NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
NOTE 1 – DESCRIPTION OF BUSINESS
Organization
References in the notes to unaudited consolidated financial statements to “the Company”, “Terra Tech”, “we”, “us”, or “our” are intended to mean Terra Tech Corp., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.
Through MediFarm, LLC, a Nevada limited liability company (“MediFarm”), MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”), and MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”), subsidiaries in which the Company owns interests, the Company operates and/or plans to operate medical marijuana dispensary facilities, cultivation, and production facilities in Nevada. Through Blüm San Leandro, a California corporation (“Blüm San Leandro”), the Company operates a medical marijuana retail dispensary and production facility in San Leandro, California. Through MediFarm So Cal Inc., a California mutual benefit corporation (“MediFarm SoCal”), the Company operates a medical marijuana retail dispensary in Santa Ana, California. Through MediFarm I Real Estate, LLC, a Nevada limited liability company (“MediFarm I RE”), the Company owns real property on which a medical marijuana dispensary is located and operated by MediFarm I. Through Black Oak Gallery, a California corporation (“Black Oak”), the Company operates a medical marijuana retail dispensary, a medical marijuana cultivation facility, and has a second medical marijuana cultivation facility in the early stages of construction, all in Oakland, California. Through IVXX, LLC, a Nevada limited liability company (“IVXX LLC”), and IVXX, Inc., a California corporation (“IVXX Inc”); together with IVXX LLC (“IVXX”), the Company’s wholly-owned subsidiary, the Company produces and sells a line of cannabis flowers, as well as a line of cannabis pure concentrates through Black Oak Gallery’s permit. The Company is a wholesale seller of locally grown hydroponic produce, herbs and floral products through its wholly-owned subsidiary, Edible Garden Corp., a Nevada corporation (“Edible Garden”). EG Transportation LLC, a Nevada limited liability company (“EG Transportation”), supports the distribution of Edible Garden product.
On April 1, 2016, the Company acquired Black Oak. Black Oak operates a medical marijuana retail 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, and Black Oak.
Since the Merger was completed on April 1, 2016, Black Oak’s financial results are included in our unaudited consolidated financial statements subsequent to that date.
Due to changes in planned operations of the MediFarm dispensaries, the Company acquired an additional 38% ownership for no additional consideration during August 2017. Previously, the Company owned 60%. As of September 30, 2017, the Company has 98% ownership of MediFarm. In connection with the ownership change the Company recorded a $1,830,925 adjustment to additional paid in capital representing the change in non-controlling interest.
On August 17, 2017, the Company formed a wholly owned legal entity, MediFarm SoCal, to acquire all assets of Tech Center Drive Management, LLC (“Tech Center Drive”) and 55 OC Collective, Inc. (“55 OC”). 55 OC owns and holds the cannabis dispensary license in the city of Santa Ana, California. Tech Center Drive manages and operates a dispensary under the license of 55 OC. On September 13, 2017, MediFarm SoCal acquired all of the assets of Tech Center Drive and 55 OC. The acquisition was accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10,
“Business Combinations”;
see “Note 4 – Acquisition”
for further information. MediFarm SoCal’s sole purpose is to operate a medical marijuana retail dispensary.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Securities Exchange Commission (“SEC”) Form 10-Q and Article 10 of Regulation S-X of the Securities Act of 1933. The unaudited consolidated financial statements include the accounts of the Company and each of its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of September 30, 2017, the consolidated results of operations for the three and nine months ended September 30, 2017 and 2016, and the consolidated results of cash flows for the nine months ended September 30, 2017 and 2017 have been included. These interim unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s most recent Annual Report on Form 10-K filed with the SEC. The December 31, 2016 balances reported herein are derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2016, filed with the SEC on October 27, 2017. The results for the interim periods are not necessarily indicative of results to be expected for the full year.
Non-Controlling Interest
Non-controlling interest is shown as a component of 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 unaudited 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, 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 and stockholders’ equity.
Inventory
Inventory is stated at the lower of cost or market, 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; 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 6 – 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 August 1 and whenever events or changes in circumstances indicate its carrying amount may not be recoverable. When assessing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs a two-step impairment test. If the Company concludes otherwise, then no further action is taken. The Company also has the option to bypass the qualitative assessment and only perform a quantitative assessment, which is the first step of the two-step impairment test. In the two-step impairment test, 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. There were no events or changes in circumstances that indicated potential impairment of intangible assets during 2017, as such the Company determined that no adjustment to the carrying value of goodwill was required.
Intangible Assets, Net
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
|
|
5 to 12 Years
|
Trade Names
|
|
2 to 8 Years
|
Dispensary License
|
|
14 Years
|
Patent
|
|
2 Years
|
Management Service Agreement
|
|
15 Years
|
The Company reviews intangible assets quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Intangible assets that have indefinite useful lives are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of the reporting unit exceeds its fair value.
Long-Lived Assets
Other long-lived assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360,
“Property, Plant, and Equipment”
. Our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. See
“Note 6 – Property, Equipment and leasehold Improvements, Net”
for further information.
Other Assets
Other assets are comprised primarily of security deposits for leased properties in California, Nevada and New Jersey. The deposits will be returned at the end of the lease term.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 605,
“Revenue Recognition.”
Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken ownership and assumed risk of loss.
Cannabis Dispensary, Cultivation and Production
The Company recognizes revenue from manufacturing and distribution product sales, upon transfer of title and risk to the customer, which occurs either at shipping (F.O.B. terms), or upon sell through, depending on the arrangement.
Revenue from our retail dispensaries is recognized net of discounts, rebates, promotional adjustments, price adjustments and returns, and net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Revenue is recorded upon transfer of title and risk to the customer, which occurs at the time customers take delivery of our products at our retail dispensaries. Upon purchase, the Company has no further performance obligations and collection is assured as sales are paid for at time of purchase.
Revenue related to the sale of consignment inventory is not recognized until the product is pulled from inventory and sold directly to end-customers. The Company recognizes revenue from the sale of consignment inventory on a gross basis, as the Company has determined that: 1) the Company is the primary obligor to the customer; 2) the Company has latitude in establishing the sales prices and profit margins of its products; 3) the Company has discretion in selecting its suppliers; 4) the Company is responsible for loss or damage to consigned inventory; and 5) the Company’s customer validation process performs an important part of the process of providing such products to authorized customers. The Company believes that these factors outweigh the fact that the Company does not have title to the consigned inventory prior to its sale.
Herbs and Produce Products
The Company recognizes revenue from products grown in its greenhouses and sold net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer of title and risk to the customer, which occurs at delivery (F.O.B. terms). Upon delivery, the Company has no further performance obligations, selling price is fixed, and collection is reasonably assured.
