The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
TERRA TECH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(47,852
|
)
|
|
$
|
(39,474
|
)
|
Less: Income from discontinued operations
|
|
|
(588
|
)
|
|
|
490
|
|
Net loss from continuing operations
|
|
|
(48,440
|
)
|
|
|
(38,984
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
2,221
|
|
|
|
-
|
|
Cancellation of shares issued
|
|
|
(58
|
)
|
|
|
(118
|
)
|
Gain on sale of assets
|
|
|
(860
|
)
|
|
|
(5,644
|
)
|
Non-cash interest expense
|
|
|
7,880
|
|
|
|
11,926
|
|
Depreciation and amortization
|
|
|
7,213
|
|
|
|
4,706
|
|
Non-cash operating lease expense
|
|
|
1,218
|
|
|
|
-
|
|
Stock based compensation
|
|
|
5,286
|
|
|
|
3,457
|
|
Loss on revaluation of equity interests
|
|
|
1,067
|
|
|
|
-
|
|
Impairment loss
|
|
|
8,347
|
|
|
|
-
|
|
Other
|
|
|
(28
|
)
|
|
|
662
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,668
|
)
|
|
|
(249
|
)
|
Inventory
|
|
|
(2,821
|
)
|
|
|
3,849
|
|
Prepaid expenses and other current assets
|
|
|
(93
|
)
|
|
|
(438
|
)
|
Other assets
|
|
|
1
|
|
|
|
(319
|
)
|
Accounts payable and accrued expenses
|
|
|
7,790
|
|
|
|
1,422
|
|
Operating lease liabilities
|
|
|
(1,894
|
)
|
|
|
-
|
|
Net cash provided by / (used in) operating activities - continuing operations
|
|
|
(15,839
|
)
|
|
|
(19,730
|
)
|
Net cash provided by / (used in) operating activities - discontinued operations
|
|
|
1,099
|
|
|
|
(147
|
)
|
NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES
|
|
|
(14,740
|
)
|
|
|
(19,877
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of note receivable
|
|
|
(1,800
|
)
|
|
|
-
|
|
Purchase of property, equipment and leasehold improvements
|
|
|
(4,482
|
)
|
|
|
(11,407
|
)
|
Purchase of equity investment
|
|
|
(400
|
)
|
|
|
(7,766
|
)
|
Purchase of intangible assets
|
|
|
(100
|
)
|
|
|
-
|
|
Cash acquired from NuLeaf acquisition
|
|
|
127
|
|
|
|
-
|
|
Proceeds from sales of assets
|
|
|
1,249
|
|
|
|
5,644
|
|
Net cash provided by / (used in) investing activities - continuing operations
|
|
|
(5,406
|
)
|
|
|
(13,529
|
)
|
Net cash provided by / (used in) investing activities - discontinued operations
|
|
|
6,035
|
|
|
|
(3,002
|
)
|
NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES
|
|
|
629
|
|
|
|
(16,531
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
13,000
|
|
|
|
33,650
|
|
Payments of debt principal
|
|
|
(2,150
|
)
|
|
|
-
|
|
Cash paid for debt discount
|
|
|
(150
|
)
|
|
|
(1,195
|
)
|
Proceeds from issuance of common stock
|
|
|
4,500
|
|
|
|
5,600
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
101
|
|
Cash paid for acquisition of non-controlling interest
|
|
|
(6,250
|
)
|
|
|
-
|
|
Cash contribution (distribution) from non-controlling interest
|
|
|
1
|
|
|
|
-
|
|
Purchase of treasury stock
|
|
|
(808
|
)
|
|
|
-
|
|
Net cash provided by / (used in) financing activities - continuing operations
|
|
|
8,143
|
|
|
|
38,156
|
|
Net cash provided by / (used in) financing activities - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES
|
|
|
8,143
|
|
|
|
38,156
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
(5,968
|
)
|
|
|
1,748
|
|
Cash at beginning of period
|
|
|
7,193
|
|
|
|
5,445
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
1,226
|
|
|
$
|
7,193
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,594
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Consolidation of NuLeaf net assets
|
|
$
|
11,957
|
|
|
$
|
-
|
|
Financing fees in accounts payable
|
|
$
|
165
|
|
|
$
|
-
|
|
Purchase of land and building with a mortgage
|
|
$
|
-
|
|
|
$
|
6,500
|
|
Claw back of escrow shares
|
|
$
|
-
|
|
|
$
|
351
|
|
Stock issued for assets
|
|
$
|
-
|
|
|
$
|
200
|
|
Warrants issued for debt discount
|
|
$
|
183
|
|
|
$
|
818
|
|
Deposits applied to the purchase of property
|
|
$
|
-
|
|
|
$
|
3,500
|
|
Non-cash contribution from non-controlling interest
|
|
$
|
703
|
|
|
$
|
-
|
|
Beneficial conversion feature recorded for Dominion debt
|
|
$
|
5,795
|
|
|
$
|
9,015
|
|
Debt principal converted to common stock
|
|
$
|
13,200
|
|
|
$
|
36,267
|
|
The accompanying notes are an integral part of the consolidated financial statements.
TERRA TECH CORP. AND SUBSIDIARIES
NOTES TO 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.
Terra Tech is a holding company with the following subsidiaries:
|
·
|
620 Dyer LLC, a California corporation (“Dyer”);
|
|
·
|
1815 Carnegie LLC, a California limited liability company (“Carnegie”);
|
|
·
|
Black Oak Gallery, a California corporation (“Black Oak”);
|
|
·
|
Blüm San Leandro, a California corporation (“Blüm San Leandro”);
|
|
·
|
Edible Garden Corp., a Nevada corporation (“Edible Garden”);
|
|
·
|
EG Transportation, LLC, a Nevada limited liability company (“EG Transportation”);
|
|
·
|
GrowOp Technology Ltd., a Nevada corporation (“GrowOp Technology”);
|
|
·
|
IVXX, Inc., a California corporation (“IVXX Inc.”; together with IVXX LLC, “IVXX”);
|
|
·
|
IVXX, LLC, a Nevada limited liability company (“IVXX LLC”);
|
|
·
|
MediFarm, LLC, a Nevada limited liability company (“MediFarm”);
|
|
·
|
MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”);
|
|
·
|
MediFarm I Real Estate, LLC, a Nevada limited liability company (“MediFarm I RE”);
|
|
·
|
MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”); and
|
|
·
|
MediFarm So Cal, Inc., a California corporation (“MediFarm SoCal”)
|
|
·
|
121 North Fourth Street, LLC, a Nevada limited liability company ("121 North Fourth")
|
|
·
|
OneQor Technologies, Inc., a Delaware corporation ("OneQor")
|
The Company is a retail, production and cultivation company, with an emphasis on providing the highest quality of medical and adult use cannabis products. The Company grows organic antioxidant rich Superleaf rich lettuce and living herbs using classic Dutch hydroponic farming methods. We have licensed an exclusive patent on the Superleaf lettuce.
The Company has a presence in three states (California, Nevada and New Jersey), and currently has a concentrated cannabis interest in California and Nevada. All of the Company’s cannabis dispensaries operate under the name Blüm. The Company’s 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-use cannabis products including flowers, concentrates and edibles.
In Nevada, the Company has three dispensaries, two under MediFarm in Las Vegas and one under MediFarm I in Reno, which sell quality medical and adult use cannabis products.
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 April 1, 2016, the Company acquired Black Oak. Black Oak operates a medical marijuana dispensary and cultivation in Oakland, California under the name Blüm, pursuant to that certain Agreement and Plan of Merger, dated December 23, 2015 (the “Merger Agreement”), with Generic Merger Sub, Inc., a California corporation and our wholly-owned subsidiary (the “Merger Sub”), and Black Oak. The Merger Agreement was amended by a First Amendment to the Agreement and Plan of Merger, dated February 29, 2016. Pursuant to the Merger Agreement, the Merger Sub merged with and into Black Oak, with Black Oak as the surviving corporation, and became our wholly-owned subsidiary (the “Merger”). The Merger was intended to qualify for Federal income tax purposes as a tax-free reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended.
