subtle difference between de-criminalization and legalization, and each state’s laws are different.
The states that have legalized medicinal cannabis are as follows (in alphabetical order):
1. Alaska
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11. Maine
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21. New York
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2. Arizona
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12. Maryland
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22. North Dakota
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3. Arkansas
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13. Massachusetts
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23. Ohio
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4. California
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14. Michigan
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24. Oregon
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5. Colorado
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15. Minnesota
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25. Pennsylvania
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6. Connecticut
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16. Montana
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26. Rhode Island
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7. Delaware
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17. Nevada
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27. Vermont
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8. Florida
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18. New Hampshire
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28. Washington
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9. Hawaii
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19. New Jersey
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29. West Virginia
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10. Illinois
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20. New Mexico
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Medical cannabis decriminalization is generally referred to as the removal of all criminal penalties for the private possession and use of cannabis by adults, including cultivation for personal use and casual, nonprofit transfers of small amounts. Legalization is generally referred to as the development of a legally controlled market for cannabis, where consumers purchase from a safe, legal, and regulated source.
The dichotomy between federal and state laws has also limited the access to banking and other financial services by marijuana businesses. Recently the U.S. Department of Justice and the U.S. Department of Treasury issued guidance for banks considering conducting business with marijuana dispensaries in states where those businesses are legal, pursuant to which banks must now file a Marijuana Limited Suspicious Activity Report that states the marijuana business is following the government’s guidelines with regard to revenue that is generated exclusively from legal sales. However, since the same guidance noted that banks could still face prosecution if they provide financial services to marijuana businesses, it has led to the widespread refusal of the banking industry to offer banking services to marijuana businesses operating within state and local laws.
In November 2016, California and Nevada voters both approved marijuana use for adults over the age of 21 without a physician’s prescription or recommendation, so called recreational marijuana, and permitted the cultivation and sale of marijuana, in each case subject to certain limitations. We have obtained the necessary permits and licenses to expand our existing business to cultivate and distribute marijuana in compliance with the laws in the state of Nevada and California. We have received provisional permits to operate a dispensary and production facility in the city of San Leandro, California, and upon project completion and inspection, to receive final operating permits. Although, there is no guarantee that we will be successful in doing so. Despite the changes in state laws, marijuana remains illegal under federal law.
In November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. Many of the provisions of the AUMA do not become effective until January 1, 2018 and the California Bureau of Marijuana Control is expected to enact regulations to implement the AUMA by that date.
Nevada voters approved Question 2 in a ballot initiative in November 2016. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one-eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions. On June 30, 2017, the State of Nevada Department of Taxation approved our Dual Use Marijuana business licenses. This approval allowed all four of our Blüm cannabis dispensaries in Nevada to commence sales of cannabis for adult-use beginning on July 1, 2017.
In an effort to provide guidance to federal law enforcement, the Department of Justice (the “DOJ”) has issued Guidance Regarding Marijuana Enforcement to all United States Attorneys in a memorandum from Deputy Attorney General David Ogden on October 19, 2009, in a memorandum from Deputy Attorney General James Cole on June 29, 2011 and in a memorandum from Deputy Attorney General James Cole on August 29, 2013. Each memorandum provides that the DOJ is committed to the enforcement of the CSA, but the DOJ is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way.
The August 29, 2013 memorandum provides updated guidance to federal prosecutors concerning marijuana enforcement in light of state laws legalizing medical and recreational marijuana possession in small amounts. The memorandum sets forth certain enforcement priorities that are important to the federal government:
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Distribution of marijuana to children;
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Revenue from the sale of marijuana going to criminals;
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Diversion of medical marijuana from states where it is legal to states where it is not;
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Using state authorized marijuana activity as a pretext of other illegal drug activity;
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Preventing violence in the cultivation and distribution of marijuana;
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Preventing drugged driving;
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Growing marijuana on federal property; and
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Preventing possession or use of marijuana on federal property.
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The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property, but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.
