UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from ___________ to ____________

 

Commission file number 000-54258

 

TERRA TECH CORP.

(Exact name of registrant as specified in its charter)

 

NEVADA

 

26-3062661

(State or other jurisdiction of

incorporation or organization) 

 

(I.R.S. Employer

Identification No.)

   

4700 Von Karman, Suite 110

Newport Beach, California 92660

(Address of principal executive offices)

(ZIP Code)

 

(855) 447-6967

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 

As of November 5, 2015, there were 285,383,674 shares of common stock outstanding, 100 shares of Series A Preferred Stock, convertible at any time into 100 shares of common stock, 16,300,000 shares of Series B Preferred Stock, convertible into 87,763,363 shares of common stock, and 33,026,008 shares of common stock issuable upon the exercise of all of our outstanding warrants.

 

 

TERRA TECH CORP.

Form 10-Q

 

INDEX

 

Index 

 

Page

 

 

 

 

 

Part I. Financial Information 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Consolidated Condensed Balance Sheets

 

3

 

 

Consolidated Condensed Statement of Operations

 

4

 

 

Consolidated Condensed Statement of Cash Flows

 

5

 

 

Notes to Consolidated Condensed Financial Statements

 

7

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

Company Overview

 

23

 

 

Results of Operations

 

25

 

 

Disclosure About Off-Balance Sheet Arrangements

 

27

 

 

Critical Accounting Estimates

 

27

 

 

Liquidity and Capital Resources

 

27

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

 

 

Part II. Other Information  

 

 

 

Item 1.

Legal Proceedings

 

30

 

Item 1A.

Risk Factors

 

30

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

Item 3.

Defaults Upon Senior Securities

 

30

 

Item 4.

Mine Safety Disclosures

 

30

 

Item 5.

Other Information

 

30

 

Item 6.

Exhibits

 

31

 

 

 

 

 

 

Signatures 

 

32

 

 

 
2
 

 

TERRA TECH CORP.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$1,367,636

 

 

$846,650

 

Accounts receivable, net

 

 

688,630

 

 

 

417,463

 

Prepaid expenses

 

 

83,273

 

 

 

82,200

 

Inventory

 

 

664,387

 

 

 

670,180

 

Total Current Assets

 

 

2,803,926

 

 

 

2,016,493

 

 

 

 

 

 

 

 

 

 

Property, equipment and leasehold improvements, net

 

 

5,587,501

 

 

 

5,446,743

 

Intangible assets, net

 

 

129,552

 

 

 

161,412

 

Deposits

 

 

117,650

 

 

 

94,578

 

Total Assets

 

$8,638,629

 

 

$7,719,226

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$1,237,046

 

 

$573,721

 

Derivative liability

 

 

735,500

 

 

 

1,253,000

 

Short-term debt

 

 

1,233,361

 

 

 

4,615,547

 

Total Current Liabilities

 

 

3,205,907

 

 

 

6,442,268

 

Long-term debt, net of unamortized debt discount

 

 

261,790

 

 

 

-

 

Total Liabilities

 

 

3,467,697

 

 

 

6,442,268

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitment and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, Convertible Series A, Par value $0.001; authorized and issued 100 shares as of September 30, 2015 and December 31, 2014, respectively

 

 

-

 

 

 

-

 

 

 

 

 

 

 

Preferred stock, Convertible Series B, Par value $0.001; authorized 24,999,900 shares; issued and outstanding 16,300,000 and 15,500,000 shares as of September 30, 2015 and December 31, 2014, respectively

 

 

16,300 

 

 

 

15,500 

 

 

 

 

 

 

 

 

 

 

Common stock, Par value $0.001; authorized 350,000,000 shares; issued 269,637,561 and 197,532,892 shares as of September 30, 2015 and December 31, 2014, respectively

 

 

269,638

 

 

 

197,533 

 

Additional paid-in capital

 

 

48,838,543

 

 

 

38,081,784

 

Accumulated Deficit

 

 

(43,517,786)

 

 

(36,726,529)

Total Terra Tech Corp. stockholders' equity

 

 

5,606,695

 

 

 

1,568,288

 

Non-controlling interest

 

 

(435,763)

 

 

(291,330)

Total Stockholders' Equity

 

 

5,170,932

 

 

 

1,276,958

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$8,638,629

 

 

$7,719,226

 

 

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

 

 
3
 

 

TERRA TECH CORP.

CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

(Unaudited)

 

 

   

Three Months Ended

Nine Months Ended

 

    

September 30,

  September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

$2,018,351

 

 

$1,314,973

 

 

$7,805,994

 

 

$5,587,093

 

Cost of Goods Sold

 

 

1,648,545

 

 

 

1,251,035

 

 

 

6,944,859

 

 

 

5,620,702

 

 

 

 

369,806

 

 

 

63,938

 

 

 

861,135

 

 

 

(33,609)

Selling, general and administrative expenses

 

 

2,099,314

 

 

 

8,035,171

 

 

 

7,792,445

 

 

 

14,131,053

 

Loss from operations

 

 

(1,729,508)

 

 

(7,971,233)

 

 

(6,931,310)

 

 

(14,164,662)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

(258,306)

 

 

-

 

 

 

(524,161)

 

 

-

 

Loss on extinguishment of debt

 

 

(263,950)

 

 

-

 

 

 

(263,950)

 

 

-

 

Loss from derivatives issued with debt greater than debt carrying value

 

 

 -

 

 

 

 (2,248,000

)

 

 

(561,000

 

 

(4,808,000

Gain (Loss) on fair market valuation of derivatives

 

 

372,400

 

 

 

1,085,505

 

 

 

1,779,600

 

 

 

817,680

 

Interest Expense

 

 

(108,563)

 

 

(387,720)

 

 

(426,793)

 

 

(838,033)

Total Other Income (Expense)

 

 

(258,419)

 

 

(1,550,215)

 

 

3,696

 

 

 

(4,828,353)

Loss before Provision of Income Taxes

 

 

(1,987,927)

 

 

(9,521,448)

 

 

(6,927,614)

 

 

(18,993,015)

Provision for income taxes

 

 

3,000

 

 

 

-

 

 

 

8,076

 

 

 

-

 

Net Loss

 

 

(1,990,927)

 

 

(9,521,448)

 

 

(6,935,690)

 

 

(18,993,015)

Net Loss attributable to non-controlling interest

 

 

32,760

 

 

 

-

 

 

 

144,433

 

 

 

-

 

Net Loss attributable to Terra Tech Corp.

 

$(1,958,167)

 

$(9,521,448)

 

$(6,791,257)

 

$(18,993,015)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss per Common Share attributable to Terra Tech Corp. common stockholders - Basic and Dilutes

 

$

(0.01

 

$

(0.05

 

$

(0.03

)

 

$

(0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding - Basic and Diluted

 

 

252,220,146

 

 

 

181,233,509

 

 

 

224,483,147

 

 

 

168,742,609

 

 

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

 

 
4
 

 

TERRA TECH CORP.

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

For the Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Loss

 

$(6,791,257)

 

$(18,993,015)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

(Gain) loss on fair market valuation of derivatives

 

 

(1,779,600)

 

 

(817,680)

Loss on extinguishment of debt

 

 

263,950

 

 

 

-

 

Amortization of debt discount

 

 

524,161

 

 

 

-

 

Depreciation and amortization

 

 

481,321

 

 

 

310,473

 

Warrants issued with common stock and debt

 

 

1,148,069

 

 

 

5,038,986

 

Stock issued for interest expense

 

 

-

 

 

 

284,101

 

Stock issued for compensation

 

 

680,630

 

 

 

1,657,860

 

Stock issued for services

 

 

656,186

 

 

 

2,900,368

 

Equity instruments issued with debt greater than debt carrying amount

 

 

561,000

 

 

 

4,808,000

 

Change in accounts receivable reserve

 

 

169,683

 

 

 

(1,391)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(440,850)

 

 

(149,538)

Prepaid expenses

 

 

(1,073)

 

 

(85,924)

Inventory

 

 

5,793

 

 

 

(91,271)

Note receivable

 

 

-

 

 

 

173,754

 

Deposits

 

 

(23,072)

 

 

(152,547)

Accounts payable

 

 

1,138,463

 

 

 

(749,479)

Net cash used in operations

 

 

(3,406,596)

 

 

(5,867,303)
 

 

 

 