Due to changes in planned operations of the MediFarm dispensaries, the Company acquired an additional 38.0% ownership for no additional consideration during August 2017. Previously, the Company owned 60.0%. In December 2018, we issued 200,000 shares of common stock with a fair value of $0.20 million to acquire the remaining 2.0% interest in MediFarm. MediFarm has received the necessary governmental approvals and permitting to operate medical marijuana and adult use dispensary facilities in Clark County, Nevada and a medical and adult use marijuana dispensary facility in the City of Las Vegas. On February 26, 2019, the Company acquired the remaining interest in MediFarm I and II.
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 Treasurer 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 Tech Center Drive to purchase the medical marijuana dispensary license of 55 OC. The acquisition was accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10, “Business Combinations”. MediFarm SoCal’s sole purpose is to operate a medical marijuana retail dispensary. On November 6, 2018, MediFarm So Cal Inc. was converted from a Nonprofit Mutual Benefit Corporation to a General Stock Corporation.
On March 12, 2018, the Company implemented 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. 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 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 consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Securities Exchange Commission (“SEC”) Form 10-K and Regulation S-X and reflect the accounts and operations of the Company and those of our subsidiaries in which we have a controlling financial interest. In accordance with the provisions of FASB or ASC 810, “Consolidation”, we consolidate any variable interest entity (“VIE”), of which we are the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as VIEs, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. We do not consolidate a VIE in which we have a majority ownership interest when we are not considered the primary beneficiary. We have determined that we are the primary beneficiary of a number of VIEs. We evaluate our relationships with all the VIEs on an ongoing basis to reassess if we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of December 31, 2019 and 2018, the consolidated results of operations and cash flows for the years ended December 31, 2019 and 2018 have been included.
Going Concern
The accompanying financial statements have been prepared assuming that we will continue as a going concern. In an effort to achieve liquidity that would be sufficient to meet all of our commitments, we have undertaken a number of actions, including minimizing capital expenditures and reducing recurring expenses. However, we believe that even after taking these actions, we will not have sufficient liquidity to satisfy all of our future financial obligations. The risks and uncertainties surrounding the timing of the close of our pending asset sales in Nevada, our limited capital resources, and the weak industry conditions impacting our business raise substantial doubt as to our ability to continue as a going concern. See Note 21 – ”Going Concern”of the Notes to Consolidated Financial Statements included in Part II and Item 1A – “Risk Factors”in Part I of this Annual Report on Form 10-K.
Non-Controlling Interest
Non-controlling interest is shown as a component of stockholders’ equity on the consolidated balance sheets and the share of income (loss) attributable to non-controlling interest is shown as a component of 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, and 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 and stockholders’ equity. See Note 17 for further discussion regarding discontinued operations.
Trade and other Receivables
The Company extends non-interest 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. The reserve for doubtful accounts was $0.44 million and $0.33 million as of December 31, 2019 and 2018, respectively
Notes Receivable
The Company reviews all outstanding notes receivable for collectability as information becomes available pertaining to the Company’s inability to collect. An allowance for notes receivable is recorded for the likelihood of non-collectability. The Company accrues interest on notes receivable based net realizable value. The allowance for uncollectible notes was $1.83 million and $0 as of December 31, 2019 and 2018, respectively.
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.
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 up-front 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 7 – “Property, Equipment and Leasehold Improvements, Net”for further information.
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 the impairment test, the Company measures the recoverability of goodwill by comparing a reporting unit’s carrying amount, including goodwill, to the estimated fair value of the reporting unit.
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 or its fair value, the Company recognizes an impairment charge equal to the amount in 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
|
|
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.
The Company calculates fair value of our intangible assets as the present value of estimated future cash flows the Company expects to generate from the asset using a risk-adjusted discount rate. In determining our estimated future cash flows associated with our intangible assets, The Company uses estimates and assumptions about future revenue contributions, cost structures and remaining useful lives of the asset (asset group).
Intangible assets that have indefinite useful lives are tested annually for impairment and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the asset group exceeds its fair value.
Other Assets
Other assets are comprised primarily of deposits for the purchase of real property and security deposits for leased properties in California, Nevada and New Jersey. The deposits for the purchase of real property are reclassified to Property and Equipment once the purchase is final.
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
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, promotional adjustments and returns. We collect taxes on certain revenue transactions to be remitted to governmental authorities, which may include sales, excise and local taxes. These taxes are not included in the transaction price and are, therefore, excluded from revenue. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.
Revenue related to distribution customers is recorded when the customer is determined to have taken control of the product. This 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. Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities with 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 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 is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration
Cost of Goods Sold
Cannabis Dispensary, Cultivation and Production
Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and delivery costs. It also includes the labor and overhead costs incurred in cultivating and producing cannabis flower and cannabis-derived products. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.
Herbs and Produce Products
Cost of goods sold include cultivation costs, packaging, other supplies and purchased plants that are sold into the retail marketplace by Edible Garden. Other expenses included in cost of goods sold include freight, allocations of rent, repairs and maintenance, and utilities.
Advertising Expenses
The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.”Advertising expenses recognized totaled $1.80 million and $1.23 million the years ended December 31, 2019 and 2018, respectively.
Stock-Based Compensation
The Company accounts for its stock-based awards in accordance with ASC Subtopic 718-10, “Compensation – Stock Compensation”,which requires fair value measurement on the grant date and recognition of compensation expense for all stock-based payment awards made to employees and directors, including restricted stock awards. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. The fair value of restricted stock awards is based upon the quoted market price of the common shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the consolidated statements of operations.
The Black-Scholes option-pricing model requires the input of certain assumptions that require the Company’s judgment, including the expected term and the expected stock price volatility of the underlying stock. The assumptions used in calculating the fair value of stock-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from management’s estimates, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At December 31, 2019 and 2018, such net operating losses were offset entirely by a valuation allowance.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
Loss Per Common Share
In accordance with the provisions of ASC 260, “Earnings Per Share”,net loss per share is computed by dividing net loss by the weighted-average shares of common stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock, and convertible debt are not considered in the diluted loss per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the years ended December 31, 2019 and 2018. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for all years.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because there effect is anti-dilutive are as follows (in common equivalent shares):
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
1,313,459
|
|
|
|
1,053,252
|
|
Common stock options
|
|
|
12,365,295
|
|
|
|
8,400,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,678,755
|
|
|
|
9,453,881
|
|
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 for any eligible financial instruments.
Investments
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 5.0% 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 and Discontinued Operations
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 records 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 other market 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. The Company follows the guidance within ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity” when assets held for sale represent a strategic shift in the Company’s operations and financial results.
Recently Adopted Accounting Standards
FASB ASU No. 2018-07 (Topic 718), “Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”– Issued in June 2018, ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606. The Company adopted ASU 2018-07 on January 1, 2019. Adoption of this guidance did not have a material impact on the Company’s consolidated financial condition or results of 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. As early adoption is permitted, the Company adopted ASU 2017-04 on January 1, 2019. Adoption of this guidance did not have a material impact on the Company’s consolidated financial condition or results of operations.
FASB ASU No. 2016-02 (Topic 842), “Leases”– Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, “Leases,” as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure 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 with a term greater than 12 months. Leases 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 effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. We adopted this standard effective January 1, 2019 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 “other assets”) and a lease liability of $11.64 million (included in “other liabilities”) (see Note 11 – “Leases”).
Recently Issued Accounting Standards
FASB ASU No. 2019-12, “Simplifying the Accounting for Income Taxes”– Issued in December 2019, ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its financial position and results of operations.
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 $0.18 million and $4.83 million as of December 31, 2019 and 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 year ended December 31, 2019 and 2018.
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. As a result, we are dependent upon the licensed vendors in California to supply products as of that date. 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 year ended December 31, 2019 and 2018, 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 – VARIABLE INTEREST ENTITY ARRANGEMENTS
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 (collectively “NuLeaf”) to build and operate cultivation and production facilities for our IVXX brand of cannabis products in Nevada. The agreements were subject to approval by the State of Nevada, the City of Sparks and the City of Reno in Nevada. Under the terms of the agreements, the Company remitted to NuLeaf an upfront investment of $4.50 million in the form of convertible loans bearing an interest rate of 6% per annum. On June 28, 2018, the Company received approval from the State of Nevada. The remaining required approvals from local authorities were received in July 2018. As a result, the notes receivable balance 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 began consolidating the accounts and operations of these entities as of March 1, 2019. All intercompany transactions are eliminated in the consolidated financial statements. On March 1, 2019, we remeasured our equity method investment in NuLeaf to fair value and consolidated the results of NuLeaf in our consolidated financial statements and report its results in our cannabis segment.