Furthermore, H.R. 83, enacted by Congress on December 16, 2014, provides that none of the funds made available to the DOJ pursuant to the 2015 Consolidated and Further Continuing Appropriations Act may be used to prevent certain states, including Nevada and California, from implementing their own laws that authorized the use, distribution, possession, or cultivation of medical marijuana.
We are monitoring the Trump administration’s, the DOJ’s and Congress’ positions on federal marijuana law and policy. Based on public statements and reports, we understand that certain aspects of those laws and policies are currently under review, but no official changes have been announced. It is possible that certain changes to existing laws or policies could have a negative effect on our business and results of operations.
We currently operate medical marijuana businesses in California and Nevada. Although the possession, cultivation and distribution of marijuana for medical use is permitted in California and Nevada, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we operate our business in compliance with applicable Nevada and California law and regulations. Any changes in federal, state or local law enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.
Our Medical Marijuana Dispensaries, Cultivation and Manufacturing
Black Oak Gallery
On April 1, 2016, we acquired Black Oak, which operates a medical marijuana dispensary in Oakland, California under the name Blüm. Black Oak opened its retail storefront in Oakland, California in November 2012.
Black Oak sells a combination of our own cultivated products as well as high quality name-brand products from outside suppliers. In addition to multiple grades of medical marijuana, Black Oak sells “edibles”, which include cannabis-infused baked goods, chocolates, and candies; cannabis-infused topical products, such as lotions, massage oils and balms; clones of marijuana plants; and numerous kinds of cannabis concentrates, such as hash, shatter and wax.
Black Oak’s target markets are those individuals located in the areas surrounding its dispensary and qualify as “patients” under state and local rules and regulations. Black Oak services approximately 1,000 patients per day and has over 42,000 registered patients. Collectively known as the Blüm Campus, Black Oak’s location consists of a retail dispensary storefront, indoor cultivation area, laboratory and a 20-car capacity parking lot.
During March 2017, we executed a lease for 13,000 square feet of industrial space on over 30,000 square feet of land in Oakland’s industrial corridor. We are in the early stages of construction of the Hegenberger facility. We expect to complete construction by late 2017.
On May 11, 2017, we terminated the Operations and Asset Management Agreement (the “Agreement”) by and among the Company, Black Oak and Platinum Standard, LLC (“Platinum”), dated March 31, 2016. There is no relationship between the Company or its affiliates and Platinum, other than pursuant to the Agreement. Pursuant to the Agreement, the Company hired and appointed Platinum as the operator and asset manager of the Company’s licensed medical cannabis dispensary business located at 578 West Grand Avenue, in the City of Oakland, State of California, commonly known as Blüm Oakland, in exchange for certain payments to be made by the Company to Platinum, all as more fully set forth in the Agreement. We terminated the Agreement as a result of the default by Platinum in the performance of certain of its material obligations under the Agreement. We did not incur any early termination penalty in connection with terminating the Agreement. A copy of the Agreement was filed as Exhibit 10.29 to the Company’s Form 10-Q for the quarterly period ended March 31, 2016. See
“Note 9 – Contingent Consideration Liability”
for further information.
Blüm San Leandro
We incorporated Blüm San Leandro, a California corporation, a wholly-owned subsidiary, on October 14, 2016. Blüm San Leandro has received the necessary governmental approvals and permitting to operate a medical marijuana dispensary and production facility in San Leandro, California. We have executed a lease for 13,300 square feet of industrial space in San Leandro’s industrial corridor and are in the final planning and design stages of the retail dispensary and production facility. We also plan on incorporating community meeting space at this facility. We expect to complete construction of the dispensary by late 2017 and we expect to complete construction of the production facility and community meeting space by early 2018.