 

 

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(590,219)

 

 

(1,989,237)

Purchase of intangible assets - domain names

 

 

-

 

 

 

(11,500)

Net cash used in investing activities

 

 

(590,219)

 

 

(2,000,737)
 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of notes payable

 

 

1,650,000

 

 

 

7,344,737

 

Proceeds from issuance of notes payable to related parties

 

 

-

 

 

 

27,500

 

Payments on notes payable

 

 

-

 

 

 

(300,000)

Payments on notes payable to related parties

 

 

-

 

 

 

(130,000)

Proceeds from issuance of common stock and warrants and common stock subscribed

 

 

3,012,234

 

 

 

4,014,919

 

Proceeds from issuance of common stock from the exercise of warrants

 

 

-

 

 

 

293,420

 

Short swing profit payment

 

 

-

 

 

 

67,100

 

Payments by subsidiaries for non-controlling interest

 

 

(144,433)

 

 

-

 

Net cash provided by financing activities

 

 

4,517,801

 

 

 

11,317,676

 

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

520,986

 

 

 

3,449,636

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

846,650

 

 

 

26,943

 

CASH AND CASH EQUIVALENTS, end of period

 

$1,367,636

 

 

$3,476,579

 

 

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

 

 
5
 

 

TERRA TECH CORP.

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS

(Unaudited)

 

 

For the Nine Months Ended

September 30,

 

 

2015

 

 

2014

 

SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$-

 

 

$285,371

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE FOR FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant expense

 

$1,148,069

 

 

$5,038,986

 

 

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

 

 
6
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

We were incorporated in Nevada on July 22, 2008, under the name Private Secretary, Inc. Our original business was developing a software program that would allow for automatic call processing through voice-over-Internet protocol, or "VoIP", technology. Our operations were limited to capital formation, organization, and development of our business plan and target customer market. We generated no revenue.

 

We changed our name to Terra Tech Corp. on January 27, 2012. Through our wholly-owned subsidiary, GrowOp Technology Ltd., a Nevada corporation ("GrowOp Technology"), we engage in the design, marketing, and sale of hydroponic equipment with proprietary technology to create sustainable solutions for the cultivation of indoor agriculture. We are also a wholesale seller of locally grown hydroponic produce through our wholly-owned subsidiary, Edible Garden Corp., a Nevada corporation ("Edible Garden"). 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 we own interests, we plan to operate medical marijuana cultivation, production, and dispensary facilities in Nevada. Through IVXX, LLC, a Nevada limited liability company ("IVXX"), our wholly-owned subsidiary, we produce and sell a line of cannabis flowers and cigarettes, as well as a line of cannabis pure concentrates. Most recently, we formed another subsidiary, MediFarm I Real Estate, LLC, a Nevada limited liability company ("MediFarm I RE"), which will own the real property on which a medical marijuana dispensary will be constructed. We anticipate that the dispensary will be operated by MediFarm I.

 

On February 9, 2012, we completed a reverse-triangular merger with GrowOp Technology, whereby we acquired all of the issued and outstanding shares of GrowOp Technology and in exchange we issued: (i) 33,998,520 shares of our common stock, (ii) 100 shares of Series A Preferred Stock, convertible into shares of common stock on a one-for-one basis, and (iii) 14,750,000 shares of Series B Preferred Stock, with each share convertible into 5.38425537 shares of common stock. The issuance represented approximately 50.3% of our total shares of common stock outstanding, assuming the conversion of all the shares of Series A Preferred Stock and Series B Preferred Stock, immediately following the closing of the merger. As a result of the merger, GrowOp Technology became our wholly-owned subsidiary. Following the merger, Terra Tech ceased its prior operations and is now solely a holding company.

 

We acquired our second wholly-owned subsidiary, Edible Garden, in 2013. Edible Garden is a wholesale seller of locally grown hydroponic produce, which is distributed throughout the Midwest and the Northeast United States. We entered into a Share Exchange Agreement, dated March 23, 2013 (the "Share Exchange Agreement"), by and among the Company, Edible Garden,and the stockholders of Edible Garden. Pursuant to the Share Exchange Agreement, we offered and sold 1,250,000 shares of our common stock in consideration for all the issued and outstanding shares in Edible Garden. Separately, Amy Almsteier, one of our stockholders and a director (and, at that time, an executive officer) of ours, offered and sold 7,650,000 shares of Series B Preferred Stock to Ken Vande Vrede, Mike Vande Vrede, Steve Vande Vrede, Dan Vande Vrede, Beverly Willekes, and David Vande Vrede (collectively, the "Former EG Principal Stockholders"). The 7,650,000 shares of Series B Preferred Stock are convertible at any time into 36,344,198 shares of common stock and have voting power equal to 765,000,000 shares of common stock.

 

 
7
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

The effect of the issuance of the 1,250,000 shares of common stock and the sale of the 7,650,000 shares of Series B Preferred Stock by Ms. Almsteier was that the Former EG Principal Stockholders held approximately 25.7% of our issued and outstanding shares of common stock and approximately 43.3% of our voting power of as of March 23, 2013. Articles of Exchange, consummating the share exchange, were filed with the Secretary of the State of Nevada on April 24, 2013.

 

On March 19, 2014, we formed MediFarm, a subsidiary. On July 18, 2014, we formed MediFarm I, a subsidiary. On July 30, 2014, we formed MediFarm II, a subsidiary. Through MediFarm, MediFarm I, and MediFarm II, we plan to operate medical marijuana cultivation, production, and dispensary facilities establishments in Nevada.

 

On September 16, 2014, we formed IVXX for the purpose of producing a line of cannabis flowers and cigarettes, as well as a complete line of cannabis pure concentrates including: oils, waxes, shatters, and clears. We began producing and selling IVXX's products during the first quarter of fiscal 2015. We currently offer these products to 100 select dispensaries in California. We are using our supercritical CO2 extraction lab located in Oakland, California to manufacture these products. IVXX sells clothing, apparel, and other various branded products.

 

On October 14, 2015, we formed MediFarm I RE. MediFarm I RE is a real estate holding company that owns the real property and building at which a medical marijuana dispensary facility will be located. It is our intention that MediFarm I will operate the medical marijuana dispensary. We own 50% of the membership interests in MediFarm I RE. The remaining membership interests are owned by Forever Young Investments, LLC (50%), an otherwise unaffiliated entity.

 

The accompanying unaudited consolidated condensed financial statements include all of the accounts of Terra Tech. These consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for financial information and with the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

Use of Estimates

 

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

Cash and all highly liquid investments with a maturity of three months or less from the date of purchase, including money market mutual funds, short-term time deposits, and government agency and corporate obligations, are classified as cash and cash equivalents.

 

Accounts Receivable

 

We review all outstanding accounts receivable for collectability on a quarterly basis. An allowance for doubtful accounts is recorded for any amounts deemed uncollectable. We do not accrue interest receivable on past due accounts receivable. There was an allowance of $184,642 at September 30, 2015 and $49,168 at December 31, 2014.

 

 
8
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets: 3-15 years for machinery and equipment, leasehold improvements are amortized over the estimated useful life. Repairs and maintenance expenditures which do not extend the useful lives of related assets are expensed as incurred.

 

Intangibles

 

Intangible assets with definite lives are amortized, but are tested for impairment quarterly and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. We test intangibles for impairment by first comparing the carrying value of net assets to the fair value of the related operations. If the fair value is determined to be less than the carrying value, a second step is performed to compute the amount of the impairment. In this process, a fair value for intangibles is estimated, based in part on the fair value of the operations, and is compared to its carrying value. The shortfall of the fair value below the carrying value represents the amount of intangible impairment. We test these intangibles for impairment by comparing their carrying value to current projections of discounted cash flows attributable to the customer list. Any excess carrying value over the amount of discounted cash flows represents the amount of the impairment.

 

Deposits

 

Deposits are for stores and land in Nevada.

 

Revenue Recognition

 

Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, we have no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping.

 

Cost of Goods Sold

 

Cost of goods sold are for the plants grown and purchased and sold into the retail marketplace by Edible Garden. It also includes the cost incurred in producing the oils, waxes, shatters, and clears sold by IVXX.

 

Research and Development

 

Research and development costs are expensed as incurred.