The Company finalized the accounting for the NuLeaf transaction in the fourth quarter of 2019 and now considers the measurement period to be closed. The aggregate 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)
|
|
|
|
February 28,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2019
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
127
|
|
|
$
|
243
|
|
Accounts receivable, net
|
|
|
-
|
|
|
|
16
|
|
Inventory
|
|
|
974
|
|
|
|
2,910
|
|
Prepaid expenses and other current assets
|
|
|
88
|
|
|
|
35
|
|
Total current assets
|
|
|
1,189
|
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
|
10,839
|
|
|
|
9,543
|
|
Other assets
|
|
|
92
|
|
|
|
598
|
|
TOTAL ASSETS
|
|
$
|
12,120
|
|
|
$
|
13,345
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
37
|
|
|
$
|
213
|
|
Total long-term liabilities
|
|
|
-
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
$
|
37
|
|
|
$
|
628
|
|
For fiscal year 2019, revenue and net loss attributed to NuLeaf was $4.08 million and $3.04 million, respectively. Additional pro forma information was omitted as amounts are not material.
Blum Desert Inn
On November 1, 2019, we entered into an agreement with Picksy, LLC (“Picksy”) to transfer all management responsibilities over the operations of our Blum Desert Inn retail dispensary. In consideration of the services to be performed by Picksy, the Company has conveyed the rights to 85% of all future net profits generated from the aforementioned store. In the event of a loss, Picksy has assumed responsibility to cover all future working capital shortfalls. The agreement will terminate upon the closing of the related asset purchase agreement, whereby the Company has agreed to sell all of the assets associated with the Blum Desert Inn location to Picksy. The Company’s 15% share of net profits are to be applied to the purchase price payable to the Company upon the closing of the asset purchase agreement. See Note 17 – “Discontinued Operations.”
As the agreement transferred the benefits and risks arising from the operations of the Desert Inn store, as well as complete managerial authority over the operations, management concluded that Picksy became the primary beneficiary of Blum Desert Inn upon execution of the agreement. As a result, the Company deconsolidated Desert Inn’s assets as of November 1, 2019.
NOTE 5 – 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 investment in Hydrofarm was recorded at cost and is included in other assets on the consolidated balance sheet as of December 31, 2019.
NOTE 6 – INVENTORY
Raw materials consists of material for NuLeaf and IVXX’s lines of cannabis pure concentrates, as well as Edible Garden’s herb product lines. Work-in-progress consists of cultivation materials and live plants grown at NuLeaf and Black Oak Gallery, and plants grown for Edible Garden’s herb product lines. Finished goods consists of cannabis products sold in retail.
Inventory as of December 31, 2019 and 2018 consists of the following:
|
|
(in thousands)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
2,650
|
|
|
$
|
1,208
|
|
Work-in-progress
|
|
|
3,425
|
|
|
|
311
|
|
Finished goods
|
|
|
573
|
|
|
|
858
|
|
Inventory reserve
|
|
|
(1,493
|
)
|
|
|
(1,018
|
)
|
Total inventory
|
|
$
|
5,155
|
|
|
$
|
1,359
|
|
NOTE 7 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
|
|
(in thousands)
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Land and building
|
|
$
|
11,206
|
|
|
$
|
13,945
|
|
Furniture and equipment
|
|
|
5,147
|
|
|
|
3,268
|
|
Computer hardware
|
|
|
464
|
|
|
|
333
|
|
Leasehold improvements
|
|
|
20,976
|
|
|
|
6,681
|
|
Construction in progress
|
|
|
10,975
|
|
|
|
12,180
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
48,768
|
|
|
|
36,407
|
|
Less accumulated depreciation
|
|
|
(8,686
|
)
|
|
|
(4,726
|
)
|
Property, equipment and leasehold improvements, net
|
|
$
|
40,082
|
|
|
$
|
31,681
|
|
Depreciation expense related to property, equipment and leasehold improvements for the years ended December 31, 2019 and 2018 was $7.21 million and $4.71 million, respectively.
Assets Divested
On July 6, 2018, MediFarm LLC, a wholly-owned subsidiary of the Company, entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Exhale Brands Nevada III, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1921 Western Ave., Las Vegas, NV 89102 (“Western”). The total consideration was $6.25 million in cash plus the value of the inventory on the closing date. The transaction closed on October 22, 2018 upon receiving approval from the Nevada Department of Taxation.
Management has concluded that the Western asset purchase agreement does not meet the definition of the sale of a business. Therefore, the relevant guidance is ASC 610-20 “Other Income.”The Company recognized a gain upon sale of the assets equal to the difference between the consideration paid and the book value of the assets as of the disposition date, less direct costs to sell.
The following table summarizes the transaction:
Total Consideration
|
|
$
|
6,408
|
|
Inventory
|
|
|
159
|
|
Prepaid Expenses
|
|
|
10
|
|
Property & Equipment
|
|
|
597
|
|
Total Asset Book Value
|
|
|
766
|
|
Transaction Costs
|
|
|
413
|
|
Gain on Sale
|
|
$
|
5,229
|
|
On July 31, 2019, MediFarm I Real Estate LLC entered into a purchase agreement to sell real property in Reno, NV to Green Wagon Reno LLC, an unaffiliated third party, for total cash consideration of $1.50 million.
NOTE 8 – INTANGIBLE ASSETS AND GOODWILL
Goodwill
Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities.
Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the last day of the third quarter, or more frequently under certain circumstances. For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment (“step one”) where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31, 2019 and 2018 was $27.72 million and $35.17 million, respectively and was attributed to the Cannabis reportable segment.
The table below summarizes the changes in the carrying amount of goodwill:
Goodwill
|
|
|
|
|
|
|
|
Balance at December 31,2017
|
|
$
|
28,921
|
|
Measurement Period Adjustment
|
|
|
6,251
|
|
Balance at December 31, 2018
|
|
|
35,172
|
|
Impairment
|
|
|
(7,450
|
)
|
Balance of December 31, 2019
|
|
$
|
27,722
|
|
The Company completed a preliminary step one assessment as of September 30, 2019 and concluded no adjustment to the carrying value of goodwill was required, however the fair value of the Black Oak Gallery reporting unit exceeded the carrying value by less than 5%.
During the fourth quarter of 2019, Company’s market capitalization declined more than 50%. The decline coincided with an overall weakening of the legal cannabis industry, primarily due to high taxation and increasing competition from the illicit cannabis market in California. On November 21, 2019 the California Department of Tax and Fee Administration (CDTFA) announced cannabis mark-up and cultivation tax rate changes that will become effective as of Jan. 1, 2020. Management considered the decline in market capitalization and pending increase in taxes to be impairment indicators and performed an interim impairment analysis of the Black Oak Gallery and Blum Santa Ana reporting units as of December 31, 2019, using a “step one” quantitative assessment for each reporting unit.
The Company first reviewed long-lived assets, which resulted in an impairment charge of $0.25 million in the fourth quarter of 2019. The Company then performed a goodwill impairment analysis which resulted in an $7.45 million charge in the fourth quarter of 2019, which approximates the excess of the carrying value over the estimated fair value of the Black Oak Gallery reporting unit.
The Company estimated the fair value of the reporting unit using a combination of the Guideline Public Company and Comparable Transactions methods. These non-cash charges relating to goodwill and other assets were recorded in the Impairment of Intangible Assets line in the Consolidated Statements of Operations.
The results of the Company’s 2019 and 2018 goodwill impairment assessments indicated that no other goodwill impairment existed.