MediFarm, MediFarm I, and MediFarm II
We formed three subsidiaries for the purposes of cultivation or production of medical marijuana and/or operation of dispensary facilities in various locations in Nevada. MediFarm, MediFarm I, and MediFarm II have received four final dispensary licenses, two provisional cultivation licenses and two provisional production licenses from the State of Nevada, and we have received approval from local authorities with respect to all eight of such licenses. The receipt of both the provisional licenses from the State of Nevada and approval from local authorities were necessary to commence the final permitting process for the cultivation and production licenses. The receipt of final permits and licenses was necessary to commence the cultivation and production businesses of MediFarm, MediFarm I, and MediFarm II. Effectuation of the businesses of each of (i) MediFarm, (ii) MediFarm I, and (iii) MediFarm II is also dependent upon the continued legislative authorization of medical marijuana at the state level.
Each subsidiary was formed with different investors, thus necessitating the need for multiple entities with different strategic partners and advisory board members. In addition, we anticipate each subsidiary will service a different geographical market in Nevada. We expect to allocate future business opportunities among MediFarm, MediFarm I, and MediFarm II based on the locations of such opportunities.
We formed MediFarm, LLC on March 19, 2014. We own 60% of the membership interests in MediFarm. The remaining membership interests are owned by Camden Goorjian (20%) and by Richard Vonfeldt (20%), two otherwise unaffiliated individuals. MediFarm has received the necessary governmental approvals and permitting to operate medical marijuana cultivation, production, and/or dispensary facilities in Clark County, Nevada and a medical marijuana dispensary facility in the City of Las Vegas. As of June 30, 2017, MediFarm has three fully operational retail medical marijuana dispensaries in the greater Las Vegas region.
We formed MediFarm I, LLC on July 18, 2014. We own 50% of the membership interests in MediFarm I. The remaining membership interests are owned by Forever Green NV, LLC (50%), an otherwise unaffiliated entity that also owns certain membership interests in MediFarm II. MediFarm I has the necessary governmental approvals and permitting to operate a medical marijuana dispensary in Reno, Nevada. As of June 30, 2017, MediFarm I has one fully operational retail medical marijuana dispensary in Reno, Nevada.
We formed MediFarm II, LLC on July 30, 2014. We own 55% of the membership interests in MediFarm II. The remaining membership interests are owned by Nevada MF, LLC (30%) and by Forever Green NV, LLC (15%), two otherwise unaffiliated entities. Forever Green NV, LLC also owns certain membership interests in MediFarm I. MediFarm II has received provisional licenses from the State of Nevada to operate a medical marijuana cultivation and production facility in Spanish Springs, Nevada.
MediFarm, MediFarm I, and MediFarm II may face substantial competition in the operation of cultivation, production, and dispensary facilities in Nevada. Numerous other companies were also granted licenses, and, therefore, we anticipate that we will face competition with these other companies if such companies operate cultivation, production, and dispensary facilities in and around the locations at which we operate our facilities. Our management has extensive experience in successfully developing, implementing, and operating all facets of equivalent businesses in other markets. We believe this experience will provide MediFarm, MediFarm I, and MediFarm II with a competitive advantage over these other companies.
MediFarm, MediFarm I, and MediFarm II rely on a combination of trademark laws, trade secrets, confidentiality provisions, and other contractual provisions to protect their proprietary rights. MediFarm, MediFarm I, and MediFarm II do not own any patents.
IVXX and IVXX Branded Products
On September 16, 2014, Terra Tech formed IVXX, a wholly-owned subsidiary, for the purposes of producing a line of IVXX branded cannabis flowers as well as a complete line of IVXX branded pure cannabis concentrates including: oils, waxes, shatters, and clears.
The science of cannabis concentrate extraction functions on the solubility of the cannabinoids and other active ingredients in the cannabis plant. Cannabinoids are not water soluble, so to extract them properly, the cannabinoids must be dissolved in a solvent. IVXX utilizes multiple proprietary extraction methods to produce its concentrates in its lab located in Oakland, California. The Company’s extractors process raw cannabis plants and separate the chemical cannabinoids from the cannabis plant material, producing a concentrate. IVXX also sells clothing, apparel, and other various branded products.