 

 
9
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Income Taxes

 

We provide for income taxes based on enacted tax law and statutory tax rates at which items of income and expenses 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. We have incurred net operating losses for financial-reporting and tax-reporting purposes. Accordingly, for Federal and state income tax purposes, the benefit for income taxes has been offset entirely by a valuation allowance against the related Federal and state deferred tax asset for the nine months ended September 30, 2015.

 

Loss Per Common Share

 

Net loss per share is computed in accordance with the provisions of ASC 260, "Earnings Per Share" by dividing net loss by the weighted average number of 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 income (loss) per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the nine months ended September 30, 2015; therefore, the basic and diluted weighted average shares of common stock outstanding were the same.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

 
10
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

 

Our valuation techniques used to measure the fair value of money market funds and certain marketable equity securities were derived from quoted prices in active markets for identical assets or liabilities. The valuation techniques used to measure the fair value of all other financial instruments, all of which have counterparties with high credit ratings, were valued based on quoted market prices or model driven valuations using significant inputs derived from or corroborated by observable market data.

 

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

 

Management does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position, or cash flow.

 

2. GOING CONCERN

 

Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities, and upon additional financing. Management believes they can raise the appropriate funds needed to support their business plan and develop an operating company which is cash flow positive.

 

However, we have incurred net losses for the nine months ended September 30, 2015, and have an accumulated deficit of approximately $43.5 million at September 30, 2015. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations. These factors raise substantial doubt about our ability to continue as a going concern.

 

The condensed financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should we be unable to continue as a going concern.

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

We maintain cash balances in several financial institutions which are insured by the Federal Deposit Insurance Corporation up to certain federal limitations.

 

We provide credit in the normal course of business to customers located throughout the U.S. We perform ongoing credit evaluations of our customers and maintain allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information.

 

 
11
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

4. SHARE EXCHANGE

 

On March 23, 2013, we entered into the Share Exchange Agreement pursuant to which Edible Garden's stockholders exchanged common stock of Edible Garden for our common stock. Pursuant to the Share Exchange Agreement, we offered and sold 1,250,000 shares of our common stock, valued at $212,500, in consideration for all the issued and outstanding shares in Edible Garden. We also acquired Edible Garden's customer list.

 

The transaction was accounted for as a business acquisition. In accordance with generally accepted accounting principles, intangible assets are recorded at fair values as of the date of the transaction. We preliminarily allocated the $212,500 consideration paid for the acquired assets as follows:

 

Cash

 

 

100

 

Intangible assets, customer list

 

 

212,400

 

Fair value acquired

 

$212,500

 

 

Intangible assets with estimated useful lives are amortized over a five-year period. Amortization expense was approximately $21,240 for the nine months ended September 30, 2015.

 

5. REVERSE MERGER

 

On February 9, 2012, we completed a reverse merger transaction through a merger with GrowOp Technology, whereby we acquired all of the issued and outstanding shares of GrowOp Technology and in exchange we issued: (i) 33,998,520 shares of our common stock, (ii) 100 shares of Series A Preferred Stock, convertible into shares of common stock on a one-for-one basis, and (iii) 14,750,000 shares of Series B Preferred Stock, with each share convertible into 5.38425537 shares of common stock. As a result of the reverse merger, GrowOp Technology became our wholly-owned subsidiary and, at the time the transaction was closed, the former stockholders of GrowOp Technology became our controlling stockholders. The share exchange transaction with GrowOp Technology was treated as a reverse acquisition, with GrowOp Technology as the accounting acquiror and the Company as the accounting acquiree.

 

Purchase Accounting

 

The acquisition was accounted for using the purchase method of accounting as a reverse acquisition. In a reverse acquisition, the post-acquisition net assets of the surviving combined company include the historical cost basis of the net assets of the accounting acquirer, GrowOp Technologies, plus the fair value of the net assets of the accounting acquiree, Terra Tech. Further, under the purchase method, the purchase price is allocated to the assets acquired and liabilities assumed based on their estimated fair values and the excess of the purchase price over the estimated fair value of the identifiable net assets is allocated to any intangible assets with the remaining excess purchase price over net assets acquired allocated to goodwill.

 

 
12
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

5. REVERSE MERGER, Continued

 

The fair value of the consideration transferred in the acquisition was $4,800,000 and was calculated as the number of shares of common stock that GrowOp Technologies would have had to issue in order for Terra Tech stockholders to hold a 58.6% equity interest in the combined company post-acquisition, multiplied by the estimated fair value of our common stock on the acquisition date. The estimated fair value of our common stock was based on the offering price of the common stock sold in a private placement of share subscriptions which was completed most recently prior to the merger. This price was determined to be the best indication of fair value on that date since the price was based on an arm's length negotiation with a group consisting of both new and existing investors that had been advised of the pending acquisition and assumed similar liquidity risk as those investors holding the majority of shares being valued as purchase consideration.

 

The following table summarizes our determination of fair values of the assets acquired and the liabilities as of the date of acquisition.

 

Consideration - issuance of securities

 

$4,800,000

 

Cash

 

$35

 

Goodwill

 

 

4,799,965

 

 

 

 

 

 

Total purchase price

 

$4,800,000

 

 

We performed an impairment test related to goodwill as of the date of the merger and it was determined that goodwill was impaired. At that time, we recorded a charge to operations for the amount of the impairment, which totaled $4,799,965.

 

6. INVENTORY

 

Inventory consists of raw materials for Edible Garden's herb product lines and IVXX's line of cannabis pure concentrates. Work-In-Progress consists of live plants grown for Edible Garden's herb product line. Cost of goods sold is calculated using the average costing method. We review our inventory periodically to determine net realizable value. We write down inventory, if required, based on forecasted demand. These factors are impacted by market and economic conditions, new products introductions, and require estimates that may include uncertain elements. Inventory at September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Raw Materials

 

$388,869

 

 

$479,682

 

Work-In-Progress

 

 

275,518

 

 

 

190,498

 

 

 

$664,387

 

 

$670,180

 

 

 
13
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

7. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Property, equipment and leasehold improvements at cost, less accumulated depreciation, at September 30, 2015 and December 31, 2014 consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Land

 

$344,124

 

 

$-

 

Furniture

 

 

85,789

 

 

 

53,790

 

Equipment

 

 

2,440,140

 

 

 

2,367,605

 

Leasehold improvements

 

 

3,609,803

 

 

 

3,468,243

 

Subtotal

 

 

6,479,856

 

 

 

5,889,638

 

Less accumulated depreciation

 

 

(892,355)

 

 

(442,895)

Total

 

$5,587,501

 

 

$5,446,743

 

 

Depreciation expense related to property and equipment for the nine months ended September 30, 2015 was $449,461 and for the year ended December 31, 2014 was $392,883.

 

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Accounts payable

 

$965,832

 

 

$240,204

 

Accrued interest

 

 

208,615

 

 

 

270,918

 

Accrued payroll taxes

 

 

62,599

 

 

 

62,599

 

 

 

$1,237,046

 

 

$573,721

 

 

 
14
 

 

TERRA TECH CORP. 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

9. NOTES PAYABLE

 

Notes payable are as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Unsecured promissory demand note dated May 7, 2012, issued to an accredited investor, bearing interest at a rate of 4% per annum. Holder may elect to convert into common stock at $0.75 per share.

 

 

5,000

 

 

 

5,000

 

 

 

 

 

 

 

 

 

 

Promissory note dated July 25, 2014, issued to an accredited investor, maturing July 24, 2015, bearing interest at a rate of 12% per annum. Principal and interest may be converted into common stock based on the average trading price of the ten days prior to maturity at the holder's option.

 

 

150,000

 

 

 

150,000

 

 

 

 

 

 

 

 

 

 

Unsecured promissory demand notes, issued to an accredited investor, bearing interest at a rate of 4% per annum. Holder may elect to convert into common stock at $0.75 per share.

 

 

109,306

 

 

 

109,306

 

 

 

 

 

 

 

 

 

 

5% Original issue discount senior secured convertible promissory note dated March 5, 2014, issued to accredited investors, maturing September 5, 2015, bearing interest at a rate of 12% per annum. The fixed conversion price in effect was set at 90% of the 20-day VWAP of our common stock on February 5, 2014, or $0.30753 per share.

 

 

-

 

 

 

248,902

 

 

5% Original issue discount senior secured convertible promissory note dated May 5, 2014, issued to accredited investors, maturing November 5, 2015, bearing interest at a rate of 12% per annum. The fixed conversion price in effect was set at 90% of the 20-day VWAP of our common stock on February 5, 2014, or $0.30753 per share.