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 other supplies, fees for services and processing, other expenses for services, and allocated overhead. It also includes the cost incurred in producing the oils, waxes, shatters, and clears sold by IVXX. 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 $294,449 and $242,393 for the three months ended September 30, 2017 and 2016, respectively, and $844,639 and $546,257 for the nine months ended September 30, 2017 and 2016, 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 share-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 unaudited 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.
Warrants
ASC 815-40,
“Contracts in Entity’s Own Equity”
, requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or a liability. Under the provisions of ASC 815-40, a contract designated as an asset or a liability must be carried at fair value on a company’s balance sheet, with any changes in fair value recorded in the company’s results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required from period to period.
ASC 815,
“Derivatives and Hedging”
, requires all derivatives to be recorded on the balance sheet at fair value. Furthermore, ASC 815 precludes contracts issued or held by a reporting entity that are both (1) indexed to its own stock and (2) classified as stockholders’ equity in its statement of financial position from being treated as derivative instruments.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740,
“Income Taxes”
. 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 September 30, 2017 and December 31, 2016, 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% 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 unaudited 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 three and nine months ended September 30, 2017 and 2016. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for both periods.
Fair Value of Financial Instruments
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. We have not elected the fair value option for any eligible financial instruments.
Recently Issued Accounting Standards
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. The Company is currently evaluating the effect that ASU 2017-04 will have on our consolidated financial statements and related disclosures.
FASB ASU 2017-01 (Topic 805), “Business Combinations: Clarifying the Definition of a Business”
– Issued in January 2017, ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. This guidance will be effective for the Company in the first fiscal quarter of 2018 on a prospective basis, and early adoption is permitted. The Company does not expect the standard to have a material impact on our consolidated financial statements and related disclosures.
FASB ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”
– Issued in August 2016, the amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230,
“Statement of Cash Flows”
. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial statements and related disclosures.
FASB ASU No. 2016-02 (Topic 842), “Leases”
– Issued in February 2016, ASU No. 2016-02 will require entities to recognize right-of-use assets and lease liabilities on the balance sheet for the rights and obligations created by all leases, including operating leases, with terms of more than 12 months. The new standard also requires additional disclosures on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The new standard will be effective for the Company on January 1, 2019. Early adoption is permitted. The Company is in the process of evaluating the impact the adoption of this standard will have on its consolidated financial statements and related disclosures.
FASB ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers”
– Issued in May 2014, ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued ASU No. 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
. This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08,
“Principal versus Agent Considerations (Reporting Gross versus Net)”,
which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”
and 2016-12,
“Narrow-Scope Improvements and Practical Expedients”
, both of which provide additional clarification of certain provisions in Topic 606. These ASC updates are effective for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.
The Company expects to apply the guidance using the modified retrospective transition method. The Company does not expect the adoption of ASU 2014-09 to have a material impact on the Company’s financial position or results of operations but will result in additional disclosures regarding the Company’s revenue recognition policies. The Company also does not expect the adoption of ASU 2014-09 will require material or significant changes to its internal controls over financial reporting. In connection with the application of that guidance and the adoption of ASU 2014-09, the Company expects that it will expand its revenue recognition inquiries and update its questionnaires primarily to identify matters that would signal variable consideration implications under the new guidance.
NOTE 3 – CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions that are insured by the Federal Deposit Insurance Corporation up to certain federal limitations. At times, the Company’s cash balance exceeds these federal limitations 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 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.
NOTE 4 – ACQUISITION
On September 13, 2017, the Company acquired all assets of Tech Center Drive and majority control of 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. Tech Center Drive 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 Tech Center Drive.
The purchase price allocation for the acquisition, as set forth in the table below, reflects various preliminary fair value estimates and analyses, including preliminary work performed by third-party valuation specialists, which are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company’s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could also be affected. The Company acquired inventory, property, equipment and leasehold improvements, a security deposit and a management service agreement which allows for Tech Center Drive to purchase the medical marijuana dispensary license of 55 OC.
As consideration for entering into the Asset Purchase Agreement, the Company paid $4,120,791 in cash, issued 9,500,206 shares of the Company’s common stock with a value of $2,090,046 on the closing date and issued 2,891,365 shares of the Company’s common stock with a value of $636,100 into an escrow account. The shares held in escrow are to be paid six months after the acquisition date subject to any amounts to be withheld related to working capital type adjustments. The Company is also due $7,012 from the sellers of Tech Center Drive for amounts paid in excess of the agreement, which will be settled six months after the closing date. The value of the shares issued were based on the closing value of the Company's common stock on September 13, 2017, which was $0.22 per share.
The following table summarizes the acquisition with a purchase price of $6,839,925:
Assets Acquired
|
|
|
|
Inventory
|
|
$
|
113,779
|
|
Property, Equipment and Leasehold Improvements:
|
|
|
|
|
Furniture and Equipment
|
|
|
52,829
|
|
Leasehold Improvements
|
|
|
46,737
|
|
Security Deposits
|
|
|
5,000
|
|
Management Service Agreement
|
|
|
6,621,580
|
|
Total Assets Acquired
|
|
$
|
6,839,925
|
|
The supplemental pro forma information, as if the acquisition had occurred on January 1, 2016, is as follows:
|
|
Pro Forma Results of Operations
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
10,629,069
|
|
|
$
|
7,895,506
|
|
|
$
|
27,196,032
|
|
|
$
|
19,700,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Terra Tech Corp.
|
|
$
|
(8,670,424
|
)
|
|
$
|
(5,602,487
|
)
|
|
$
|
(19,664,164
|
)
|
|
$
|
(14,724,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Common Share Attributable to Terra Tech Corp. Common Stockholders - Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
The supplemental pro forma information above is based on estimates and assumptions that we believe are reasonable. The pro forma information presented is not necessarily indicative of the consolidated results of operations in future periods or the results that would have been realized had the acquisition occurred on January 1, 2016. The supplemental pro forma results above exclude any benefits that may result from the acquisition due to synergies that are expected to be derived from the elimination of any duplicative costs.
NOTE 5 – INVENTORY
Raw materials consist of Edible Garden’s herb product lines and material for IVXX’s line of cannabis pure concentrates. Work-in-progress consists of live plants grown for Edible Garden’s herb product lines and live plants grown at Black Oak. Finished goods consists of IVXX’s line of cannabis packaged products to be sold into dispensaries and Black Oak cannabis products sold in retail, and Edible Garden’s products to be sold via food, drug, and mass channels.