IVXX currently sells its branded products at wholesale to multiple medical cannabis dispensaries throughout California. None of IVXX’s products cross state lines. IVXX continues to actively seek opportunities to sell its products to other retailers located throughout the State of California. IVXX anticipates expanding its business into other states in which the sale of marijuana is legally permitted. In order for such expansion to occur, IVXX must secure the necessary licenses and permits required to operate in any given state, the timing and occurrence of which there can be no assurance. Initially, IVXX anticipates selling its products in Nevada in the four dispensaries operated by MediFarm and MediFarm I. They will be produced at our extraction lab operated by MediFarm II once they are issued final permits and commence operations, as to the occurrence of which there can be no assurance.
IVXX’s target markets are those individuals located in the areas surrounding the dispensaries that sell IVXX’s products and that qualify as “patients” under state and local rules and regulations.
IVXX also intends to produce, market and sell their line of IVXX branded cannabis products in the adult use, recreational cannabis markets in both California and Nevada pursuant to Proposition 64 and Question 2, respectively, which made marijuana consumption legal, with certain restrictions and rules, for adults over the age of 21. IVXX is consistently engaged in research and development with respect to increasing the efficiency of the processes used to produce its products, as well as improving the quality of its products for the benefit of its patients.
On May 24, 2017, we announced the launch of a new “Craft Cultivation” model to expand our cultivation capabilities and the signing of our first “Craft Cultivator” in Northern California. This farm, which is approved for up to one full acre (approximately 44,000 square feet) of cannabis cultivation and uses 22,000 square feet of engineered greenhouse space, is estimated to yield approximately one metric ton of our proprietary high grade “IVXX” cannabis on an annual basis.
MediFarm I RE
On October 14, 2015, we formed MediFarm I RE, LLC. We own 50% of the membership interests in MediFarm I RE. The remaining membership interests are owned by Forever Young Investments, LLC (50%), an otherwise unaffiliated entity. MediFarm I RE is a real estate holding company that owns the real property and a building that is situated on such real property, at which a medical marijuana dispensary facility is expected to be located. This facility is in the early stages of planning. It is our intention that MediFarm I will operate the medical marijuana dispensary.
Herbs and Produce Products
Edible Garden
Edible Garden was incorporated on April 9, 2013. Edible Garden is a retail seller of locally grown hydroponic produce, herbs, and floral products that are distributed throughout the Northeast and Midwest United States. Currently, Edible Garden’s products are sold at approximately 1,800 retailers throughout these markets. Most of the produce and herbs grown by Edible Garden are certified organic. Our target customers are those individuals seeking organic and fresh produce locally grown using environmentally sustainable methods.
Pursuant to letter agreements with Gro-Rite Inc., a New Jersey corporation, and Heartland Growers Inc. (collectively the “Farmers”), have agreed to cultivate the various parts of the line of Edible Garden produce to be sold into the retail grocery channel. Pursuant to the terms of the agreements, Edible Garden will manage the marketing and sales, while the Farmers will be responsible for the cultivation, packaging, and shipping of the product for retail sale under the Edible Garden brand. The terms of the agreements are now month-to-month.
There are numerous growers that are available to us, and therefore, we are not limited in the number of growers available nor are we dependent on any one grower. We completed construction of a greenhouse structure in 2014, which can be used to grow plants to satisfy selling demands; however, we may incur additional freight costs to distribute these plants until growers are replaced.
Edible Garden’s main competitors are Shenandoah Growers and Sun Aqua Farms. To a lesser extent, Edible Garden competes with Green Giant, Del Monte, Rock Hedge Herbs, and Infinite Herbs. Edible Garden is an up and coming brand that has increased its retailers to approximately 1,800 retail sellers since we acquired Edible Garden in March 2013. Edible Garden believes the following three factors set it apart from its competitors: (1) its branding and marketing displays, which are predominately placed in high traffic areas on its proprietary racks; (2) it uses proprietary strands and seeds for its produce and its methodology for growing such produce; and (3) all of its produce is hydroponically grown and sold “alive” (
i.e.,
the produce is sold “rooted”).