Intangible Assets Net
Intangible assets consisted of the following as of December 31, 2019 and 2018:
|
|
|
|
(in Thousands)
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
Estimated Useful Life in Years
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Net
Carrying
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Amortization
Accumulated
|
|
|
Net
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
3 to 5
|
|
|
$
|
8,072
|
|
|
$
|
(5,834
|
)
|
|
|
2,238
|
|
|
$
|
8,072
|
|
|
$
|
(3,630
|
)
|
|
$
|
4,443
|
|
Trademarks and Patent
|
|
2 to 8
|
|
|
|
196
|
|
|
|
(166
|
)
|
|
|
29
|
|
|
|
196
|
|
|
|
(117
|
)
|
|
|
79
|
|
Dispensary Licenses
|
|
|
14
|
|
|
|
10,270
|
|
|
|
(2,751
|
)
|
|
|
7,519
|
|
|
|
10,270
|
|
|
|
(1,985
|
)
|
|
|
8,285
|
|
Management Service Agreement
|
|
|
15
|
|
|
|
470
|
|
|
|
(57
|
)
|
|
|
414
|
|
|
|
370
|
|
|
|
(32
|
)
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amortizing Intangible Assets
|
|
|
|
|
|
|
19,008
|
|
|
|
(8,808
|
)
|
|
|
10,200
|
|
|
|
18,908
|
|
|
|
(5,763
|
)
|
|
|
13,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
Indefinite
|
|
|
|
5,070
|
|
|
|
-
|
|
|
|
5,070
|
|
|
|
5,320
|
|
|
|
-
|
|
|
|
5,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Amortizing Intangible Assets
|
|
|
|
|
|
|
5,070
|
|
|
|
-
|
|
|
|
5,070
|
|
|
|
5,320
|
|
|
|
-
|
|
|
|
5,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets, Net
|
|
|
|
|
|
$
|
24,078
|
|
|
$
|
(8,808
|
)
|
|
|
15,270
|
|
|
$
|
24,228
|
|
|
$
|
(5,763
|
)
|
|
$
|
18,466
|
|
In the fourth quarter of 2018, the Company reduced the estimated useful life of its customer relationships to better reflect the expected benefit period. The change in estimated useful life has been accounted for as a change in accounting estimate. The reduction in the useful life increased loss from operations and net loss by approximately $1.58 million for the year ended December 31, 2018.
The Company recorded amortization expense of $3.05 million and $1.72 million for the years ended December 31, 2019 and 2018, respectively. Based solely on the amortizable intangible assets recorded at December 31, 2019, the Company estimates amortization expense for the next five years to be as follows:
|
|
(in thousands)
|
|
|
|
Year Ending December 31,
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024and thereafter
|
|
|
Total
|
|
Amortization expense
|
|
$
|
3,042
|
|
|
$
|
804
|
|
|
$
|
766
|
|
|
$
|
765
|
|
|
$
|
4,873
|
|
|
|
10,250
|
|
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes.
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
|
|
(in thousands)
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
6,774
|
|
|
$
|
2,576
|
|
Sales & Local Tax Payable
|
|
|
275
|
|
|
|
568
|
|
Accrued Payroll
|
|
|
830
|
|
|
|
2,553
|
|
Accrued Expenses
|
|
|
3,942
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable and Accrued Expenses
|
|
$
|
11,820
|
|
|
$
|
6,901
|
|
NOTE 10 – NOTES PAYABLE
Notes payable consists of the following:
|
|
December 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
|
|
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.
|
|
|
-
|
|
|
|
7,000
|
|
Securities Purchase Agreement dated June 11, 2019, issued to accredited investors, which matures December 11, 2020 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50 or 87% of the average of the two (2) lowest VWAPs in the thirteen (13) trading days prior to the conversion date.
|
|
|
4,000
|
|
|
|
-
|
|
Securities Purchase Agreement dated October 21, 2019, issued to accredited investors, which matures April 21, 2021 and bears interest at a rate of 7.5% per annum. The conversion price is $4.50 or 87% of the average of the two (2) lowest VWAPs in the thirteen (13) trading days prior to the conversion date.
|
|
|
1,500
|
|
|
|
-
|
|
Secured promissory note dated December 30, 2019, issued to Matthew Lee Morgan Trust (a related party), which matures December 30, 2020, and bears interest at a rate of 10% per annum. The note is secured by the Company's HydroFarm investment.
|
|
|
500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Notes payable - promissory notes
|
|
$
|
18,600
|
|
|
$
|
20,950
|
|
Vehicle loans
|
|
|
47
|
|
|
|
-
|
|
Less: Short term debt
|
|
|
(11,022
|
)
|
|
|
-
|
|
Less: Debt discount
|
|
|
(1,055
|
)
|
|
|
(2,637
|
)
|
Net Long Term Debt
|
|
$
|
6,570
|
|
|
$
|
18,313
|
|
Scheduled Maturities of Debt
Scheduled maturities of debt are as follows:
|
|
(in thousands)
|
|
|
|
Year Ending December 31,
|
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024 and thereafter
|
|
|
Total
|
|
Total Debt
|
|
$
|
11,022
|
|
|
$
|
7,578
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,600
|
|
Promissory Notes
On November 22, 2017, the Company entered into a $4.50 million promissory note for the purchase of land and a building in California with a third-party creditor. The promissory note is collateralized by the land and building purchased and matures in December 1, 2020. The interest rate for the first year is 12.0% and increases 0.5% per year through 2020. Payments of interest only are due monthly. The full principle balance and accrued interest are due at maturity.
On January 18, 2018, the Company entered into a $6.50 million promissory note for the purchase of land and a building in California with a third-party creditor. As part of the closing of the purchase of land, the Company issued warrants with a value of approximately $0.16 million and paid a cash fee of $0.20 million. The warrants and cash fee were recorded as a debt discount. The unamortized balance of such discount as of December 31, 2019 was $0.25 million. The interest rate for the first year is 12.0% and increases 0.5% per year, up to 13.0%, through 2021. Payments of interest only are due monthly. The full principle balance and accrued interest are due at maturity.
On October 5, 2018, the Company entered into a $1.60 million promissory note for the purchase of a building in Nevada with a third-party creditor. The promissory note is collateralized by the building purchased and matures in October 5, 2021. The interest rate for the first year is 12.0% and increases 0.5% per year through 2020. Payments of interest only are due monthly. The full principle balance and accrued interest are due at maturity.
2017 Master Securities Purchase Agreement and Convertible Promissory Notes
The Company has 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 12.0% convertible notes for an aggregate value of $20.00 million due at various dates through June 2019. Of the $20.00 convertible notes issued during 2017, the Company converted $6.90 million of the convertible notes into shares of the Company’s common stock during the year ended December 31, 2018. The Company paid $0.60 million in cash and issued approximately $0.56 million of warrants in connection with the notes. The cash fee and warrants issued were recorded as a debt discount.
2018 Master Securities Purchase Agreement and Convertible Promissory Notes
In March 2018, the Company entered into the 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 in eight tranches averaging $5.00 million, for a total of $40.00 million. The Company converted $18.70 million of convertible notes into the Company’s common stock during the year ended December 31, 2019. As of December 31, 2019, $8.35 million of principle remains outstanding. The Company paid $0.67 million in cash and issued warrants with a total fair value of approximately $0.54 million. The cash fee and warrants issued were recorded as a debt discount. For each note issued under the 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) 85.0% of the lowest daily volume weighted average price of the Common Stock in the fifteen (15) trading days prior to the conversion date (“Conversion Price”), which 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 70.0% 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 $2.50 million for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) days’ 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) 110.0% 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) 115.0% of the sum of the then-outstanding principal amount of Note A 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) 125.0% 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.
On March 12, 2019, Terra Tech Corp. (the “Company”) issued a 7.5% Senior Convertible Promissory Note due September 12, 2020 (the “Note”) in the principal amount of $5.00 million to an accredited investor (the “Purchaser”) for a purchase price of $5.00 million (the “Offering”) pursuant to a Securities Purchase Agreement with the Purchaser, dated as of March 12, 2018 (the “Purchase Agreement”). The Note and the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), issuable upon conversion of the Note (the “Conversion Shares”) are collectively referred to herein as the “Securities.” The Note is the sixth of eight tranches of 7.5% Senior Convertible Promissory Notes to be issued by the Company to the Purchaser pursuant to the Purchase Agreement.