Inventory consists of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,309,131
|
|
|
$
|
486,119
|
|
Work-in-Progress
|
|
|
901,241
|
|
|
|
570,145
|
|
Finished Goods
|
|
|
2,271,421
|
|
|
|
853,066
|
|
|
|
|
|
|
|
|
|
|
Total Inventory
|
|
$
|
4,481,793
|
|
|
$
|
1,909,330
|
|
NOTE 6 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment, and leasehold improvements, net consists of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Land and Building
|
|
$
|
1,316,087
|
|
|
$
|
1,454,124
|
|
Furniture and Equipment
|
|
|
3,467,647
|
|
|
|
3,141,244
|
|
Computer Hardware and Software
|
|
|
457,535
|
|
|
|
396,479
|
|
Leasehold Improvements
|
|
|
8,785,307
|
|
|
|
7,568,465
|
|
Construction in Progress
|
|
|
834,220
|
|
|
|
459,327
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
14,860,796
|
|
|
|
13,019,639
|
|
Less Accumulated Depreciation
|
|
|
(3,886,864
|
)
|
|
|
(2,554,875
|
)
|
|
|
|
|
|
|
|
|
|
Property, Equipment and Leasehold Improvements, Net
|
|
$
|
10,973,932
|
|
|
$
|
10,464,764
|
|
Depreciation expense related to property, equipment and leasehold improvements for the three months ended September 30, 2017 and 2016 was $479,686 and $453,723, respectively, and for the nine months ended September 30, 2017 and 2016 was $1,399,418 and $827,391, respectively.
During the third quarter of 2017, the Company recorded an impairment charge for land held in Nevada. In accordance with the guidance for the impairment of long-lived assets, the Company evaluated the property for recovery and recorded an impairment charge of $138,037 to adjust the carrying value of the property to our estimate of fair value. The impairment charge was recorded in other expense in our unaudited consolidated statement of operations and we allocated that charge to our eliminations and other segment, see “
Note 15 – Segment Information”
for additional disclosure regarding segments.
NOTE 7 – INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Estimated Useful Life
in Years
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Net
Carrying
Value
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated Amortization
|
|
|
Net
Carrying
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
5 to 12
|
|
|
$
|
8,960,700
|
|
|
$
|
(1,437,312
|
)
|
|
$
|
7,523,388
|
|
|
$
|
8,960,700
|
|
|
$
|
(780,960
|
)
|
|
$
|
8,179,740
|
|
Trade Brands and Patent
|
|
2 to 8
|
|
|
|
498,598
|
|
|
|
(173,106
|
)
|
|
|
325,492
|
|
|
|
498,598
|
|
|
|
(91,061
|
)
|
|
|
407,537
|
|
Dispensary Licenses
|
|
|
14
|
|
|
|
10,270,000
|
|
|
|
(1,100,358
|
)
|
|
|
9,169,642
|
|
|
|
10,270,000
|
|
|
|
(550,179
|
)
|
|
|
9,719,821
|
|
Management Service Agreement
|
|
|
15
|
|
|
|
6,621,580
|
|
|
|
-
|
|
|
|
6,621,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amortizing Intangible Assets
|
|
|
|
|
|
|
26,350,878
|
|
|
|
(2,710,776
|
)
|
|
|
23,640,102
|
|
|
|
19,729,298
|
|
|
|
(1,422,200
|
)
|
|
|
18,307,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Amortizing Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
|
Indefinite
|
|
|
|
5,320,000
|
|
|
|
-
|
|
|
|
5,320,000
|
|
|
|
5,320,000
|
|
|
|
-
|
|
|
|
5,320,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Amortizing Intangible Assets
|
|
|
|
|
|
|
5,320,000
|
|
|
|
-
|
|
|
|
5,320,000
|
|
|
|
5,320,000
|
|
|
|
-
|
|
|
|
5,320,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets, Net
|
|
|
|
|
|
$
|
31,670,878
|
|
|
$
|
(2,710,776
|
)
|
|
$
|
28,960,102
|
|
|
$
|
25,049,298
|
|
|
$
|
(1,422,200
|
)
|
|
$
|
23,627,098
|
|
The Company recorded amortization expense of $429,526 and $298,902 for the three months ended September 30, 2017 and 2016, respectively, and $1,288,576 and $826,400 for the nine months ended September 30, 2017 and 2016, respectively
.
Future estimated amortization expense of existing intangible assets is as follows:
|
|
Three months ending
|
|
|
Year Ending December 31,
|
|
|
|
December 31, 2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022 and
thereafter
|
|
|
Total
|
|
Amortization expense
|
|
$
|
539,614
|
|
|
$
|
1,783,635
|
|
|
$
|
1,769,913
|
|
|
$
|
1,769,913
|
|
|
$
|
1,731,568
|
|
|
$
|
16,045,459
|
|
|
$
|
23,640,102
|
|
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
2,171,256
|
|
|
$
|
1,986,907
|
|
Sales Tax Payable
|
|
|
482,509
|
|
|
|
122,470
|
|
Accrued Interest Payable
|
|
|
2,844
|
|
|
|
96,633
|
|
Accrued Expenses
|
|
|
1,553,905
|
|
|
|
211,390
|
|
|
|
|
|
|
|
|
|
|
Total Accounts Payable and Accrued Expenses
|
|
$
|
4,210,514
|
|
|
$
|
2,417,400
|
|
NOTE 9 – NOTES PAYABLE
Notes payable consists of the following:
|
|
September 30,
2017
|
|
|
De
cember 31,
2016
|
|
Unsecured promissory demand notes issued to an accredited investor, which bear interest at a rate of 4% per annum. Holder may elect to convert into common stock at $0.75 per share. The balance of the note and accrued interest was converted into common stock in April 2017.
|
|
$
|
-
|
|
|
$
|
64,324
|
|
Convertible promissory note dated December 14, 2015, issued to accredited investors, which matured December 13, 2016 and bears interest at a rate of 12% per annum. The holder of the note extended the maturity to December 13, 2017. The conversion price is $0.1211, subject to adjustment. The balance of the note and accrued interest was converted into common stock in July 2017.
|
|
|
-
|
|
|
|
500,000
|
|
Senior convertible promissory note dated October 28, 2016, issued to accredited investors, which matures April 28, 2018 and bears interest at a rate of 1% per annum. The conversion price is 90% of the average of the lowest three (3) VWAPs for the five (5) consecutive trading days prior to the conversion date. The balance of the note and accrued interest was converted into common stock in January 2017.
|
|
|
-
|
|
|
|
102,582
|
|
Senior convertible promissory note dated November 1, 2016, issued to accredited investors, which matures May 1, 2018 and bears interest at a rate of 12% per annum. The conversion price is $0.35, subject to adjustment. The balance of the note and accrued interest was converted into common stock in July 2017.
|
|
|
-
|
|
|
|
31,615
|
|
Senior convertible promissory note dated December 16, 2016, issued to accredited investors, which matures June 16, 2018 and bears interest at a rate of 12% per annum. The conversion price is $0.27, subject to adjustment. The balance of the note and accrued interest was converted into common stock in May 2017.
|
|
|
-
|
|
|
|
1,220,155
|
|
Senior convertible promissory note dated February 22, 2017, issued to accredited investors, which matures August 22, 2018 and bears interest at a rate of 12% per annum. The conversion price is $0.25, subject to adjustment. The balance of the note and accrued interest was converted into common stock in June 2017.