Edible Garden relies on a combination of trademark laws, trade secrets, confidentiality provisions, and other contractual provisions to protect its proprietary rights, which are primarily its brand names, marks, and proprietary pods and seeds. Edible Garden owns trademarks, but does not own any patents. Edible Garden signed an exclusive license agreement with Nutrasorb LLC, a spin-off from Rutgers University, to grow and commercialize nutritionally-enhanced lettuce varieties. Under the terms of the agreement, Edible Garden has the right to grow and sell Green and Red Superleaf Lettuce across the North American and European continents as well as Australia. With five times more antioxidants than ordinary lettuce, the produce is high in vitamins A and C, magnesium, iron and potassium contents. It also has high levels of fiber and chlorogenic acid for superior digestion. These nutritionally-enhanced, proprietary Green and Red Superleaf Lettuces were developed by scientists at Rutgers University following years of intensive research. Edible Garden pays a license fee to Nutrasorb, LLC for each unit sold.
Edible Garden’s produce is Global Food Safety Initiative certified. Edible Garden also obtained certain organic certifications for its products. No other governmental regulations or approvals are needed or affect its business.
Edible Garden’s research and development activities have primarily focused on developing and testing new pods and seeds, as well as different fertilizers, nutrient blends, and lighting.
Our Operations
We are organized into two reportable segments:
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Herbs and Produce Products
– Includes herbs and leafy greens that are grown using classic Dutch hydroponic farming methods; and
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Cannabis Dispensary, Cultivation and Production
– Includes cannabis-focused retail, cultivation and production.
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Herbs and Produce Products
Either independently or in conjunction with third parties, we are a retail seller of locally grown hydroponic herbs, produce, and floral products, which are distributed through major grocery stores throughout the East 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 dispensaries and a medical marijuana cultivation in California. In addition, we operate four retail medical marijuana dispensary facilities in Nevada, and have in various stages of construction, medical marijuana cultivation and production facilities in Nevada. We own real property in Nevada on which we plan to build a medical marijuana dispensary. All of our retail dispensaries in California and Nevada offer a broad selection of medical cannabis products including flowers, concentrates and edibles. We also produce and sell a line of medical cannabis flowers, as well as a line of medical cannabis-extracted products, which include concentrates, cartridges, vape pens and wax products.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
Revenues
For the three months ended June 30, 2017, we generated revenues of $7.84 million, compared to $9.70 million for the three months ended June 30, 2016, a decrease of $1.86 million or 19.2 percent. The decrease was primarily due to revenues from floral sales resulting from a contract that expired at December 31, 2016. The floral revenues were $4.40 million for the three months ended June 30, 2016 versus zero for the three months ended June 30, 2017. The decrease was partially offset by increased revenue generated by: (i) the Black Oak, MediFarm and MediFarm I dispensaries; (ii) IVXX from the sale of its cannabis products; and (iii) Edible Garden from the sale of its herbs and produce products. At this stage in our development, revenues are not yet sufficient to cover ongoing operating expenses.
Cost of Goods Sold
For the three months ended June 30, 2017, cost of goods sold was $6.34 million, compared to $8.15 million for the three months ended June 30, 2016, a decrease of $1.81 million or 22.2%. The decrease in cost of goods sold was attributable to: (i) a decrease of $4.19 million from the herbs and produce segment, which had $1.33 million and $5.52 million cost of goods sold for the three months ended June 30, 2017 and 2016, respectively; and (ii) an increase of $2.41 million from the cannabis segment, which had $5.01 million and $2.60 million cost of goods sold for the three months ended June 30, 2017 and 2016, respectively. The cannabis segment increase was related to two additional MediFarm dispensaries and one additional MediFarm I dispensary that were open during the three months ended June 30, 2017 versus not being open during the three months ended June 30, 2016. The herbs and produce segment decrease was related to the expiration of the floral product contract.