On June 11, 2019, Terra Tech Corp. (the “Company”) issued a 7.5% Senior Convertible Promissory Note due December 11, 2020 (the “Note”) in the principal amount of $4.00 million to an accredited investor (the “Purchaser”) for a purchase price of $4.00 million (the “Offering”) pursuant to a Securities Purchase Agreement with the Purchaser, dated as of March 12, 2018 (the “Purchase Agreement”). The Note and the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), issuable upon conversion of the Note (the “Conversion Shares”) are collectively referred to herein as the “Securities.” The Note is the seventh of eight tranches of 7.5% Senior Convertible Promissory Notes to be issued by the Company to the Purchaser pursuant to the Purchase Agreement.
On October 21, 2019, Terra Tech Corp. (the “Company”) issued a Promissory Note (the “Note”) in the principal amount of $1.50 million to an accredited investor (the “Purchaser”). This 7.5% Senior Convertible Promissory Note is one of a series of duly authorized and validly issued convertible promissory notes of Terra Tech Corp. under the 2018 Master Securities Purchase and Convertible Promissory Notes Agreement. It matures April 21, 2021 and bears an interest rate of 7.5% per annum. The conversion price is $4.50, subject to adjustment.
Conversion of Notes Payable
During the years ended December 31, 2019 and 2018, the Company converted debt and accrued interest into 29,380,222 and 16,652,002 shares of the Company’s common stock, respectively.
NOTE 11 – LEASES
A lease provides the lessee the right to control the use of an 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 Company’s Consolidated Balance Sheets.
ROU assets represent the Company’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 lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms at our Decatur and Edible Garden properties that have either been extended or are likely to be extended. The terms used to calculate the ROU assets for these properties include the renewal options that the Company is reasonably certain 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. Total operating lease costs were $1.92 million in 2019. Short-term lease costs during the 2019 fiscal year were not material.
As of December 31 2019, short term lease liabilities of $1.20 million are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheet. The table below presents total operating lease ROU assets and lease liabilities as of December 31, 2019:
|
|
(in thousands)
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2019
|
|
Operating lease ROU assets
|
|
$
|
10,497
|
|
Operating lease liabilities
|
|
|
10,968
|
|
The table below presents the maturities of operating lease liabilities as of December 31, 2019:
|
|
(in thousands)
|
|
|
|
Operating
|
|
|
|
Leases
|
|
2020
|
|
$
|
2,351
|
|
2021
|
|
|
2,066
|
|
2022
|
|
|
2,085
|
|
2023
|
|
|
2,148
|
|
2024
|
|
|
1,843
|
|
Thereafter
|
|
|
5,294
|
|
Total lease payments
|
|
|
15,787
|
|
Less: discount
|
|
|
(4,819
|
)
|
Total operating lease liabilities
|
|
$
|
10,968
|
|
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:
|
|
Twelve Months Ended
December 31,
|
|
|
|
2019
|
|
Weighted average remaining lease term (years)
|
|
|
8.6
|
|
Weighted average discount rate
|
|
|
11.3
|
%
|
NOTE 12 – TAX EXPENSE
The components of deferred income tax assets and (liabilities) are as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Options expense
|
|
$
|
2,314
|
|
|
$
|
1,018
|
|
Depreciation
|
|
|
203
|
|
|
|
|
|
Allowance for Doubtful Accounts
|
|
|
663
|
|
|
$
|
33
|
|
Net operating Losses
|
|
|
14,921
|
|
|
|
13,409
|
|
|
|
|
18,101
|
|
|
|
14,460
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
(829
|
)
|
Total
|
|
|
18,101
|
|
|
|
13,631
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(18,101
|
)
|
|
|
(13,631
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company did not incur income tax expense or benefit for the years ended December 31, 2019 or 2018 from continuing or discontinued operations. The reconciliation between the Company s effective tax rate and the statutory tax rate is as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected Income Tax Benefit at Stautory Tax Rate, Net
|
|
$
|
(9,705
|
)
|
|
$
|
(6,847
|
)
|
Amortization
|
|
|
641
|
|
|
|
642
|
|
IRC 280E Adjustment
|
|
|
3,785
|
|
|
|
1,566
|
|
Impairment of Assets
|
|
|
73
|
|
|
|
-
|
|
Impairment of Intangibles
|
|
|
1,680
|
|
|
|
-
|
|
Derivatives Expense
|
|
|
-
|
|
|
|
-
|
|
Other Non-Deductible Items
|
|
|
29
|
|
|
|
405
|
|
Change In Valuation Allowance
|
|
|
3,496
|
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
Reported income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
On 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 reduced 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 included 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 extent reasonable estimates could be made. Additionally, upon obtaining, preparing, or analyzing additional information (including computations), companies were permitted to record additional tax effects and adjustments to previously recorded provisional amounts within one year from the enactment date of the Tax Act.
As of December 31, 2018, the Company had recorded a provisional income tax benefit of $3.30 million, which was primarily associated with the remeasurement of certain deferred tax liabilities in the U.S. from 35.0% to 21.0%. As of December 31, 2018, 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, 2019, 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 years ended December 31, 2019 and 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.
As of December 31, 2019, and 2018, the Company had net operating loss carryforwards of approximately $47.48 million and $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 assessed the effect of these limitations and did not believe the losses through December 31, 2019 to be substantially limited.
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 period ended December 31, 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 December 31, 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 are subject to examination.
NOTE 13 – EQUITY
Preferred Stock
The Company authorized 50.00 million shares of preferred stock with $0.001 par value per share. The Company designated 100 shares of preferred stock as “Series A Preferred Stock,” of which there were 8 and 12 shares of Series A Preferred Stock outstanding as of December 31, 2019 and 2018, respectively. Series A Preferred Stock is convertible on a one-for-one basis into common stock and has all of the voting rights of the Company’s common stock.
The Company designated 41.00 million shares of preferred stock as “Series B Preferred Stock,”. Each share of Series B Preferred Stock: (i) is entitled to 100 votes for each share of common stock into which a share of Series B Preferred Stock is convertible and (ii) is convertible, at the option of the holder, on a 1-for-5.38 basis, into shares of the Company’s common stock. During the year ended December 31, 2018, all Series B Preferred Stock were converted to common stock.
Common Stock
The Company authorized 990.00 million shares of common stock with $0.001 par value per share. As of December 31, 2019 and 2018, 118.00 million and 81.76 million shares of common stock were issued and outstanding, respectively.
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.
Treasury Stock
During 2019, the Company acquired 2,308,408 shares of common stock and 4 shares of Series A Preferred stock as part of a litigation settlement. The shares were recorded at fair market value as of the date the agreement was executed. See Note 19 - “Litigation and Claims” for additional information regarding the settlement.
NOTE 14 – STOCK-BASED COMPENSATION
Equity Incentive Plans
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 both plans as of December 31, 2019:
|
|
Awards Reserved for Issuance
|
|
|
Awards Issued
|
|
|
Awards Available for Grant
|
|
|
|
|
|
|
|
|
|
|
|
2016 Equity Incentive Plan
|
|
|
2,000,000
|
|
|
|
1,461,064
|
|
|
|
538,936
|
|
2018 Equity Incentive Plan
|
|
|
13,000,000
|
|
|
|
9,844,666
|
|
|
|
3,155,334
|
|
Stock Options
The following table summarizes the Company’s stock option activity and related information for the year ended December 31, 2019 and 2018:
|
|
Number of
Shares
|
|
|
Weighted-Average Exercise
Price Per Share
|
|
|
Weighted-Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value of
In-the-Money
Options
|
|
|
|
|
|
|
|
|
Options Outstanding as of January 1, 2018
|
|
|
1,177,732
|
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
7,659,565
|
|
|
$
|
1.56
|
|
|
|
|
|
|
Options Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options Forfeited
|
|
|
(436,668
|
)
|
|
$
|
2.36
|
|
|
|
|
|
|
Options Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2018
|
|
|
8,400,629
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Granted
|
|
|
4,174,428
|
|
|
$
|
0.62
|
|
|
|
|
|
|
Options Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
Options Forfeited
|
|
|
(209,762
|
)
|
|
$
|
1.39
|
|
|
|
|
|
|
Options Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding as of December 31, 2019
|
|
|
12,365,295
|
|
|
$
|
1.24
|
|
|
8.9 years
|
|
$
|
-
|
|
Options Exercisable as of December 31, 2019
|
|
|
5,145,005
|
|
|
$
|
1.54
|
|
|
8.6 years
|
|
$
|
-
|
|
The aggregate intrinsic value is calculated as the difference between the Company’s closing stock price of $0.16 on December 31, 2019 and the exercise price of options, multiplied by the number of options. As of December 31, 2019, there was $2.76 million total unrecognized stock-based compensation. Such costs are expected to be recognized over a weighted-average period of approximately 1.91 years. The weighted average fair value of awards granted was $0.53 and $0.93 during 2019 and 2018, respectively.