|
|
|
-
|
|
|
|
-
|
|
Senior convertible promissory note dated June 23, 2017, issued to accredited investors, which matures December 23, 2018 and bears interest at a rate of 12% per annum. The conversion price is $0.1362, subject to adjustment.
|
|
|
335,119
|
|
|
|
-
|
|
Senior convertible promissory note dated August 21, 2017, issued to accredited investors, which matures February 21, 2019 and bears interest at a rate of 12% per annum. The conversion price is $0.30, subject to adjustment.
|
|
|
1,798,785
|
|
|
|
-
|
|
Total Debt
|
|
|
2,133,904
|
|
|
|
1,918,676
|
|
|
|
|
|
|
|
|
|
|
Less Short-Term Portion
|
|
|
-
|
|
|
|
564,324
|
|
|
|
|
|
|
|
|
|
|
Long-Term Portion
|
|
$
|
2,133,904
|
|
|
$
|
1,354,352
|
|
As of September 30, 2017 and December 31, 2016, total debt was $2,133,904 and $1,918,676, respectively, which included unamortized debt discount of $3,766,095 and $4,295,648, respectively. Senior secured promissory notes are secured by shares of common stock. There was accrued interest payable of $2,844 and $96,633 as of September 30, 2017 and December 31, 2016, respectively.
See
“Note 17 – Subsequent Events”
for additional disclosure regarding changes in notes payable subsequent to September 30, 2017.
Securities Purchase Agreement Dated August 21, 2017 and 12% Senior Convertible Promissory Note Due February 21, 2019
On August 21, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company sold to the accredited investor a 12% Senior Convertible Promissory Note due February 21, 2019 (“Note A”) in the principal amount of $5,500,000 for a purchase price of $5,500,000 (“Offering A”). There were no fees or expenses deducted from the net proceeds received by the Company in Offering A. The Company paid $180,000 in cash and issued approximately $169,000 of warrants in connection with the loan. The cash fee and warrants issued were recorded as a debt discount. Note A and the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) issuable upon conversion of Note A are collectively referred to herein as the “Securities.”
All principal and interest due and owing under Note A 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) $0.30 or (ii) 85% 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 A”), which Conversion Price A 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 of Note A will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect.
In addition, at any time that (i) the daily volume weighted average price of the Common Stock for the prior ten (10) consecutive trading days is $0.70 or more and (ii) the average daily trading value of the Common Stock is greater than $2,500,000 for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) day’s notice, that the holder convert Note A at Conversion Price A.
The Company may prepay in cash any portion of the outstanding principal amount of Note A and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of Note A plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of Note A; (ii) 115% 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 Note A; or (iii) 125% of the sum of the then-outstanding principal amount of Note A plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of Note A.
Securities Purchase Agreement Dated June 23, 2017 and 12% Senior Convertible Promissory Note Due December 23, 2018
On June 23, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company sold to the accredited investor a 12% Senior Convertible Promissory Note due December 23, 2018 (“Note B”) in the principal amount of $3,000,000 for a purchase price of $3,000,000 (“Offering B”). There were no fees or expenses deducted from the net proceeds received by the Company in Offering B. The Company paid $90,000 in connection with the loan. The cash fee was recorded as a debt discount. Note B and the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) issuable upon conversion of Note B are collectively referred to herein as the “Securities.”
All principal and interest due and owing under Note B 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) $0.1362 or (ii) 85% 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 B”), which Conversion Price B 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 of Note B will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect.
In addition, at any time that (i) the daily volume weighted average price of the Common Stock for the prior ten (10) consecutive trading days is $0.70 or more and (ii) the average daily trading value of the Common Stock is greater than $2,500,000 for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) day’s notice, that the holder convert Note B at Conversion Price B.
The Company may prepay in cash any portion of the outstanding principal amount of Note B and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of Note B plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of Note B; (ii) 115% of the sum of the then-outstanding principal amount of Note B plus accrued but unpaid interest, if the prepayment date is between 91 days and 180 days of the issuance date of Note B; or (iii) 125% of the sum of the then-outstanding principal amount of Note B plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of Note B.
Securities Purchase Agreement Dated February 22, 2017 and 12% Senior Convertible Promissory Note Due August 22, 2018
On February 22, 2017, the Company entered into a Securities Purchase Agreement with an accredited investor pursuant to which the Company sold to the accredited investor a 12% Senior Convertible Promissory Note due August 22, 2018 (“Note C”) in the principal amount of $3,000,000 for a purchase price of $3,000,000 (“Offering C”). There were no fees or expenses deducted from the net proceeds received by the Company in Offering C. The Company paid $90,000 in connection with the loan. The cash fee was recorded as a debt discount. Note C and the shares of the Common Stock issuable upon conversion of Note C are collectively referred to herein as the “Securities.”
All principal and interest due and owing under Note C 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) $0.2495 or (ii) 85% 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 C”), which Conversion Price C 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 of Note C will automatically become 70% of the average of the three (3) lowest volume weighted average prices of the Common Stock in the twenty (20) consecutive trading days prior to the conversion date for so long as such event of default remains in effect. All interest payments under the Note are payable, at the Company’s option, in cash or shares of Common Stock.
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 $0.70 or more and (ii) the average daily trading value of the Common Stock is greater than $2,500,000 for the prior ten (10) consecutive trading days, then the Company may demand, upon one (1) day’s notice, that the holder convert Note C at Conversion Price C.
The Company may prepay in cash any portion of the outstanding principal amount of Note C and any accrued and unpaid interest by, upon ten (10) days’ written notice to the holder, paying an amount equal to (i) 110% of the sum of the then-outstanding principal amount of Note C plus accrued but unpaid interest, if the prepayment date is within 90 days of the issuance date of Note C; (ii) 115% of the sum of the then-outstanding principal amount of Note C plus accrued but unpaid interest, if the prepayment date is between 91 days and 180 days of the issuance date of Note C; or (iii) 125% of the sum of the then-outstanding principal amount of Note C plus accrued but unpaid interest, if the prepayment date is after 180 days of the issuance date of Note C.
Conversion of Notes Payable and Related Loss on Extinguishment of Debt
The table below details the conversion of the notes payable into equity and the loss on extinguishment of debt for the three and nine months ended September 30, 2017 and 2016:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value of common stock issued upon conversion
|
|
$
|
6,424,597
|
|
|
$
|
-
|
|
|
$
|
18,156,952
|
|
|
$
|
2,064,137
|
|
Principal amount of debt converted
|
|
|
(3,250,000
|
)
|
|
|
-
|
|
|
|
(11,814,324
|
)
|
|
|
(846,491
|
)
|
Accrued interest converted
|
|
|
(232,225
|
)
|
|
|
-
|
|
|
|
(506,985
|
)
|
|
|
(115,249
|
)
|
Fair value of derivative at conversion date
|
|
|
(3,434,900
|
)
|
|
|
-
|
|
|
|
(9,106,950
|
)
|
|
|
(570,100
|
)
|
Debt discount value at conversion date
|
|
|
1,866,066
|
|
|
|
-
|
|
|
|
7,323,440
|
|
|
|
388,500
|
|
Loss on extinguishment of debt
|
|
$
|
1,373,538
|
|
|
$
|
-
|
|
|
$
|
4,052,133
|
|
|
$
|
920,797
|
|
NOTE 10 – CONTINGENT CONSIDERATION LIABILITY
The Company accounts for “contingent consideration” according to ASC 805,
“Business Combinations”
(ASC 805). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction.