 

 

96,491

 

 

 

482,456

 

 

 

 

 

 

 

 

 

 

5% Original issue discount senior secured convertible promissory note dated June 5, 2014, issued to accredited investors, bearing interest at a rate of 12% per annum. The fixed conversion price in effect was set at 90% of the 20-day VWAP of our common stock on February 5, 2014, or $0.30753 per share.

 

 

-

 

 

 

146,197

 

 

 
15
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

9. NOTE PAYABLE, Continued

   

5% Original issue discount senior secured convertible promissory note dated July 1, 2014, issued to accredited investors, bearing interest at a rate of 12% per annum. The fixed conversion price in effect was set at 90% of the 20-day VWAP of our common stock on February 5, 2014, or $0.30753 per share.

 

 

-

 

 

 

578,947

 

 

 

 

 

 

 

 

 

 

5% Original issue discount senior secured convertible promissory note dated July 31, 2014, issued to accredited investors, maturing February 1, 2016, bearing interest at a rate of 12% per annum. The fixed conversion price in effect was set at 90% of the 20-day VWAP of our common stock on February 5, 2014, or $0.30753 per share.

 

 

741,698

 

 

 

2,894,739

 

 

 

 

 

 

 

 

 

 

Convertible promissory note dated February 27, 2015, issued to accredited investors, maturing August 27, 2016, bearing interest at a rate of 12% per annum. The conversion price in effect is $0.1677, subject to adjustment.

 

 

130,866

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible promissory note dated April 7, 2015, issued to accredited investors, maturing October 7, 2016, bearing interest at a rate of 12% per annum. The conversion price in effect is $0.1303, subject to adjustment.

 

 

144,263

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Convertible promissory note dated May 13, 2015, issued to accredited investors, maturing November 13, 2016, bearing interest at a rate of 12% per annum. The conversion price in effect is $0.1211, subject to adjustment.

 

 

117,527

 

 

 

-

 

Total Debt

 

 

1,495,151

 

 

 

4,615,547

 

 

 

 

 

 

 

 

 

 

Less short-term portion

 

 

1,233,361

 

 

 

4,615,547

 

 

 

 

 

 

 

 

 

 

Long-term portion

 

$261,790

 

 

$-

 

 

Total debt as of September 30, 2015 and December 31, 2014, was $1,495,151 and $4,615,547, respectively, which included unamortized debt discount of $810,916 and $0, respectively. The senior secured promissory notes are secured by shares of common stock. There was accrued interest of $208,615 as of September 30, 2015.

 

On February 27, 2015, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain purchasers (the "Purchasers") relating to the issuance and sale (the "Offering") of (i) 12% Convertible Promissory Notes (the "Notes") in the aggregate principal amount of Three Million Dollars ($3,000,000), that are convertible into shares (the "Conversion Shares") of our common stock, par value $0.001 per share, and (ii) warrants (the "Warrants") to acquire shares (the "Warrant Shares") of our common stock pursuant to the terms of the Purchase Agreement. The purchase of the Notes is expected to occur in nine (6) tranches (each, a "Tranche", and, collectively, the "Tranches"), with the first Tranche of $750,000 closing simultaneously with the execution of the Purchase Agreement. Each additional Tranche is expected to be in the amount of $450,000 and, as long as we are not in default of the Notes, each Tranche is expected to close on every 30th day following the previous closing date; however, the closing of the third through sixth Tranches is subject to the mutual agreement of the parties. The second tranche of $450,000 closed on April 6, 2015. The third tranche of $450,000 closed on May 12, 2015.

 

The Purchase Agreement contains customary representations, warranties, and covenants by, among, and for the benefit of the parties. The Purchasers were granted customary participation rights in future financings. The Purchase Agreement also limits our ability to engage in subsequent equity sales for a certain period of time.

 

 
16
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

9. NOTE PAYABLE, Continued

 

The proceeds from the Offering are intended to be used for general corporate proceeds and cannot be used: (i) for the satisfaction of any portion of our debt (other than payment of trade payables in the ordinary course of our business and prior practices), (ii) for the redemption of our common stock or common stock equivalents, (iii) for the settlement of any outstanding litigation, or (iv) in violation of the Foreign Corrupt Practices Act or the Office of Foreign Assets Control.

 

The Offering is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(a)(2) of the Securities Act (in that the Notes, the Conversion Shares, the Warrants, and the Warrant Shares were sold by us in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. The Notes, the Conversion Shares, the Warrants, and the Warrant Shares are restricted securities that have not been registered under the Securities Act, and will not be registered under the Securities Act, and may not be offered or sold absent registration or applicable exemption from the registration requirements.

 

10. FAIR VALUE MEASUREMENTS

 

The following table represents the fair value hierarchy for those financial assets measured at fair value on a recurring basis:

 

 

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

Fair Value Measurement Using

 

 

 

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability - Conversion Feature

 

$735,500

 

 

 

-

 

 

 

-

 

 

$735,500

 

 

 

$735,500

 

 

 

-

 

 

 

-

 

 

$735,500

 

 

 

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

Fair Value Measurement Using

 

 

 

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability - Conversion Feature

 

$1,253,000

 

 

 

-

 

 

 

-

 

 

$1,253,000

 

 

 

$1,253,000

 

 

 

-

 

 

 

-

 

 

$1,253,000

 

 

Liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

Balance at December 31, 2014

 

$1,253,000

 

Change in fair market value of Conversion Feature

 

 

(1,779,600)

Issuance of equity instruments with debt greater than debt carrying amount

 

 

561,000

 

Derivative debt converted into equity

 

 

(897,900)

Issuance of equity instruments with derivatives

 

 

1,599,000

 

Balance at September 30, 2015

 

$735,500

 

 

 
17
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

11. DEFERRED TAX EXPENSE

 

The Company incurred no current or deferred tax expense for period ended September 30, 2015 and the year ended December 31, 2014.

  

The components of deferred tax assets and liabilities are as follows:

 

 

 

September 30,
2015

 

 

December 31,
2014

 

Deferred income tax assets:

 

 

 

 

 

 

Allowance for bad debt

 

$81,000

 

 

$21,000

 

Warrants expense

 

 

3,256,000

 

 

 

2,216,000

 

Derivatives expense

 

 

738,000

 

 

 

1,274,000

 

Net operating losses

 

 

4,454,000

 

 

 

3,227,000

 

 

 

 

8,529,000

 

 

 

6,738,000

 

Deferred income tax liabilities:

 

 

 

 

 

 

 

 

Depreciation

 

 

 (105,000

 

 

 -

 

 

 

 

 

 

 

 

 

 

Total

 

 

 8,424,000

 

 

 

 6,738,000

 

Valuation allowance

 

 

(8,424,000)

 

 

(6,738,000)
 

 

 

 

 

 

 

 

 

Net deferred tax assets

 

$-

 

 

$-

 

 

Permanent differences include ordinary and necessary business expenses deemed by the Company as a non-allowable deduction under IRC § 280E, and tax deductions related to equity compensation that are less than the compensation recognized for financial reporting.

 

As of September 30, 2015, and December 31, 2014, the Company has net operating loss carryforwards of approximately $12,276,000 and $8,900,000, respectively, which, if unused, will expire beginning in years 2034. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under Internal Revenue Code Section 382, which will limit their utilization. The Company has yet to assess the effect of these limitations and accordingly has placed a reserve against any assets associated with these losses.

 

Pursuant to IRC § 280E, the Company is allowed to only to deduct expenses directly related to sales of product. The Company has allocated accelerated depreciation related to production equipment, which results in a difference in the cost of sales for financial reporting and tax reporting taxable income. As a result the Company had no taxable income for the period ended September 30, 2015.

 

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, 2015. 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, a valuation allowance of approximately $8,529,000 has been recorded to against all deferred tax assets as these assets are more likely than not to be realized. 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 grow.

  

12. CAPITAL STOCK

 

Preferred Stock

 

We have authorized 25 million shares of preferred stock with $0.001 par value, of which there were 100 shares of Series A Preferred Stock outstanding as of September 30, 2015. Series A Preferred Stock is convertible on a one-for-one basis into common stock and has all of the voting rights of our common stock.