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 weighted-average assumptions were used to calculate stock-based compensation:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Expected term (years)
|
|
6 Years
|
|
|
6 Years
|
|
Volatility
|
|
115.3-117.5
|
%
|
|
113.2-128.0
|
%
|
Risk-Free Interest Rate
|
|
1.85-2.5
|
%
|
|
2.5-2.9
|
%
|
Dividend Yield
|
|
|
0
|
%
|
|
|
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.
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 number of shares or options)
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2019
|
|
|
December 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
|
|
|
4,174,428
|
|
|
$
|
4,342
|
|
|
|
7,659,565
|
|
|
$
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees (Common Stock)
|
|
|
740,580
|
|
|
|
473
|
|
|
|
201,296
|
|
|
|
603
|
|
Directors (Common Stock)
|
|
|
173,610
|
|
|
|
102
|
|
|
|
49,500
|
|
|
|
100
|
|
Non–Employee Consultants (Common Stock)
|
|
|
715,065
|
|
|
|
369
|
|
|
|
132,971
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock–Based Compensation Expense
|
|
|
|
|
|
$
|
5,286
|
|
|
|
|
|
|
$
|
3,457
|
|
NOTE 15 – WARRANTS
The following table summarizes warrant activity for the years ended December 31, 2019 and 2018:
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
Warrants Outstanding as of January 1, 2018
|
|
|
1,191,367
|
|
|
$
|
-
|
|
Warrants Exercised
|
|
|
(339,275
|
)
|
|
$
|
1.96
|
|
Warrants Granted
|
|
|
420,092
|
|
|
$
|
2.67
|
|
Warrants Expired
|
|
|
(218,933
|
)
|
|
$
|
1.17
|
|
Warrants Outstanding as of December 31, 2018
|
|
|
1,053,252
|
|
|
$
|
4.28
|
|
Warrants Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Warrants Granted
|
|
|
454,237
|
|
|
$
|
0.69
|
|
Warrants Expired
|
|
|
(194,029
|
)
|
|
$
|
2.08
|
|
Warrants Outstanding as of December 31, 2019
|
|
|
1,313,459
|
|
|
$
|
2.67
|
|
The weighted-average exercise price and weighted-average fair value of the warrants granted by the Company are as follows:
|
|
For the Year Ended
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Fair Value
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Fair Value
|
|
Warrants Granted Whose Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Exceeded Fair Value at the Date of Grant
|
|
$
|
0.69
|
|
|
$
|
0.41
|
|
|
$
|
2.37
|
|
|
$
|
1.61
|
|
Warrants Granted Whose Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Was Equal or Lower Than Fair Value at the Date of Grant
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3.95
|
|
|
$
|
4.53
|
|
For the warrants issued in 2019 and 2018 the Company valued the warrants utilizing the Black-Scholes option-pricing model with the following weighted-average inputs:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock Price on Date of Grant
|
|
$
|
0.69
|
|
|
$
|
2.63
|
|
Exercise Price
|
|
$
|
0.72
|
|
|
$
|
2.67
|
|
Volatility
|
|
|
96.9
|
%
|
|
|
115.7
|
%
|
Term
|
|
5 -Years
|
|
|
5 -Years
|
|
Risk-Free Interest Rate
|
|
|
2.0
|
%
|
|
|
2.7
|
%
|
Expected Dividend Rate
|
|
|
0
|
%
|
|
|
0
|
%
|
For the years ended December 31, 2019 and 2018, $0.18 million and $0.73 million of warrants were issued in connection with debt and recorded as a debt discount.
NOTE 16 –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 January 1, 2018, temporary permits were to be issued and the state anticipated issuing annual licenses by May of 2018. Licensees were eligible for several 90 days extensions to their temporary licenses. Throughout 2018 Terra Tech subsidiaries operated compliantly and were eligible for all of the extensions. As of March 2019, the State of California has yet to issue annual permits. The Company has received a temporary license for each local jurisdiction in which it has active operations and temporary licenses have been issued through the second quarter of 2019. The temporary permits may be extended for an additional period of time. The Company has submitted its applications for the annual permits to the state. Although the Company believes it will receive the necessary licenses from the state to conduct its business in a timely fashion, the state has already exceeded the anticipated time by which it would have issued all annual licenses, and there is no guarantee the State will not continue to extend the temporaries or that 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.
NOTE 17 – DISCONTINUED OPERATIONS
On May 8, 2019, MediFarm LLC, a wholly-owned subsidiary of Terra Tech Corp. (the “Company”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Picksy, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1130 East Desert Inn Road, Las Vegas, NV 89109 (the “Business”). The aggregate consideration to be paid for the Business is $10.00 million, of which $7.20 million is cash (the “Purchase Price”). A portion of the Purchase Price is payable by the Purchaser pursuant to a 12 month Secured Promissory Note with a principal amount of $2.80 million (the “Note”). The Note is secured by all the assets sold pursuant to the Purchase Agreement. In conjunction with the Note, Purchaser and the Company entered in to a Security Agreement granting the Company a security interest in all the assets sold pursuant to the Purchase Agreement. The transaction is subject to approval by the Nevada Department of Taxation and is expected to close promptly following receipt of such approval.
On August 19, 2019, MediFarm I LLC, a wholly-owned subsidiary of Terra Tech Corp. (the “Company”), entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Picksy Reno, LLC (the “Purchaser”) pursuant to which the Company agreed to sell and the Purchaser agreed to purchase substantially all of the assets of the Company related to the Company’s dispensary located at 1085 S Virginia St Suite A, Reno, NV 89502 (the “Business”). The aggregate consideration to be paid for the Business is $13.50 million, of which $9.30 million is cash (the “Purchase Price”). A portion of the Purchase Price is payable by the Purchaser pursuant to a 12 month Secured Promissory Note with a principal amount of $4.20 million (the “Note”). The Note is secured by all the assets sold pursuant to the Purchase Agreement. In conjunction with the Note, Purchaser and the Company entered into a Security Agreement granting the Company a security interest in all the assets sold pursuant to the Purchase Agreement.
As of December 31, 2019, Management classified a real estate asset held in California and a real estate asset held in Nevada as available-for-sale, as they met the criteria of ASC 360-10-45-9.
During fiscal year 2019, Management concluded that the pending sales of our Nevada dispensaries and expected sale of real estate in California represented a strategic shift that will have a major effect on the Company’s operations and financial results. As a result, Management determined the results of these components qualified for discontinued operations presentation in accordance with ASC 205, “Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity.”