In the acquisition of Black Oak, the Company valued the contingent consideration based on an analysis using a cash flow model to determine the expected contingent consideration payment, which model determined that the aggregate expected contingent consideration liability was $15,305,463 and the present value of the contingent consideration liability was $12,754,553. Accordingly, the Company recognized at April 1, 2016, the closing date of the Black Oak merger, a $12,754,553 contingent consideration liability associated with the contingent consideration paid pursuant to the Merger Agreement.
On April 1, 2017, the anniversary date of the acquisition and the settlement date of the contingent consideration, the final contingent consideration was approximately $16.5 million. A summary of the changes in the contingent consideration as well as the detail is below:
|
|
Amount
|
|
Contingent Consideration Summary:
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
12,085,859
|
|
Change in Fair Market Valuation of Contingent Consideration
|
|
|
4,348,761
|
|
|
|
|
|
|
Balance at March 31, 2017 and April 1, 2017
|
|
$
|
16,434,620
|
|
|
|
|
|
|
Contingent Consideration Detail:
|
|
|
|
|
|
|
|
|
|
Performance-Based Cash Contingent Consideration
|
|
$
|
2,088,000
|
|
Market-Based Stock Contingent Consideration
|
|
|
14,346,620
|
|
|
|
|
|
|
Balance at March 31, 2017 and April 1, 2017
|
|
$
|
16,434,620
|
|
Changes in the fair market valuation of the contingent consideration are recognized in the unaudited consolidated statements of operations. For the three and nine months ended September 30, 2017, the loss on fair market valuation of contingent consideration was $0 and $4,426,047, respectively.
During April 2017, in final settlement of the contingent consideration, the Company issued approximately $4.7 million in shares of its common stock, or common stock equivalent of approximately 18.1 million shares of its common stock, and made a cash payment of approximately $2.1 million. A summary is as follows:
Contingent Consideration Balance at March 31, 2017
|
|
$
|
16,434,620
|
|
|
|
|
|
|
Change in Fair Market Valuation of Contingent Consideration
|
|
|
77,286
|
|
Payment of Contingent Consideration in Cash
|
|
|
(2,088,000
|
)
|
Settlement of Contingent Consideration in Stock
|
|
|
(4,739,638
|
)
|
Settlement of Contingent Consideration Recorded Against Additional Paid-In Capital
|
|
|
(4,692,697
|
)
|
Gain on Settlement of Contingent Consideration
|
|
|
(4,991,571
|
)
|
|
|
|
|
|
Contingent Consideration Balance at June 30, 2017 and September 30, 2017
|
|
$
|
-
|
|
Pursuant to the terms of the contingent consideration as outlined in the Merger Agreement, the Company was required to release from escrow shares worth approximately $14.4 million. Of those shares, 18.1 million shares, with a value of $4,789,638, were issued in final settlement of the Market-Based Contingent Consideration, and approximately 34.2 million shares were additionally clawed-back. The Market-Based Clawback associated with common stock equivalent of approximately 35.1 million shares were clawed-back pursuant to the appreciation of the quoted price of the Company’s stock underlying the market-based component of the contingent consideration. An additional common stock equivalent of approximately 34.2 million shares, with a value of $9,684,268, were clawed-back pursuant to disputes between the sellers of Black Oak and the Company with respect to certain operational and performance goals that would have impacted the appreciation of the quoted price of the Company’s common stock underlying the market-based component of the contingent consideration and, in effect, increasing the number of clawback shares. The Company applied the guidance of ASC 470-50-40-2, related to the additional $9,684,268 worth of shares that were clawed back. For the three and nine months ended September 30, 2017, the Company recognized a gain on settlement of contingent consideration of $0 and $4,991,571, respectively. The balance attributable to related parties was recorded in additional paid in capital.
See
“Note 11 – Fair Value Measurements”
for further information.
NOTE 11 – FAIR VALUE MEASUREMENTS
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth the financial liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of the dates indicated:
|
|
Fair Value at September 30,
|
|
|
Fair Value Measurement Using
|
|
Description
|
|
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities – Conversion Feature
|
|
$
|
4,639,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,639,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,639,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,639,000
|
|
|
|
Fair Value at December 31,
|
|
|
Fair Value Measurement Using
|
|
Description
|
|
2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities – Conversion Feature
|
|
$
|
6,987,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,987,000
|
|
Liability – Contingent Consideration
|
|
|
12,085,859
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,085,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,072,859
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,072,859
|
|
The Company estimates the fair value of the derivative liabilities using the Black-Scholes-Merton option pricing model using the following assumptions:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$0.17 - $0.34
|
|
|
$0.29 - $0.49
|
|
Conversion and Exercise Price
|
|
$0.12 - $0.44
|
|
|
$0.22 - $0.50
|
|
Annual Dividend Yield
|
|
-
|
|
|
-
|
|
Expected Life (Years)
|
|
0.45 - 3.42
|
|
|
1.5 - 4.0
|
|
Risk-Free Interest Rate
|
|
1.04% - 2.50%
|
|
|
2.50%
|
|
Expected Volatility
|
|
43.80% - 123.56%
|
|
|
120.30%-144.03%
|
|
Volatility is based on historical volatility of our common stock. Historical volatility was computed using weekly pricing observations for our common stock that correspond to the expected term. This method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and conversion features.
No financial assets were measured on a recurring basis as of September 30, 2017 and December 31, 2016.
The following table presents a reconciliation of the derivative liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017:
Balance at December 31, 2016
|
|
$
|
6,987,000
|
|
|
|
|
|
|
Change in Fair Market Value of Conversion Feature
|
|
|
(1,122,050
|
)
|
Derivative Debt Converted into Equity
|
|
|
(9,106,950
|
)
|
Issuance of Debt Instruments with Derivatives
|
|
|
7,881,000
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
4,639,000
|
|
The following table presents a reconciliation of the contingent consideration liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2017:
Balance at December 31, 2016
|
|
$
|
12,085,859
|
|
|
|
|
|
|
Change in Fair Market Valuation of Contingent Consideration
|
|
|
4,426,047
|
|
Payment of Contingent Consideration in Cash
|
|
|
(2,088,000
|
)
|
Settlement of Contingent Consideration
|
|
|
(4,739,638
|
)
|
Settlement of Contingent Consideration Recorded Against Additional Paid-In Capital
|
|
|
(4,692,697
|
)
|
Gain on Settlement of Contingent Consideration
|
|
|
(4,991,571
|
)
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
-
|
|
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
Non-financial assets, such as property, equipment and leasehold improvements, goodwill, and intangible assets, are required to be measured at fair value only when an impairment loss is recognized. The Company recorded an impairment charge related to property during the three and nine months ended September 30, 2017, see
“Note 6 - Property, Equipment and Leasehold Improvements, Net”
for further information
.