 

There were 16,300,000 shares of Series B Preferred Stock outstanding as of September 30, 2015. Each share of Series B Preferred Stock: (i) has voting rights equal to 100 shares of common stock, and (ii) is convertible, at the option of the holder, on a 1-for-5.384325537 basis, into shares of our common stock.

 

Common Stock

 

We have authorized 350 million shares of common stock, $0.001 par value per share. As of September 30, 2015, 269,637,561 shares of common stock were issued and outstanding.

 

 
18
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

13. WARRANTS

 

We have the following shares of common stock reserved for exercise of the warrants outstanding as of September 30, 2015:

 

 

 

September 30, 2015

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

 

 

 

Exercise

 

 

 

Shares

 

 

Price

 

Warrants outstanding – beginning of year

 

 

20,709,845

 

 

$0.23

 

Warrants exercised

 

 

-

 

 

 

0.00

 

Warrants granted

 

 

17,856,563

 

 

 

0.20

 

Warrants expired

 

 

(6,140,400)

 

 

(0.33)
 

 

 

 

 

 

 

 

 

Warrants outstanding – end of period

 

 

32,426,008

 

 

$0.18

 

 

The weighted exercise price and weighted fair value of the warrants granted by us as of September 30, 2015, are as follows:

 

 

 

September 30, 2015

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Weighted

 

 

 

Exercise

 

 

Average

 

 

 

Price

 

 

Fair Value

 

Weighted average of warrants granted during the nine months whose exercise price exceeded fair market value at the date of grant

 

$0.20

 

 

$0.20

 

 

The following table summarizes information about fixed-price warrants outstanding:

 

Number

 

 

Average

 

 

 

 

 

 

Range of

 

 

Outstanding at

 

 

Remaining

 

Weighted

 

Exercise

 

 

September 30,

 

 

Contractual

 

Average

 

Prices

 

 

2015

 

 

Life

 

Exercise Price

 

$0.46

 

 

 

150,000

 

 

4 Months

 

$0.46

 

$0.85

 

 

 

40,000

 

 

7 Months

 

$0.85

 

$0.40

 

 

 

333,333

 

 

11 Months

 

$0.40

 

$0.33

 

 

 

439,637

 

 

16 Months

 

$0.33

 

$0.16

 

 

 

750,000

 

 

18 Months

 

$0.16

 

$0.21

 

 

 

14,946,119

 

 

33 Months

 

$0.21

 

$0.30

 

 

 

964,912

 

 

34 Months

 

$0.30

 

$0.30

 

 

 

4,824,561

 

 

35 Months

 

$0.30

 

$0.06

 

 

 

7,067,002

 

 

37 Months

 

$0.06

 

$0.16

 

 

 

1,118,068

 

 

41 Months

 

$0.16

 

$0.13

 

 

 

863,392

 

 

43 Months

 

$0.13

 

$0.12

 

 

 

928,984

 

 

44 Months

 

$0.12

 

 

 

 

 

 

32,426,008

 

 

 

 

 

 

 

 

For the warrants issued in June 2015, the Company valued the warrants utilizing the Black Scholes method with the following inputs: stock price $0.11, exercise price of $0.20625, volatility of 142.53%, years 3, treasury bond rate 2.5% and dividend rate of 0%.

 

 
19
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

14. OPERATING LEASE COMMITMENTS

 

We lease certain business facilities under operating lease agreements which specify minimum rentals. Many of these have renewal provisions along with the option to acquire the property. Our net rent expense for the nine months ended September 30, 2015 and 2014 was $379,166 and $100,400, respectively. Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:

 

 

 

Scheduled

 

Year Ending December 31:

 

Payments

 

2015

 

$539,705

 

2016

 

 

541,656

 

2017

 

 

487,517

 

2018

 

 

478,587

 

2019

 

 

342,336

 

2020 and thereafter

 

 

2,277,656

 

Total minimum rental payments

 

$4,667,457

 

 

15. LITIGATION AND CLAIMS

 

We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. We review any such legal proceedings and claims on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. To estimate whether a loss contingency should be accrued by a charge to income, we evaluate, 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. We do 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, we determined that there were no matters that required an accrual as of September 30, 2015, nor were there any asserted or unasserted claims for which material losses are reasonably possible.

 

16. SEGMENT INFORMATION

 

Our operating and reportable segments are currently organized around the following products that we offer as part of our core business strategy:

 

 

·

Hydroponic Produce

 

 

 

 

·

Cannabis Products

 

These two reportable segments, described in greater detail below, had previously been reported on a combined basis as they had been operated and evaluated as one operating segment. We experienced significant growth over the last year in most of our product areas. As we have grown organically, and as we have added to our capabilities through acquisitions, our products have increased in scale and become more strategically important and distinctly organized and managed under these two groupings. In addition, our chief operating decision maker ("CODM") has begun reviewing results and managing and allocating resources among these two strategic business groupings, and we have begun budgeting using these business segments. Our segment information for the nine months and quarter ended September 30, 2014 have been reclassified to conform to our current presentation.

 

 
20
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

16. SEGMENT INFORMATION, Continued

 

Our 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 sales in the "Eliminations and Other" column. The "Eliminations and Other" column also includes various income and expense items that we do not allocate to our operating segments. These income and expense amounts include the results of our 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 we have not identified a reasonable basis for allocation. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to the Consolidated Condensed Financial Statements.

 

Hydroponic Produce – Our locally grown hydroponic produce is started from seed and is grown in environmentally controlled greenhouses. When harvested, the products are sold through retailers targeted to customers seeking fresh produce locally grown using environmentally sustainable methods.

 

Cannabis Products – IVXX's cannabis products are currently produced in our supercritical Co2 lab in California and are sold in select dispensaries throughout California. We plan to operate medical marijuana cultivation, production, and dispensary facilities in Nevada through our subsidiaries, MediFarm, MediFarm I, and MediFarm II. We were granted eight provisional permits in Nevada and have received approval from the local authorities with respect to eight of the eight permits.

 

Summarized financial information concerning our reportable segments is shown in the following tables. Total asset amounts at September 30, 2015 and 2014 exclude intercompany receivable balances eliminated in consolidation.

 

 

 

3 Months Ended September 30, 2015

 

 

Hydroponic

 

 

Cannabis

 

 

Eliminations

 

 

 

 

 

 

Produce

 

 

Products

 

 

and Other

 

 

Total

 

Total Revenues

 

$1,597,378

 

 

$420,973

 

 

$-

 

 

$2,018,351

 

Cost of Goods Sold

 

 

1,370,804

 

 

 

290,256

 

 

 

(12,515)

 

 

1,648,545

 

 

 

 

226,574

 

 

 

130,717

 

 

 

12,515

 

 

 

369,806

 

Selling, general and administrative expenses

 

 

441,177

 

 

 

164,970

 

 

 

1,493,167

 

 

 

2,099,314

 

Loss from operations

 

 

(214,603)

 

 

(34,253)

 

 

(1,480,652)

 

 

(1,729,508)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

-

 

 

 

-

 

 

 

(258,306)

 

 

(258,306)

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

(263,950)

 

 

(263,950)

Loss from derivatives issued with debt greater than debt carrying value

 

 

 -

 

 

 

-

 

 

 

-

 

 

 

-

 

Gain (Loss) on fair market valuation of derivatives

 

 

-

 

 

 

-

 

 

 

372,400

 

 

 

372,400

 

Interest Income (Expense)

 

 

-

 

 

 

-

 

 

 

(108,563)

 

 

(108,563)

Total Other Income (Expense)

 

 

-

 

 

 

-

 

 

 

(258,419)

 

 

(258,419)

Loss before Provision of Income Taxes

 

$(214,603)

 

$(34,253)

 

$(1,739,071)

 

$(1,987,927)

  

 

 

3 Months Ended September 30, 2014

 

 

Hydroponic

 

 

Cannabis

 

 

Eliminations

 

 

 

 

 

 

Produce

 

 

Products

 

 

and Other

 

 

Total

 

Total Revenues

 

$1,311,850

 

 

$-

 

 

$3,123

 

 

$1,314,973

 

Cost of Goods Sold

 

 

1,247,308

 

 

 

-

 

 

 

3,727

 

 

 

1,251,035

 

 

 

 

64,542

 

 

 

-

 

 

 

(604)

 

 

63,938

 

Selling, general and administrative expenses

 

 

344,209

 

 

 

517,459

 

 