Gross Profit
Our gross profit for the three months ended June 30, 2017 was $1.51 million, compared to a gross profit of $1.55 million for the three months ended June 30, 2016, a decrease of $41,000 or 2.6 percent. Our gross margin percentage for the three months ended June 30, 2017 was 19.2 percent, compared to 15.9 percent for the three months ended June 30, 2016. The increase in gross margin percentage was attributable to: (i) the cannabis segment, which had $1.04 million and $1.17 million gross profit for the three months ended June 30, 2017 and 2016, respectively, or 17.2 percent and 31.1 percent gross margin for the three months ended June 30, 2017 and 2016, respectively; and (ii) the herbs and produce segment, which had $451,000 and $356,000 gross profit for the three months ended June 30, 2017 and 2016, respectively, or 25.4 percent and 6.1 percent gross margin for the three months ended June 30, 2017 and 2016, respectively. The cannabis segment decrease was related to two additional MediFarm dispensaries and one additional MediFarm I dispensary that were open during the three months ended June 30, 2017 versus not being open during the three months ended June 30, 2016. The cannabis products gross margin percentage decreased due to discounting of the products sold at the new dispensaries in an effort to gain market share. The herbs and produce segment increase was related to the expiration of the floral product contract.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2017 were $6.03 million, compared to $5.36 million for the three months ended June 30, 2016, an increase of $665,000 or 12.4 percent. The increase was primarily due to salaries for the MediFarm dispensaries in Las Vegas, Nevada.
Operating Income (Loss)
We realized an operating loss of $4.52 million for the three months ended June 30, 2017, compared to an operating loss of $3.82 million for the three months ended June 30, 2016, an increase of $706,000 or 18.5 percent.
Other Income (Expense)
Other income for the three months ended June 30, 2017 was $3.62 million, compared to other expense of $973,000 for the three months ended June 30, 2016, an increase of $4.59 million. This increase was primarily attributable to: (i) a $4.99 million gain on settlement of contingent consideration related to the Black Oak acquisition (see
“Note 9 – Contingent Consideration Liability”
for further information); (ii) a $4.43 million loss on fair market valuation of contingent consideration; (iii) an increase in loss on extinguishment of debt of $1.64 million, which was $1.64 million for the three months ended June 30, 2017, compared to zero in the prior year period; (iv) an increase in amortization of debt discount of $298,000, which was $516,000 for the three months ended June 30, 2017, compared to $218,000 in the prior year period; (v) a decrease in gain (loss) on fair market valuation of derivatives of $1.19 million, which was a gain of $987,000 for the three months ended June 30, 2017, compared to a loss of $206,000 in the prior year period; and (vi) a decrease in loss from derivatives issued with debt greater than debt carrying value of $488,000, which was zero for the three months ended June 30, 2017, compared to $488,000 in the prior year period.
Net Loss Attributable to Terra Tech Corp.
We incurred a net loss attributable to Terra Tech Corp. of $454,000, or $0.00 per share, for the three months ended June 30, 2017, compared to a net loss attributable to Terra Tech Corp. of $4.93 million, or $0.01 per share, for the three months ended June 30, 2016. The primary reasons for the decrease were a decrease in revenue, an increase in selling, general and administrative expenses, and an increase in gain on settlement of contingent consideration during the three months ended June 30, 2017, compared to the prior year period.
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.
Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
Revenues
For the six months ended June 30, 2017, we generated revenues of $14.67 million, compared to $11.25 million for the six months ended June 30, 2016, an increase of $3.42 million or 30.4 percent. The increase was primarily due to revenue generated by: (i) the Black Oak, MediFarm and MediFarm I dispensaries; (ii) IVXX from the sale of its cannabis products; and (iii) Edible Garden from the sale of its herbs and produce products; partially offset by a decrease in revenues from floral sales resulting from the expiration of a contract for floral product that expired at December 31, 2016. The floral revenues were $4.79 million for the six months ended June 30, 2016 versus zero for the six months ended June 30, 2017. At this stage in our development, revenues are not yet sufficient to cover ongoing operating expenses.