There were no impairment charges recorded for the three and nine months ended September 30, 2016.
NOTE 12 – INCOME TAXES
For the three and nine months ended September 30, 2017 and 2016, the Company had no income tax expense (benefit).
The components of deferred income tax assets and (liabilities) consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred Income Tax Assets:
|
|
|
|
|
|
|
Warrants Expense
|
|
$
|
5,074,000
|
|
|
$
|
4,186,000
|
|
Derivatives Expense
|
|
|
5,172,000
|
|
|
|
4,067,000
|
|
Net Operating Losses
|
|
|
19,319,000
|
|
|
|
15,242,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,544,000
|
)
|
|
|
(1,334,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,021,000
|
|
|
|
22,161,000
|
|
Valuation Allowance
|
|
|
(28,021,000
|
)
|
|
|
(22,161,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax
|
|
$
|
-
|
|
|
$
|
-
|
|
For the three and nine months ended September 30, 2017 and 2016, certain of the Company’s subsidiaries 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.
Permanent differences include ordinary and necessary business expenses deemed by the Company as a non-allowable deduction under IRC Section 280E, and tax deductions related to equity compensation that are less than the compensation recognized for financial reporting.
As of September 30, 2017 and December 31, 2016, the Company had net operating loss carryforwards of $43,108,000 and $34,940,000, respectively, which, if unused, will expire beginning in the year 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under IRC Section 382, which will limit their utilization. The Company has yet to assess the effect of these limitations, but expects these losses to be substantially limited. Accordingly, the Company has placed a reserve against any assets associated with these losses.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. All tax years from 2013 to 2016 are subject to examination.
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 September 30, 2017. 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 September 30, 2017, a valuation allowance has been recorded against all 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.
NOTE 13 – EQUITY
Preferred Stock
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.
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 5.384325537 basis, into shares of the Company’s common stock.
On July 26, 2017, the Company filed a Certificate of Amendment to the Certificate of Designation of the Company’s Series B Preferred Stock (the “Amendment”) with the Secretary of State of the State of Nevada to provide for an adjustment of the Conversion Rate of the Company’s Series B Preferred Stock in the event of a reverse stock split or combination in the same ratio as the Company’s common stock. A copy of the Amendment was filed as Exhibit 3.14 to the Company’s Current Report on Form 8-K dated July 26, 2017.
During the nine months ended September 30, 2017, the Company issued 600,000 shares of Series B Preferred Stock for compensation in the amount of $1,035,406.
During the nine months ended September 30, 2017, the Company cancelled 4,279,841 shares of Series B Preferred Stock that had been previously issued and held in escrow in connection with the contingent consideration related to the Black Oak acquisition, see
“Note 10 – Contingent Consideration Liability”
for further information.
During the nine months ended September 30, 2017, holders of the Series B Preferred Stock converted 33,146,112 of their shares to 178,469,472 shares of common stock.
During the nine months ended September 30, 2016, the Company issued 400,000 shares of Series B Preferred Stock for compensation in the amount of $715,039.
During the nine months ended September 30, 2016, the Company issued 23,832,962 shares of Series B Preferred Stock for purchase of Black Oak acquisition and converted 150,000 shares of Series B Preferred Stock to 807,649 shares of common stock.
Common Stock
During the nine months ended September 30, 2017, senior secured convertible promissory notes and accrued interest in the amount of $12,321,309 were converted into 75,744,005 shares of common stock with a value of $18,156,952, see
“Note 9 – Notes Payable”
for further information.
During the nine months ended September 30, 2017, the Company issued 30,676,773 shares of common stock for cash in the amount of $6,700,000 pursuant to an equity financing facility with an accredited investor.
During the nine months ended September 30, 2017, the Company issued 1,215,909 shares of common stock for director fees in the amount of $221,973, issued 4,886,586 shares of common stock for services performed in the amount of $1,036,427 and issued 2,383,007 shares of common stock to employees for compensation in the amount of $490,880.
During the nine months ended September 30, 2017, the Company issued 13,394,464 shares of the Company’s common stock for prepaid inventory valued at $1,935,500, see
“Note 14 – Commitments”
for further information.
During the nine months ended September 30, 2017, the Company issued 12,391,571 shares of the Company’s common stock with a value of $2,726,146 to acquire all the assets of Tech Center Drive, see
“Note 4 – Acquisition”
for further information.
During the nine months ended September 30, 2017, the Company cancelled 9,291,744 shares of common stock that had been previously issued and held in escrow in connection with the contingent consideration related to the Black Oak acquisition, see
“Note 10 – Contingent Consideration Liability”
for further information.
During the nine months ended September 30, 2016, the Company issued 106,890,000 shares of common stock for purchase of Black Oak acquisition.
During the nine months ended September 30, 2016, senior secured convertible promissory notes and accrued interest in the amount of $961,740 were converted into 13,906,149 shares of common stock.
During the nine months ended September 30, 2016, the Company issued 25,715,674 shares of common stock for cash in the net amount of $3,208,134 pursuant to an equity financing facility with an accredited investor.
During the nine months ended September 30, 2016, the Company issued 350,000 shares of common stock for director fees in the amount of $60,550 and issued 70,000 shares of common stock for services performed in the amount of $20,727.
During the nine months ended September 30, 2016, the Company issued 172,414 shares of common stock for purchase of certain assets valued at $100,000.
During the nine months ended September 30, 2016, the Company issued 22,981,647 shares of common stock for the excise of warrants and received $3,150,000.