 

7,173,503

 

 

 

8,035,171

 

Loss from operations

 

 

(279,667)

 

 

(517,459)

 

 

(7,174,107)

 

 

(7,971,233)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from derivatives issued with debt greater than debt carrying value

 

 

-

 

 

 

-

 

 

 

(2,248,000

)

 

 

(2,248,000

)

Gain (Loss) on fair market valuation of derivatives

 

 

-

 

 

 

-

 

 

 

1,085,505

 

 

 

1,085,505

 

Interest Income (Expense)

 

 

-

 

 

 

-

 

 

 

(387,720)

 

 

(387,720)

Total Other Income (Expense)

 

 

-

 

 

 

-

 

 

 

(1,550,215)

 

 

(1,550,215)

Loss before Provision of Income Taxes

 

$(279,667)

 

$(517,459)

 

$(8,724,322)

 

$(9,521,448)

 

 
21
 

 

TERRA TECH CORP.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

  

16. SEGMENT INFORMATION, Continued

 

 

 

9 Months Ended September 30, 2015

 

 

Hydroponic

 

 

Cannabis

 

 

Eliminations

 

 

 

 

 

 

Produce

 

 

Products

 

 

and Other

 

 

Total

 

Total Revenues

 

$6,832,805

 

 

$852,745

 

 

$120,444

 

 

$7,805,994

 

Cost of Goods Sold

 

 

6,266,858

 

 

 

569,417

 

 

 

108,584

 

 

 

6,944,859

 

 

 

 

565,947

 

 

 

283,328

 

 

 

11,860

 

 

 

861,135

 

Selling, general and administrative expenses

 

 

1,373,976

 

 

 

721,104

 

 

 

5,697,365

 

 

 

7,792,445

 

Loss from operations

 

 

(808,029)

 

 

(437,776)

 

 

(5,685,505)

 

 

(6,931,310)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of debt discount

 

 

-

 

 

 

-

 

 

 

(524,161)

 

 

(524,161)

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

(263,950)

 

 

(263,950)

Loss from derivatives issued with debt greater than debt carrying value

 

 

-

 

 

 

-

 

 

 

(561,000

)

 

 

(561,000

)

Gain (Loss) on fair market valuation of derivatives

 

 

-

 

 

 

-

 

 

 

1,779,600

 

 

 

1,779,600

 

Interest Income (Expense)

 

 

-

 

 

 

-

 

 

 

(426,793)

 

 

(426,793)

Total Other Income (Expense)

 

 

-

 

 

 

-

 

 

 

3,696

 

 

 

3,696

 

Loss before Provision of Income Taxes

 

$(808,029)

 

$(437,776)

 

$(5,681,809)

 

$(6,927,614)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at September 30, 2015

 

$5,645,677

 

 

$1,105,796

 

 

$1,887,156

 

 

$8,638,629

 

   

 

 

9 Months Ended September 30, 2014

 

 

Hydroponic

 

 

Cannabis

 

 

Eliminations

 

 

 

 

 

 

Produce

 

 

Products

 

 

and Other

 

 

Total

 

Total Revenues

 

$5,465,186

 

 

$-

 

 

$121,907

 

 

$5,587,093

 

Cost of Goods Sold

 

 

5,488,662

 

 

 

-

 

 

 

132,040

 

 

 

5,620,702

 

 

 

 

(23,476)

 

 

-

 

 

 

(10,133)

 

 

(33,609)

Selling, general and administrative expenses

 

 

1,026,825

 

 

 

517,459

 

 

 

12,586,769

 

 

 

14,131,053

 

Loss from operations

 

 

(1,050,301)

 

 

(517,459)

 

 

(12,596,902)

 

 

(14,164,662)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from derivatives issued with debt greater than debt carrying value

 

 

-

 

 

 

-

 

 

 

(4,808,000

)

 

 

(4,808,000

)

Gain (Loss) on fair market valuation of derivatives

 

 

-

 

 

 

-

 

 

 

817,680

 

 

 

817,680

 

Interest Income (Expense)

 

 

2,601

 

 

 

-

 

 

 

(840,634)

 

 

(838,033)

Total Other Income (Expense)

 

 

2,601

 

 

 

-

 

 

 

(4,830,954)

 

 

(4,828,353)

Loss before Provision of Income Taxes

 

$(1,047,700)

 

$(517,459)

 

$(17,427,856)

 

$(18,993,015)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at September 30, 2014

 

$5,587,047

 

 

$2,000,990

 

 

$2,315,645

 

 

$9,903,682

 

  

17. RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2015, our subsidiary, IVXX, purchased raw materials totaling $233,735 from an entity in which our Chief Executive Officer has an ownership interest. IVXX also sold finished goods amounting to $336,357 to that same entity. The terms of the purchases of the raw materials and sales of the finished goods were at arms-length. There was no accounts receivable balance from this entity as of September 30, 2015.

 

18. SUBSEQUENT EVENTS

 

During the fourth quarter of 2015, senior secured convertible promissory notes and accrued interest in the amount of $880,350 was converted into 12,595,994 shares of common stock.

 

In the fourth quarter of 2015, pursuant to an effective Registration Statement on Form S-1, we sold 3,150,119 shares of common stock for the net amount of $271,801.

 

Subsequent to the end of the third quarter of fiscal 2015, on October 14, 2015, we formed MediFarm I RE. We own 50% of the membership interests in MediFarm I RE. The remaining membership interests is owned by Forever Young Investments, LLC (50%), an otherwise unaffiliated entity. MediFarm I RE acquired a retail building and land in Reno, Nevada for total consideration of $1,080,000. We intend to renovate the building, and, once completed, use it as a dispensary of medical cannabis.

 

 
22
 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

In addition to historical information, this Quarterly Report on Form 10-Q may contain "forward-looking statement" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which provides a "safe harbor" for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as "might," "will," "may," "should," "estimates," "expects," "continues," "contemplates," "anticipates," "projects," "plans," "potential," "predicts," "intends," "believes," "forecasts," "future," and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs, estimates, and projections will occur or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

 

There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties, and other important factors that could cause actual results to differ include, among others, the risk, uncertainties and factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (the "SEC"), and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov.

 

We caution you that the risks, uncertainties, and other factors set forth in our periodic filings with the SEC may not contain all of the risks, uncertainties, and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits, or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that: (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors' likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct, or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of the report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments, or otherwise.

 

Company Overview

 

We were incorporated in Nevada on July 22, 2008 under the name Private Secretary, Inc. We changed our name to Terra Tech Corp. on January 27, 2012. Our corporate headquarters is located at 4700 Von Karman Avenue, Suite 110, Newport Beach, California 92660 and our telephone number is (855) 447-6967. Our website addresses are as follows: www.terratechcorp.com, www.growopltd.com, www.ediblegarden.com, www.egrow.com, www.goodearthhydro.com, www.bestbuyhydro.com, and www.ivxx.com.

 

Our original business was to develop a software program that would allow for automatic call processing through "VoIP" technology. Our operations were limited to capital formation, organization, and development of our business plan and target customer market. We generated no revenue.

 

On February 9, 2012, we completed a reverse-triangular merger with GrowOp Technology Ltd., a Nevada corporation ("GrowOp Technology"), whereby we acquired all of the issued and outstanding shares of GrowOp Technology and in exchange we issued: (i) 33,998,520 shares of our common stock, (ii) 100 shares of Series A Preferred Stock, convertible into shares of common stock on a one-for-one basis, and (iii) 14,750,000 shares of Series B Preferred Stock, with each share convertible into 5.38425537 shares of common stock. The issuance represented approximately 50.3% of our total shares of common stock outstanding, assuming the conversion of all the shares of Series A Preferred Stock and Series B Preferred Stock, immediately following the closing of the merger. As a result of the merger, GrowOp Technology became our wholly-owned subsidiary. Following the merger, we ceased our prior operations and are now solely a holding company with two wholly-owned subsidiaries. We also own interests in three other subsidiaries. Through GrowOp Technology, we engage in the design, marketing, and sale of hydroponic equipment with propriety technology to create sustainable solutions for the cultivation of indoor agriculture.