Cost of Goods Sold
For the six months ended June 30, 2017, cost of goods sold was $12.80 million, compared to $9.69 million for the six months ended June 30, 2016, an increase of $3.11 million or 32.1%. The increase in cost of goods sold was attributable to: (i) an increase of $7.70 million from the cannabis segment, which had $10.51 million and $2.81 million cost of goods sold for the six months ended June 30, 2017 and 2016, respectively; and (ii) a decrease of $4.54 million from the herbs and produce segment, which had $2.30 million and $6.84 million cost of goods sold for the six months ended June 30, 2017 and 2016, respectively. The cannabis segment increase was related to: (i) a full six months of cost of goods sold for Black Oak during the six months ended June 30, 2017 versus cost of goods sold for only three months of ownership for the six months ended June 30, 2016; and (ii) two additional MediFarm dispensaries and one additional MediFarm I dispensary that were open during the six months ended June 30, 2017 versus not being open during the six months ended June 30, 2016. The herbs and produce segment decrease was related to the expiration of the floral product contract.
Gross Profit
Our gross profit for the six months ended June 30, 2017 was $1.87 million, compared to a gross profit of $1.56 million for the six months ended June 30, 2016, an increase of $304,000 or 19.5 percent. Our gross margin percentage for the six months ended June 30, 2017 was 12.7 percent, compared to 13.9 percent for the six months ended June 30, 2016. The decrease in gross margin percentage was attributable to: (i) the cannabis segment, which had $1.43 million and $1.09 million gross profit for the six months ended June 30, 2017 and 2016, respectively, or 12.0 percent and 28.0 percent gross margin for the six months ended June 30, 2017 and 2016, respectively; and (ii) the herbs and produce segment, which had $399,000 and $437,000 gross profit for the six months ended June 30, 2017 and 2016, respectively, or 14.8 percent and 6.0 percent gross margin for the six months ended June 30, 2017 and 2016, respectively. The cannabis segment increase was related to: (i) a full six months of gross profit for Black Oak during the six months ended June 30, 2017 versus only three months of ownership that contributed to gross profit for the six months ended June 30, 2016; and (ii) two additional MediFarm dispensaries and one additional MediFarm I dispensary that were open and contributed to gross profit for the six months ended June 30, 2017 versus not being open during the six months ended June 30, 2016. The cannabis products gross margin percentage decreased due to discounting of the products sold at the new dispensaries in an effort to gain market share. The herbs and produce segment decrease in gross profit was partially offset by an increase in gross margin percentage related to the expiration of the floral products contract.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30, 2017 were $12.42 million, compared to $7.29 million for the six months ended June 30, 2016, an increase of $5.13 million or 70.4 percent. The increase was primarily due to two factors: (i) an increase in salaries and wages for operations at the MediFarm dispensaries, which includes $1.36 million of stock compensation expense issued to employees during the six months ended June 30, 2017, compared to no stock compensation issued to employees during the six months ended June 30, 2016; and (ii) three additional months of activity for the Black Oak operations acquired on April 1, 2016.
Operating Income (Loss)
We realized an operating loss of $10.55 million for the six months ended June 30, 2017, compared to an operating loss of $5.73 million for the six months ended June 30, 2016, an increase of $4.82 million or 84.1 percent.
Other Income (Expense)
Other expense for the six months ended June 30, 2017 was $930,000, compared to $3.20 million for the six months ended June 30, 2016, a decrease of $2.27 million or 71.0 percent. This decrease was primarily attributable to: (i) a $4.99 million gain on settlement of contingent consideration related to the Black Oak acquisition (see
“Note 9 – Contingent Consideration Liability”
for further information); (ii) a $4.43 million loss on fair market valuation of contingent consideration; (iii) an increase in loss on extinguishment of debt of $1.76 million, which was $2.68 million for the six months ended June 30, 2017, compared to $921,000 in the prior year period; (iv) an increase in amortization of debt discount of $814,000, which was $1.13 million for the six months ended June 30, 2017, compared to $313,000 in the prior year period; (v) a decrease in gain (loss) on fair market valuation of derivatives of $3.96 million, which was a gain of $2.60 million for the six months ended June 30, 2017, compared to a loss of $1.37 million in the prior year period; and (vi) a decrease in loss from derivatives issued with debt greater than debt carrying value of $488,000, which was zero for the six months ended June 30, 2017, compared to $488,000 in the prior year period.