Stock-Based Compensation Expense
A summary of stock-based compensation for the three months ended September 30, 2017 and 2016 is as follows:
|
|
For the Three Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
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
|
|
|
1,980,769
|
|
|
$
|
234,580
|
|
|
|
–
|
|
|
$
|
47,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees (Common Stock)
|
|
|
747,227
|
|
|
|
170,148
|
|
|
|
–
|
|
|
|
–
|
|
Employees (Series B Preferred Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
715,039
|
|
Directors (Common Stock)
|
|
|
-
|
|
|
|
-
|
|
|
|
–
|
|
|
|
–
|
|
Non–Employee Consultants (Common Stock)
|
|
|
2,027,581
|
|
|
|
445,068
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock–Based Compensation
|
|
|
|
|
|
$
|
849,796
|
|
|
|
|
|
|
$
|
762,627
|
|
A summary of stock-based compensation for the nine months ended September 30, 2017 and 2016 is as follows:
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
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
|
|
|
10,230,769
|
|
|
$
|
439,599
|
|
|
|
6,700,000
|
|
|
$
|
142,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees (Common Stock)
|
|
|
2,383,007
|
|
|
|
490,880
|
|
|
|
–
|
|
|
|
–
|
|
Employees (Series B Preferred Stock)
|
|
|
600,000
|
|
|
|
1,035,406
|
|
|
|
400,000
|
|
|
|
715,039
|
|
Directors (Common Stock)
|
|
|
1,215,909
|
|
|
|
221,973
|
|
|
|
350,000
|
|
|
|
60,550
|
|
Non–Employee Consultants (Common Stock)
|
|
|
4,886,586
|
|
|
|
1,036,427
|
|
|
|
70,000
|
|
|
|
20,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock–Based Compensation
|
|
|
|
|
|
$
|
3,224,285
|
|
|
|
|
|
|
$
|
939,082
|
|
NOTE 14 – COMMITMENTS
Operating Lease Commitments
The Company leases certain business facilities under operating lease agreements that specify minimum rentals. Many of these have renewal provisions. The Company’s net rent expense for the three months ended September 30, 2017 and 2016 was $329,364 and $103,600, respectively, and for the nine months ended September 30, 2017 and 2016 was $956,431 and $535,559, respectively.
Production Operating Agreement
On May 23, 2017, the Company entered into a one-year operating agreement with Panther Gap Farms pursuant to which Panther Gap Farms will grow up to approximately one metric ton of the Company’s IVXX cannabis annually. The operating agreement is renewable for up to three additional terms of one year each. The agreement requires the Company to issue common stock, with a value of $1,150,000, upon execution of the agreement, which the Company issued in August 2017 and held in escrow. In addition to the common stock, the Company is required to issue common stock, with a value of $785,500, for the profit share of the cannabis ultimately sold by the Company upon execution of the agreement. Panther Gap Farms has the right to received up to $100,000 in cash in lieu of receiving the common stock related to the net profit share. If Panther Gap Farms requests such cash payment, the amount of common stock to be delivered will be reduced by an amount equal to the amount of such cash divided by the lower of the closing price or the 30 day VWAP of common stock on the date of the agreement. The shares to be received by Panther Gap Farms under the profit share agreement are dependent on the ultimate profit recognized by the Company when the cannabis product is sold.
The Company and Panther Gap Farms also entered into a lease agreement pursuant to which the Company leases the property on which the cannabis is grown. The lease agreement requires monthly payments of $30,000 for eight months and is also renewable for up to three additional terms of one year each.
NOTE 15 – SEGMENT INFORMATION
The Company’s operating and reportable segments are currently organized around the following products that it offers as part of its core business strategy:
|
·
|
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.
|
These two reportable segments, which are described in greater detail below, had previously been reported on a combined basis as they had been operated and evaluated as one operating segment. The Company experienced significant growth over the last few years in most of our product areas. As the Company has grown organically, and as the Company previously added to its capabilities through acquisitions, its products have increased in scale and become more strategically important and distinctly organized and managed under these two groupings. In addition, Derek Peterson, the Company’s Chief Operating Decision Maker (“CODM”), reviews results, manages and allocates resources between these two strategic business groupings, and budgets using these business segments. The Company’s CODM reviews revenues including intersegment revenues, gross profit and operating income (loss) before income taxes when evaluating segment performance and allocating resources to each segment. Accordingly, intersegment revenue is included in the segment revenues presented in the tables below and is eliminated from revenues and cost of goods sold in the “Eliminations and Other” column. The “Eliminations and Other” column also includes various income and expense items that the Company does not allocate to its operating segments. These income and expense amounts include the results of the Company’s hydroponic equipment, which are not material, interest income, interest expense, corporate overhead, and corporate-wide expense items such as legal and professional fees as well as expense items for which the Company has not identified a reasonable basis for allocation. The accounting policies of the reportable segments are the same as those described in
“Note 2 - Summary of Significant Accounting Policies”
of the notes to unaudited consolidated financial statements.
Herbs and Produce Products
Either independently or in conjunction with third parties, the Company is a wholesale seller of locally grown hydroponic herbs, produce, and floral products, which are distributed through major grocery stores throughout the East and Midwest regions of the U.S.
Cannabis Dispensary, Cultivation and Production
Either independently or in conjunction with third parties, the Company operates medical marijuana retail dispensaries, medical marijuana cultivation and production facilities in California and Nevada. The Company owns real property in Nevada on which the Company plans to build a medical marijuana grow facility. All of our retail dispensaries in California and Nevada offer a broad selection of medical cannabis products including flowers, concentrates and edibles. The Company also produces and sells a line of medical cannabis flowers, as well as a line of medical cannabis-extracted products, which include concentrates, cartridges, vape pens and wax products.
Summarized financial information concerning the Company’s reportable segments is shown in the following tables. Total assets at September 30, 2017 and 2016 exclude intercompany receivable balances eliminated in consolidation.