 

 
23
 

 

We entered into a Share Exchange Agreement, dated March 23, 2013 (the "Share Exchange Agreement"), by and among the Company, Edible Garden Corp., a Nevada corporation ("Edible Garden"), and the stockholders of Edible Garden. Pursuant to the Share Exchange Agreement, we offered and sold 1,250,000 shares of common stock of the Company in consideration for all the issued and outstanding shares in Edible Garden. Separately, Amy Almsteier, one of our stockholders and a director (and, at that time, an officer) of ours, offered and sold 7,650,000 shares of Series B Preferred Stock to Ken Vande Vrede, Mike Vande Vrede, Steve Vande Vrede, Dan Vande Vrede, Beverly Willekes, and David Vande Vrede (the "Former EG Principal Stockholders"). The 7,650,000 shares of Series B Preferred Stock are convertible at any time into 36,344,198 shares of common stock and have voting power equal to 765,000,000 shares of common stock.

 

The effect of the issuance of the 1,250,000 shares of common stock of the company and the sale of the 7,650,000 shares of Series B Preferred Stock by Ms. Almsteier was that as of the date of the issuance and sale, the Former EG Principal Stockholders held approximately 25.7% of the issued and outstanding shares of common stock of the Company and approximately 43.3% of the voting power of the Company. Articles of Exchange, consummating the share exchange, were filed with the Secretary of the State of Nevada on April 24, 2013. Through Edible Garden, we are the retail seller of locally grown hydroponic produce.

 

We formed MediFarm, LLC, a Nevada limited liability company ("MediFarm") on March 19, 2014. We own 60% of the membership interests in MediFarm. The remaining membership interests are owned by Camden Goorjian (20%) and by Richard Vonfeldt (20%), two otherwise unaffiliated individuals. Upon receipt of the necessary governmental approvals and permitting, as to which there can be no assurance, we expect MediFarm to operate medical marijuana cultivation, production, and dispensary facilities in Clark County, Nevada and a medical marijuana dispensary facility in the City of Las Vegas.

 

We formed MediFarm I , LLC, a Nevada limited liability company ("MediFarm I") on July 18, 2014. We own 50% of the membership interests in MediFarm I. The remaining membership interests are owned by Forever Green NV, LLC (50%), an otherwise unaffiliated entity. Upon receipt of the necessary governmental approvals and permitting, as to which there can be no assurance, we expect MediFarm I to operate a medical marijuana dispensary in Reno, Nevada.

 

We formed MediFarm II LLC, a Nevada limited liability company ("MediFarm II") on July 30, 2014. We own 55% of the membership interests in MediFarm II. The remaining membership interests are owned by Nevada MF, LLC (30%) and by Forever Green NV, LLC (15%), two otherwise unaffiliated parties. Upon receipt of the necessary governmental approval and permitting, as to which there can be no assurance, we expect MediFarm II to operate a medical marijuana cultivation and production facility in Spanish Springs, Nevada.

 

On September 16, 2014, we formed IVXX, LLC, a Nevada limited liability company ("IVXX") for the purpose of producing a line of cannabis flowers and cigarettes, as well as a complete line of cannabis pure concentrates, including: oils, waxes, shatters, and clears. We currently offer these products to one hundred select dispensaries in California. IVXX also sells clothing, apparel, and other various branded products.

 

We formed MediFarm I Real Estate, LLC, a Nevada limited liability company ("MediFarm I RE") on October 14, 2015. We own 50% of the membership interests in MediFarm I RE. The remaining membership interests is owned by Forever Young Investments, LLC (50%), an otherwise unaffiliated entity. MediFarm I RE is a real estate holding company that owns the real property and building at which a medical marijuana dispensary facility will be located. It is our intention that MediFarm I will operate the medical marijuana dispensary.

 

During our third quarter of 2015, MediFarm received approval for two medical cannabis dispensaries in Clark County, Nevada.

  

Our business segments consist of hydroponic produce and cannabis products. Our hydroponic produce is locally grown hydroponic produce that is started from seed and is grown in environmentally controlled greenhouses. When harvested, the products are sold through retailers targeted to customers seeking fresh produce locally grown using environmentally sustainable methods. This segment consists of Edible Garden's business and operations. Our cannabis products segment consists of IVXX's business, as well as the proposed business operations of MediFarm, MediFarm I, and MediFarm II. IVXX's cannabis products are currently produced in our supercritical Co2 lab in California and are sold in select dispensaries throughout California. We plan to operate medical marijuana cultivation, production, and dispensary facilities in Nevada through our subsidiaries, MediFarm, MediFarm I, and MediFarm II. We were granted eight provisional permits in Nevada and have received approval from the local authorities with respect to eight of the eight permits. See Note 16, Segment Information, in the Notes to the Consolidated Condensed Financial Statements for information on our net sales, cost of goods sold, selling, general and administrative expenses, other income (expense), loss from operations, and identifiable assets by segment for the three and nine months ended September 30, 2015 and September 30, 2014. We believe that our ramped up marketing and branding efforts position us to stay on track for annual revenues this year of approximately $9 million.

  

 
24
 

 

Results of Operations for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014:

 

Revenues. For the quarter ended September 30, 2015, we generated revenues of approximately $2.0 million, compared to approximately $1.3 million for the quarter ended September 30, 2014, an increase of approximately $703,000. The increase was primarily due to revenue generated by Edible Garden for the sales of its herbs and floral products and IVXX from the sale of its cannabis products. During the 2015 period, Edible Garden entered into an agreement with another high-profile grocery retailer. At this stage in our development, revenues are not yet sufficient to cover ongoing operating expenses.

 

Gross Margin. Our gross profits for the quarter ended September 30, 2015 was approximately $370,000, compared to a gross profits of approximately $64,000 for the quarter ended September 30, 2014, an increase of approximately $306,000. Our gross margin percentage for the quarter ended September 30, 2015 was approximately 18%, compared to approximately 5% for the quarter ended September 30, 2014. The increase in gross margin was primarily due to better margins from Edible Garden as a result of the completed greenhouse facility with high-tech Dutch bucket hydroponic equipment and the sales generated from IVXX from the sale of its cannabis products.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended September 30, 2015 were approximately $2.1 million, compared to approximately $8.0 million for the quarter ended September 30, 2014, a decrease of approximately $5.9 million. The decrease was primarily due to: (i) an approximately $51,000 increase in depreciation for additional farm equipment used by Edible Garden; (ii) an approximately $18,000 increase in advertising for the promotion of the IVXX brand; (iii) an approximately $64,000 increase in allowance for doubtful accounts; and (iv) an approximately $32,500 increase in consulting in connection with MediFarm's, MediFarm I's, and MediFarm II's proposed cannabis business in Nevada. These increases were offset by: (i) director fees of approximately $63,700 during the third quarter of fiscal 2015, a decrease of approximately $42,300, as compared to $106,000 in director fees that were recognized in the third quarter of fiscal 2014, and (ii) travel costs of approximately $60,500 during the third quarter of fiscal 2015, a decrease of approximately $45,500, as compared to approximately $106,000 that were incurred during the third quarter of fiscal 2014 in connection with the Nevada permit application fee. Additionally, business permit fees decreased by approximately $58,000 in the third quarter of fiscal 2015 in comparison with the equivalent quarter of fiscal 2014. Compensation expense decreased by approximately $1.4 million in the third quarter of fiscal 2015 due to a lower per share valuation for an equivalent number of shares as compared to the same period of the prior fiscal year. Further, there was an approximately $2.5 million decrease in legal and accounting expenses between the periods, primarily related to the preparation and filing of registration statements and reviewing of contracts performed in the prior year. Lastly, warrant expense decreased over the prior year's period by approximately $2.1 million primarily due to no warrants issued in the current period.

 

Operating Income (Loss). We realized an operating loss of approximately $1.7 million for the quarter ended September 30, 2015, compared to approximately $7.9 million for the quarter ended September 30, 2014.

 

Other Income (Expense). Other income for the quarter ended September 30, 2015 was approximately $258,000, compared to an expense of approximately $1.6 million for the quarter ended September 30, 2014. For the quarter ended September 30, 2015, we had an increase in amortization of debt discount in the amount of approximately $258,000 versus $0 in the prior year's period. We had a loss on the extinguishment of debt of approximately $264,000 versus $0 in the prior's year's period. We had a loss on the issuance of derivatives in the amount of $0 for the quarter ended September 30, 2015, compared to approximately $2.2 million. The decrease of approximately $2.2 million was due to the fact that no convertible notes were issued during the third quarter of fiscal 2015. We had a gain on the fair market valuation of the derivatives in the amount of $372,400 for the quarter ended September 30, 2015, compared to a gain of approximately $1.1 million from the same period of the prior year. Interest expense totaled approximately $109,000 for the quarter ended September 30, 2015, compared to approximately $387,700 for the quarter ended September 30, 2014. This decrease is due to less debt outstanding during the quarter ended September 30, 2015.