Net Loss Attributable to Terra Tech Corp.
We incurred a net loss attributable to Terra Tech Corp. of $10.57 million, or $0.02 per share, for the six months ended June 30, 2017, compared to a net loss attributable to Terra Tech Corp. of $9.06 million, or $0.03 per share, for the six months ended June 30, 2016. The primary reasons for the increase were a decrease in revenue, and an increase in selling, general and administrative expenses during the six months ended June 30, 2017, compared to the prior year period.
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.
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 six months ended June 30, 2017, and have an accumulated deficit of $83.44 million as of June 30, 2017, compared to an accumulated deficit of $72.87 million at December 31, 2016. As of June 30, 2017, we had working capital of $6.51 million, compared to a working capital deficit of $9.56 million at December 31, 2016. At June 30, 2017, we had a cash balance of $9.13 million, compared to a cash balance of $9.75 million at December 31, 2016.
We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. 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 subsidiaries. Black Oak, Blüm San Leandro and the Hegenberger facility, together, will require approximately $3.0 million in capital to complete. Construction for the completion of the packaging facility for Edible Garden will require approximately $1.2 million. The estimated construction budget for the development of the cultivation and production facilities under MediFarm II is approximately $2.0 million. Forever Green NV, LLC, a member of MediFarm II, has agreed to contribute approximately $750,000 in the form of debt to MediFarm II. We will be obligated to contribute the remaining amount.
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 second quarter of 2018. We are evaluating 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. 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.
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 six months ended June 30, 2017 was $7.15 million, compared to $3.30 million for the six months ended June 30, 2016, an increase of $3.85 million, or 116.4 percent. Increases in cash used in operating activities were primarily due to: (i) a $11.48 million net loss for the six months ended June 30, 2017, compared to a $9.32 million loss for the six months ended June 30, 2016, an increase of $2.16 million; (ii) a decrease in gain (loss) on fair market valuation of derivatives of $3.96 million, which was a gain of $2.60 million for the six months ended June 30, 2017, compared to a loss of $1.37 million in the prior year period; and (iii) a decrease in accounts payable and accrued expenses of $1.35 million. Decreases in cash used in operating activities were primarily due to: (i) an increase in loss on extinguishment of debt of $1.76 million, which was $2.68 million for the six months ended June 30, 2017, compared to $921,000 in the prior year period; and (ii) an increase in amortization of debt discount of $814,000, which was $1.13 million for the six months ended June 30, 2017, compared to $313,000 in the prior year period.
Investing Activities
Cash used in investing activities for the six months ended June 30, 2017 was $1.04 million, compared to cash used in investing activities of $1.90 million for the six months ended June 30, 2016, a decrease of $864,000, or 45.5 percent. During the first six months of 2017, cash used in investing activities was primarily comprised of expenditures related to: (i) the construction of the San Leandro and Oakland facilities; and (ii) capital expenditures at Edible Garden in Belvidere, N.J.
Financing Activities
Cash provided by financing activities for the six months ended June 30, 2017 was $7.57 million, compared to $6.46 million for the six months ended June 30, 2016, an increase of $1.11 million, or 17.2 percent. Cash provided by financing activities for the six months ended June 30, 2017 was primarily due to: (i) $6.00 million from the issuance of debt; (ii) $3.75 million from the sale of common stock; partially offset by (iii) payment of $2.09 million for the contingent consideration related to the Black Oak acquisition.