|
|
For the Three Months Ended September 30, 2017
|
|
|
|
Herbs
and
Produce
Products
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Eliminations
and
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
1,432,500
|
|
|
$
|
8,673,560
|
|
|
$
|
15,315
|
|
|
$
|
10,121,375
|
|
Cost of Goods Sold
|
|
|
1,192,251
|
|
|
|
6,594,186
|
|
|
|
-
|
|
|
|
7,786,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
240,249
|
|
|
|
2,079,374
|
|
|
|
15,315
|
|
|
|
2,334,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
874,141
|
|
|
|
2,822,488
|
|
|
|
2,541,481
|
|
|
|
6,238,110
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Loss from Operations
|
|
|
(633,892
|
)
|
|
|
(743,114
|
)
|
|
|
(2,526,166
|
)
|
|
|
(3,903,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(490,068
|
)
|
|
|
(490,068
|
)
|
Impairment of Property
|
|
|
-
|
|
|
|
-
|
|
|
|
(138,037
|
)
|
|
|
(138,037
|
)
|
Loss on Extinguishment of Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,373,538
|
)
|
|
|
(1,373,538
|
)
|
Loss on Fair Market Valuation of Derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,475,900
|
)
|
|
|
(1,475,900
|
)
|
Interest (Expense) Income
|
|
|
-
|
|
|
|
51
|
|
|
|
(119,701
|
)
|
|
|
(119,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
-
|
|
|
|
51
|
|
|
|
(3,597,244
|
)
|
|
|
(3,597,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(633,892
|
)
|
|
$
|
(743,063
|
)
|
|
$
|
(6,123,410
|
)
|
|
$
|
(7,500,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at September 30, 2017
|
|
$
|
6,914,892
|
|
|
$
|
68,290,922
|
|
|
$
|
12,151,701
|
|
|
$
|
87,357,515
|
|
|
|
For the Three Months Ended September 30, 2016
|
|
|
|
Herbs
and
Produce
Products
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Eliminations
and
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
2,138,260
|
|
|
$
|
4,769,912
|
|
|
$
|
42,193
|
|
|
$
|
6,950,365
|
|
Cost of Goods Sold
|
|
|
1,921,093
|
|
|
|
3,747,841
|
|
|
|
25,355
|
|
|
|
5,694,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
217,167
|
|
|
|
1,022,071
|
|
|
|
16,838
|
|
|
|
1,256,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
642,441
|
|
|
|
1,920,468
|
|
|
|
3,379,727
|
|
|
|
5,942,636
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Loss from Operations
|
|
|
(425,274
|
)
|
|
|
(898,397
|
)
|
|
|
(3,362,889
|
)
|
|
|
(4,686,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(610,089
|
)
|
|
|
(610,089
|
)
|
Loss from Derivatives Issued with Debt Greater than Debt Carrying Value
|
|
|
-
|
|
|
|
-
|
|
|
|
(867,000
|
)
|
|
|
(867,000
|
)
|
Gain on Fair Market Valuation of Derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
771,000
|
|
|
|
771,000
|
|
Interest Expense
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
(159,383
|
)
|
|
|
(159,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
-
|
|
|
|
(250
|
)
|
|
|
(865,472
|
)
|
|
|
(865,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(425,274
|
)
|
|
$
|
(898,647
|
)
|
|
$
|
(4,228,361
|
)
|
|
$
|
(5,552,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at September 30, 2016
|
|
$
|
6,725,967
|
|
|
$
|
2,390,233
|
|
|
$
|
60,849,033
|
|
|
$
|
69,965,233
|
|
|
|
For the Nine Months Ended September 30, 2017
|
|
|
|
Herbs
and
Produce
Products
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Eliminations
and
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
4,126,710
|
|
|
$
|
20,609,917
|
|
|
$
|
52,077
|
|
|
$
|
24,788,704
|
|
Cost of Goods Sold
|
|
|
3,487,795
|
|
|
|
17,100,535
|
|
|
|
-
|
|
|
|
20,588,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
638,915
|
|
|
|
3,509,382
|
|
|
|
52,077
|
|
|
|
4,200,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
2,389,203
|
|
|
|
7,659,968
|
|
|
|
8,604,526
|
|
|
|
18,653,697
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,750,288
|
)
|
|
|
(4,150,586
|
)
|
|
|
(8,552,449
|
)
|
|
|
(14,453,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,616,338
|
)
|
|
|
(1,616,338
|
)
|
Impairment of Property
|
|
|
-
|
|
|
|
-
|
|
|
|
(138,037
|
)
|
|
|
(138,037
|
)
|
Loss on Extinguishment of Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,052,133
|
)
|
|
|
(4,052,133
|
)
|
Gain on Fair Market Valuation of Derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
1,122,050
|
|
|
|
1,122,050
|
|
Interest (Expense) Income
|
|
|
-
|
|
|
|
51
|
|
|
|
(408,044
|
)
|
|
|
(407,993
|
)
|
Loss on Fair Market Valuation of Contingent Consideration
|
|
|
-
|
|
|
|
(4,426,047
|
)
|
|
|
-
|
|
|
|
(4,426,047
|
)
|
Gain on Settlement of Contingent Consideration
|
|
|
-
|
|
|
|
4,991,571
|
|
|
|
-
|
|
|
|
4,991,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
-
|
|
|
|
565,575
|
|
|
|
(5,092,502
|
)
|
|
|
(4,526,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(1,750,288
|
)
|
|
$
|
(3,585,011
|
)
|
|
$
|
(13,644,951
|
)
|
|
$
|
(18,980,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at September 30, 2017
|
|
$
|
6,914,892
|
|
|
$
|
68,290,922
|
|
|
$
|
12,151,701
|
|
|
$
|
87,357,515
|
|
|
|
For the Nine Months Ended September 30, 2016
|
|
|
|
Herbs
and
Produce
Products
|
|
|
Cannabis Dispensary, Cultivation and Production
|
|
|
Eliminations
and
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
9,413,121
|
|
|
$
|
8,669,092
|
|
|
$
|
116,228
|
|
|
$
|
18,198,441
|
|
Cost of Goods Sold
|
|
|
8,758,524
|
|
|
|
6,557,137
|
|
|
|
65,203
|
|
|
|
15,380,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
654,597
|
|
|
|
2,111,955
|
|
|
|
51,025
|
|
|
|
2,817,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
1,798,051
|
|
|
|
3,772,056
|
|
|
|
7,663,781
|
|
|
|
13,233,888
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,143,454
|
)
|
|
|
(1,660,101
|
)
|
|
|
(7,612,756
|
)
|
|
|
(10,416,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Debt Discount
|
|
|
-
|
|
|
|
-
|
|
|
|
(922,621
|
)
|
|
|
(922,621
|
)
|
Loss on Extinguishment of Debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(920,797
|
)
|
|
|
(920,797
|
)
|
Loss from Derivatives Issued with Debt Greater than Debt Carrying Value
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,355,000
|
)
|
|
|
(1,355,000
|
)
|
Loss on Fair Market Valuation of Derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(595,700
|
)
|
|
|
(595,700
|
)
|
Interest Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(276,193
|
)
|
|
|
(276,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,070,311
|
)
|
|
|
(4,070,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
$
|
(1,143,454
|
)
|
|
$
|
(1,660,101
|
)
|
|
$
|
(11,683,067
|
)
|
|
$
|
(14,486,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at September 30, 2016
|
|
$
|
6,725,967
|
|
|
$
|
2,390,233
|
|
|
$
|
60,849,033
|
|
|
$
|
69,965,233
|
|
NOTE 16 – 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 September 30, 2017, nor were there any asserted or unasserted material claims for which material losses are reasonably possible.
NOTE 17 – SUBSEQUENT EVENTS
Equity Financing Facility
Subsequent to September 30, 2017, the Company issued 6,942,184 shares of common stock for cash in the amount of $1,250,000 pursuant to an equity financing facility with an accredited investor.
Debt and Interest Converted into Equity
Subsequent to September 30, 2017, senior convertible promissory notes and accrued interest in the amount of $1,640,000 and $69,777, respectively, were converted into 11,527,292 shares of common stock.
Other Events
On October 26, 2017, the Company entered into a joint venture agreement with NuLeaf to build and operate a cultivation and production facility for our IVXX brand of cannabis products in Nevada. As part of the agreement the Company made a convertible loan of $4.5 million to NuLeaf bearing an interest rate of 6% per annum, payable quarterly. The convertible loan will automatically convert a 50% ownership in NuLeaf upon approval by the State of Nevada.
On November 6, 2017, Kenneth P. Krueger notified the Board of Directors (the “Board”) that he has resigned as a member of the Board, effective immediately.