Operating results for the discontinued operations were comprised of the following:
|
|
|
|
(in thousands)
|
|
|
|
Year endedDecember 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenues
|
|
$
|
10,506
|
|
|
$
|
11,169
|
|
Cost of goods sold
|
|
|
5,275
|
|
|
|
5,741
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,231
|
|
|
|
5,428
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,804
|
|
|
|
5,393
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
$
|
1,427
|
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(839
|
)
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations
|
|
$
|
588
|
|
|
$
|
(489
|
)
|
|
|
|
|
|
|
|
|
|
Income (Loss) from discontinued operations per common share attributable to Terra Tech Corp common stockholders - basic and diluted
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
The carrying amounts of the major classes of assets and liabilities for the discontinued operations are as follows:
|
|
(in thousands)
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Accounts receivable, net
|
|
$
|
332
|
|
|
|
38
|
|
Inventory
|
|
|
252
|
|
|
|
920
|
|
Prepaid expenses and other assets
|
|
|
64
|
|
|
|
88
|
|
Property, equipment and leasehold improvements, net
|
|
|
10,457
|
|
|
|
12,649
|
|
Other assets
|
|
|
33
|
|
|
|
4
|
|
Assets of discontinued operations
|
|
$
|
11,138
|
|
|
$
|
13,699
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
990
|
|
|
$
|
505
|
|
Deferred gain on sale of assets
|
|
|
3,750
|
|
|
|
-
|
|
Liabilities of discontinued operations
|
|
$
|
4,740
|
|
|
$
|
505
|
|
NOTE 18 – SEGMENT INFORMATION
During 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 segment requiring disclosure in accordance with ASC 280. Prior period information below has been revised to conform to current period presentation. We are now organized 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 Estateand Construction – Includes building ownership 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 last two fiscal years were as follows:
|
|
(in thousands)
|
|
|
|
Total Revenue
|
|
|
% of Total Revenue
|
|
|
|
Year Ended Decemeber 31,
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbs and Produce Products
|
|
$
|
5,284
|
|
|
$
|
4,476
|
|
|
|
18.8
|
%
|
|
|
15.9
|
%
|
Cannabis Dispensary, Cultivation and Production
|
|
|
22,416
|
|
|
|
14,872
|
|
|
|
79.9
|
%
|
|
|
83.9
|
%
|
Real Estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-%
|
|
|
|
-%
|
|
Corporate and Other
|
|
|
350
|
|
|
|
817
|
|
|
|
1.2
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,050
|
|
|
|
20,165
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
See Note 2 – “Summary of Significant Accounting Policies”to our 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 Nevada. In addition, we operate retail medical and adult use marijuana dispensary facilities in California, and have medical marijuana and adult use cultivation and production facilities in California. 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, and wax products.
Real Estate
We own real property in Nevada. 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.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables. Total asset amounts at December 31, 2019 and 2018 excludes intercompany receivable balances eliminated in consolidation.
|
|
(in thousands)
|
|
|
|
For the Year Ended December 31, 2019
|
|
|
|
Herbs and Produce Products
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Real Estate
|
|
|
Eliminations and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
5,284
|
|
|
$
|
22,416
|
|
|
$
|
-
|
|
|
$
|
350
|
|
|
$
|
28,050
|
|
Cost of goods sold
|
|
|
3,955
|
|
|
$
|
9,114
|
|
|
$
|
-
|
|
|
$
|
327
|
|
|
|
13,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,329
|
|
|
|
13,302
|
|
|
|
-
|
|
|
|
23
|
|
|
|
14,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
540
|
|
|
$
|
6,458
|
|
|
$
|
-
|
|
|
$
|
215
|
|
|
|
7,213
|
|
Stock-based compensation
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,918
|
|
|
|
4,918
|
|
Selling, general and administrative expenses (all other)
|
|
|
4,783
|
|
|
$
|
11,174
|
|
|
$
|
334
|
|
|
$
|
16,899
|
|
|
|
33,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,994
|
)
|
|
|
(4,330
|
)
|
|
|
(334
|
)
|
|
|
(22,009
|
)
|
|
|
(30,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income / (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/(expense)
|
|
|
-
|
|
|
$
|
(16
|
)
|
|
$
|
(1,007
|
)
|
|
$
|
(8,274
|
)
|
|
|
(9,297
|
)
|
Other income / (loss)
|
|
|
34
|
|
|
$
|
(7,794
|
)
|
|
$
|
-
|
|
|
$
|
(716
|
)
|
|
|
(8,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
34
|
|
|
|
(7,810
|
)
|
|
|
(1,007
|
)
|
|
|
(8,990
|
)
|
|
|
(17,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(3,960
|
)
|
|
$
|
(12,140
|
)
|
|
$
|
(1,341
|
)
|
|
$
|
(30,999
|
)
|
|
$
|
(48,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at December 31, 2019
|
|
$
|
(8,201
|
)
|
|
$
|
56,777
|
|
|
$
|
(2,545
|
)
|
|
$
|
73,218
|
|
|
$
|
119,249
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
Herbs and Produce
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Real Estate
|
|
|
Eliminations and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
4,476
|
|
|
$
|
14,872
|
|
|
$
|
-
|
|
|
$
|
817
|
|
|
$
|
20,165
|
|
Cost of Goods Sold
|
|
|
4,233
|
|
|
|
7,241
|
|
|
|
-
|
|
|
|
1,684
|
|
|
|
13,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
243
|
|
|
|
7,631
|
|
|
|
-
|
|
|
|
(867
|
)
|
|
|
7,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
523
|
|
|
|
3,951
|
|
|
|
-
|
|
|
|
232
|
|
|
|
4,706
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,136
|
|
|
|
3,136
|
|
Selling, General and Administrative Expenses
|
|
|
3,682
|
|
|
|
10,192
|
|
|
|
973
|
|
|
|
15,221
|
|
|
|
30,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(3,962
|
)
|
|
|
(6,512
|
)
|
|
|
(973
|
)
|
|
|
(19,456
|
)
|
|
|
(30,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income / (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/(expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
(687
|
)
|
|
|
(10,283
|
)
|
|
|
(10,970
|
)
|
Other income / (loss)
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
(107
|
)
|
|
|
3,075
|
|
|
|
2,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(77
|
)
|
|
|
-
|
|
|
|
(794
|
)
|
|
|
(7,208
|
)
|
|
|
(8,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(4,039
|
)
|
|
$
|
(6,512
|
)
|
|
$
|
(1,767
|
)
|
|
$
|
(26,664
|
)
|
|
$
|
(38,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at December 31, 2018
|
|
$
|
(6,871
|
)
|
|
$
|
40,734
|
|
|
$
|
4,248
|
|
|
$
|
81,978
|
|
|
$
|
120,088
|
|
NOTE 19 – 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 December 31, 2019 nor were there any asserted or unasserted material claims for which material losses are reasonably possible.
On April 10, 2018, GroRite, Naturally Beautiful and Whitetown Realty (“Whitetown Realty” and collectively, the “Whitetown Realty Plaintiffs”) 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 GroRite under a Marketing and Distribution Agreement between Edible Garden and 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 Plaintiffs were seeking, among other things, compensatory damages for the amounts claimed are owed and attorneys’ fees and costs. The Company disputed that Edible Garden owed any payments under the Marketing and Distribution Agreements or the Lease. Accordingly, on May 18, 2018, the company and Edible Garden filed an answer denying the allegations of the Plaintiffs. In that same pleading, Edible Garden filed a counterclaim against Naturally Beautiful and GroRite asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, trademark infringement/unfair competition, and tortious interference with contractual relations. Edible Garden also filed a third-party complaint against previously unidentified defendants arising from the wrongful misappropriation and pirating of electricity from the Edible Garden facility located at 283 Route 519, Belvidere, New Jersey. The third-party complaint alleged claims for unjust enrichment, tortious interference with contractual relations and conversion. On June 8, 2018, Edible Garden filed an amended counterclaim adding a count for conversion against Naturally Beautiful and GroRite. On June 12, 2018, Edible Garden Corp. filed an amended third-party complaint adding Gerda Vande Vrede as a named third-party defendant. On June 13, 2018, GroRite and Naturally Beautiful filed an answer to Edible Garden’s amended counterclaim and Gerda Vande Vrede filed an answer to Edible Garden’s amended third-party complaint denying the allegations asserted against them. No counterclaims, crossclaims or fourth party complaints were filed on behalf of Gerda Vande Vrede, Naturally Beautiful or GroRite.
On April 11, 2018, Kenneth Vande Vrede, Michael Vande Vrede and Steven Vande Vrede (collectively, the “Vande Vrede Brothers”) filed a lawsuit against the Company and Edible Garden alleging, among other things, that the Company and Edible Garden improperly suspended the Vande Vrede Brothers from their positions with the Company and Edible Garden. The Vande Vrede Brothers were seeking, among other things, a declaratory judgment that they did not violate their fiduciary duties owed to the Company or Edible Garden and reinstating the Vande 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. 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 April 13, 2018, Edible Garden Corp. filed a lawsuit 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 sought declaratory and equitable relief to prevent Whitetown Realty from terminating the Lease and for attorneys’ fees and costs. 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 denied that Edible Garden was entitled to the declaratory and equitable relief that Edible Garden requested.
During the third quarter of 2019, the Company settled its lawsuits and all outstanding claims with members of the Vande Vrede family and entities controlled by them. As part of the settlement, Terra Tech purchased all shares of common and preferred stock owned by the Vande Vrede family. See Note 13 – “Equity” for additional information regarding the treasury shares.
On November 21, 2018, Heidi Loeb Hegerich, Forever Green NV, and Forever Young Investments, L.L.C. filed alawsuit against the Company, certain of its subsidiaries and affiliates, and certain unrelated parties 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. Entering into the Settlement Agreement was not an admission or acknowledgement of liability or responsibility on the part of the Company in connection with the Lawsuit.
In conjunction with the settlement, the Company entered into a Securities Purchase Agreement (the “SPA”) withForever 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. Following receipt of approval of the Nevada Department of Taxation, those transactions closed on June 12, 2019. As a result, the Company owned 100% of MediFarm I, 100% of MediFarm RE and 70% of MediFarm II. MediFarm I owns the Company’s Blüm dispensary located at 1085 S. Virginia St. Suite A, Reno, NV 89502, and MediFarm I RE owned the building which housed the dispensary until the closing of an unreleated third party purchased the building on July 31, 2019 (see Note 7 – “ Property, Equipment and Leasehold Improvements, Net”).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. On June 26, 2019, the Court dismissed the Lawsuit with prejudice.
NOTE 20 – RELATED PARTY TRANSACTIONS
During the fiscal year ended December 31, 2019, the Company issued promissory notes totaling $1.80 million to OneQor Technologies, Inc (“OneQor”). Derek Peterson and Mike Nahass, the Chief Executive Officer and Chief Operating Officer, respectively, have minority ownership interests in OneQor. At the end of the fiscal year, management made the decision to fully-reserve for these loans due to their confidence in the completion of the merger with OneQor, which would result in the cancellation of these loans.
On December 30, 2019, the Company entered into a secured promissory note agreement with the Matthew Lee Morgan Trust, which is affiliated with Matthew Morgan, the Chief Executive Officer of OneQor. The note matures on December 30, 2020, and bears interest at a rate of 10% per annum. The note is secured by the Company’s HydroFarm investment.
All related party transactions are monitored quarterly by the Company and approved by the Audit Committee of the Board of Directors.
NOTE 21 – GOING CONCERN
We have incurred significant losses in prior periods. For the year ended December 31, 2019, we incurred a net loss of $46.93 million and, as of that date, we had an accumulated deficit of $189.69 million. For the year ended December 31, 2018, we incurred a net loss of $39.75 million and, as of that date, we had an accumulated deficit of $142.75 million. We expect to experience further significant net losses in 2020 and the foreseeable future.
In an effort to achieve liquidity that would be sufficient to meet all of our commitments, we have undertaken a number of actions, including minimizing capital expenditures and reducing recurring expenses. However, we believe that even after taking these actions, we will not have sufficient liquidity to satisfy all of our future financial obligations, and execute our business plan.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. If the Company is unable to obtain the funds due upon the close of our pending asset sales or obtain additional financing, future operations would need to be scaled back or discontinued. The risks and uncertainties surrounding the timing of the close of our pending asset sales in Nevada, our limited capital resources, and the weak industry conditions impacting our business raise substantial doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements.
NOTE 22 – SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company converted $0.60 million of convertible notes and $0.21 million of interest into 6.12 million shares of the Company’s common stock.
Subsequent to the balance sheet date, the Company issued 1,789,885 shares of common stock for $0.20 million in cash in settlement of put notices pursuant to the Investor Agreement dated November 28, 2016 with an accredited investor.
On January 1, 2020, the Company entered into a Management Services Agreement with Picksy Reno, LLC (“Picksy”), an unaffiliated third party, to transfer all management responsibilities of the Company’s dispensary located at 1085 S. Virginia Street., Reno, NV (the “Reno Dispensary”). In consideration of the services performed, Picksy will be entitled to 85% of the future net profits of the Reno Dispensary. In the event of a loss, Picksy will be responsible for all future capital shortfalls. The Company’s 15% interest in the future net income of the Reno Dispensary will be applied to the purchase price of the related asset sale, which as of the time of our report was pending regulatory approval.
On January 10, 2020, the Company entered into a $1.0 million Secured Promissory Note agreement with an unaffiliated third party. The note incurs interest at a rate of 15.0% per annum and matures on January 10, 2021.
On February 14, 2020, the Company merged with OneQor Technologies. Upon close of the merger, Terra Tech shareholders owned approximately 79% of the combined company and OneQor shareholders owned approximately 21%. Additionally, Derek Peterson resigned as Chief Executive Officer of Terra Tech, but will remain the Chairman of the Board of Directors. Matthew Morgan was appointed the Chief Executive Officer of Terra Tech Corp. The Board of Directors changed from four members to five members, as Mr. Morgan joins the four members of the Terra Tech Corp board. As part of this agreement, Mr. Peterson and Mr. Nahass have agreed to forfeit their vested and unvested stock options. The new company also announced plans to change its name to Onyx Group Holdings (“Onyx”).
On February 26, 2020, the Company agreed to transfer governance and control of our dispensary operation located at 2911 Tech Center Drive, Santa Ana, CA to Martin Vivero and Tetra House Co. (“Tetra”), who are unaffiliated third parties. The company received $2.00 million at closing and is due future payments of $1.80 million. MediFarm So Cal Inc. (“MediFarm So Cal”), a wholly-owned subsidiary of the Company, terminated the existing management services agreement with 55 OC Community Collective Inc. (“55 OC”). 55 OC is a mutual benefit corporation which holds a cannabis license with the City of Santa Ana in the State of California. Previously, MediFarm So Cal managed the dispensary known as “Blum Santa Ana” under the license of 55 OC. Control of 55 OC was transferred to Mr. Vivero and Tetra House Co. via a new management services agreement and the appointment of Mr. Vivero to the Board of Directors of 55 OC, which was pending final regulatory approval as of the date of our report. In conjunction with the agreement with Tetra, the Company entered into an agreement with Modernize, Inc. and Wojciech Smolenski (the “Smolenski Parties”) to transfer $0.35 million of the proceeds to the Smolenski parties as consideration for agreeing to sell the real estate that 55 OC operates within to Tetra and for settlement of an existing claim stemming from a lease dispute.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
TERRA TECH CORP.
|
|
|
|
|
|
Date: March 13, 2020
|
By:
|
/s/ Matthew Morgan
|
|
|
|
Matthew Morgan
|
|
|
|
Chief Executive Officer and Director
|
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Matthew Morgan and Michael James, and each of them, as his true and lawful attorney-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K of Terra Tech Corp. for the fiscal year ended December 31, 2019, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Power of Attorney has been signed by the following persons in the capacities and on the dates stated.
Date: March 13, 2020
|
By:
|
/s/ Derek Peterson
|
|
|
|
Derek Peterson
|
|
|
|
Chairman of the Board
|
|
|
|
|
|
Date: March 13, 2020
|
By:
|
/s/ Matthew Morgan
|
|
|
|
Matthew Morgan
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
Date: March 13, 2020
|
By:
|
/s/ Michael A. Nahass
|
|
|
|
Michael A. Nahass
|
|
|
|
President, Chief Operating Officer,
Secretary, Treasurer, and Director
|
|
|
|
|
|
Date: March 13, 2020
|
By:
|
/s/ Steven J. Ross
|
|
|
|
Steven J. Ross
|
|
|
|
Director
|
|
|
|
|
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Date: March 13, 2020
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By:
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/s/ Alan Gladstone
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Alan Gladstone
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Director
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Date: March 13, 2020
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By:
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/s/ Michael James
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Michael James
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Chief Financial Officer
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(Principal Accounting Officer
and Principal Financial Officer)
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