 

Net Income (Loss). We incurred a net loss of approximately $ 2.0 million, or $0.01 per share, for the quarter ended September 30, 2015, compared to a net loss of approximately $9.5 million, or $0.05 per share, for the quarter ended September 30, 2014. The primary reasons for the improvement in net loss is an increase in revenue, a decrease in cost of goods sold (as a percentage of revenue), a significant decrease in sales, general and administrative expenses, and a reduction in the issuance of convertible debt and warrants during the quarter ended September 30, 2015 compared to the prior year's third quarter.

 

Management will continue its efforts to lower operating expenses and increase revenue. We will continue to invest in further expanding our operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting our name and our products. Given the fact that most of the operating expenses are fixed or have a quasi-fixed character, management expects that, as revenue increases, those expenses, as a percentage of revenue, will significantly decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in succeeding quarters.

 

 
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Results of Operations for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014:

 

Revenues. For the nine months ended September 30, 2015, we generated revenues of approximately $7.8 million compared to approximately $5.6 million for the nine months ended September 30, 2014, an increase of approximately $2.2 million. This increase was primarily due to revenue generated by Edible Garden for the sales of its herbs and floral products and IVXX from the sale of its cannabis products. During the 2015 period, Edible Garden entered into an agreement with a high-profile grocery retailer. At this stage in the Company's development, revenues are not yet sufficient to cover ongoing operating expenses.

 

Gross Margin. Our gross profits for the nine months ended September 30, 2015 was approximately $861,100, compared to a negative gross profit of approximately $33,600 for the nine months ended September 30, 2014, an increase of approximately $894,700. Our gross margin percentage for the nine months ended September 30, 2015 was approximately 11.0%, compared to approximately (0.60%) negative gross margin percentage for the nine months ended September 30, 2014. The increase in gross margin was primarily due to better margins from Edible Garden as a result of the completed greenhouse facility with high-tech Dutch bucket hydroponic equipment and the sales generated from IVXX from the sale of its cannabis products.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2015 were approximately $7.8 million, compared to approximately $14.1 million for the nine months ended September 30, 2014, a decrease of approximately $6.3 million. The decrease was primarily due to: (i) an approximately $168,400 increase in depreciation for additional farm equipment used by Edible Garden; (ii) an approximately $234,300 increase in advertising for the promotion of the IVXX brand; (iii) an approximately $164,500 increase in allowance for doubtful accounts; (iv) an approximately $31,300 expense for Directors' and Officers' liability insurance; (v) an approximately $206,000 increase in consulting fees related to the cannabis business; (vi) an approximately $39,200 increase in filing fees related to the proposed construction of MediFarm's, MediFarm I's, and MediFarm's II facilities; and (vii) an approximately $144,900 increase in rent for the additional properties leased in connection with MediFarm's, MediFarm I's, and MediFarm II's proposed cannabis business in Nevada. These increases were offset by (i) director fees of approximately $127,500, a decrease of approximately $302,500, as compared to $430,000 in directors fees that were recognized in the first nine months of fiscal 2014, and (ii) travel costs of approximately $163,300, a decrease of approximately $99,400, compared to approximately $262,700 in travel costs that were incurred during the first nine months of fiscal 2014 in connection with the Nevada permit application fee. Compensation expense also decreased by approximately $343,600 due to a lower per share valuation for an equivalent number of shares as compared to the same period of the prior fiscal year. Additionally, there was an approximately $2.7 million decrease in legal and accounting expenses primarily related to the preparation and filing of registration statements and reviewing of contracts performed in the same period pf the prior year. Warrant expense decreased by approximately $3.9 million as compared to the same period of the prior year primarily due to less warrants being issued in the current period.

 

Operating Income (Loss). We realized an operating loss of approximately $6.9 million for the nine months ended September 30, 2015, compared to an operating loss of approximately $14.1 million for the nine months ended September 30, 2014.

 

Other Income (Expense). Other income for the nine months ended September 30, 2015 was approximately $3,700, compared to an expense of approximately $4.8 million for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, we had an increase in amortization of debt discount in the amount of approximately $524,200 versus $0 in the prior year period. We had a loss on the extinguishment of debt of approximately $264,000 in the nine months ended September 30, 2015 versus $0 in the prior's year's period. We had a loss on the issuance of derivatives in the amount of $561,000 for the nine months ended September 30, 2015, compared to approximately $4.8 million for the nine months ended September 30, 2014, a decrease of approximately $4.2 million, due to fewer convertible notes being issued during the first nine months of fiscal 2015. We had a gain on the fair market valuation of the derivatives in the amount of approximately $1.8 million for the nine months ended September 30, 2015, compared to a gain of approximately $817,700 in the prior's year period. Interest expense totaled approximately $426,800 for the nine months ended September 30, 2015, compared to $838,000 for the nine months ended September 30, 2014. The decrease is due to less debt outstanding during the nine months ended September 30, 2015.

 

Net Income (Loss). We incurred a net loss of approximately $6.8 million, or $0.03 per share, for the nine months ended September 30, 2015, compared to a net loss of approximately $19.0 million, or $0.11 per share, for the nine months ended September 30, 2014. The primary reasons for the improvement in net loss is an increase in revenue, a decrease in cost of goods sold (as a percentage of revenue), a significant decrease in sales, general and administrative expenses, and a reduction in the issuance of convertible debt and warrants issued during the nine months ended September 30, 2015 compared to the first nine months of fiscal 2014.

 

 
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Management will continue to make an effort to lower operating expenses and increase revenue. We will continue to invest in further expanding our operations and a comprehensive marketing campaign with the goal of accelerating the education of potential clients and promoting our name and our products. Given the fact that most of the operating expenses are fixed or have a quasi-fixed character management expects that, as revenue increases, those expenses, as a percentage of revenue, will significantly decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in succeeding periods.

 

Disclosure About Off-Balance Sheet Arrangements

 

We do not have any transactions, agreements or other contractual arrangements that constitute off-balance sheet arrangements.

 

Critical Accounting Policies

 

Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described in Note 1, Summary of Significant Accounting Policies, to the consolidated condensed financial statements included in this report.

 

Liquidity and Capital Resources

 

We have never reported net income. We incurred net losses for the nine months ended September 30, 2015 and have an accumulated deficit of approximately $43.5 million at September 30, 2015. As of September 30, 2015, we had a working capital deficit of approximately $402,000. At September 30, 2015, we had a cash balance of approximately $1,367,600, compared to a cash balance of approximately $846,700 at December 31, 2014. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through private sales of preferred stock, common stock, and debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.

 

We anticipate requiring additional capital for the commercial development of our subsidiaries. Assuming MediFarm, MediFarm I, and MediFarm II receive all the necessary permits and licenses applied for, we anticipate we will need an additional $11 million in capital for the commercial development of these subsidiaries. Because none of MediFarm, MediFarm I,or MediFarm II has commenced operations, the $11 million budget as described herein is prospective. With respect to MediFarm, the estimated construction budget (for year one) and operation budget (for the first five years of operation) is approximately $500,000 for the dispensary facilities and approximately $5 million for the cultivation and production facility. With respect to MediFarm I's dispensary facility, the estimated construction budget (for year one) and operation budget (for the first five years of operation) is approximately $500,000. With respect to MediFarm II's cultivation and production facility, the estimated construction budget (for year one) and operation budget (for the first five years of operation) is approximately $5 million. Forever Green NV, LLC, a member of both MediFarm I and MediFarm II, has agreed to contribute approximately $500,000 in the form of debt to MediFarm I and approximately $750,000 in the form of debt to MediFarm II. We will be obligated to contribute the remaining amount, or approximately $9.75 million in the aggregate, for all three subsidiaries. This amount is in addition to any proceeds we may receive if and when we sell additional securities.

 

With respect to GrowOp Technology, we anticipate needing approximately $110,000 for the commercial development of this subsidiary, which includes anticipated expenses for purchasing, marketing, and selling of a new line of double ended lighting. This amount is in addition to any proceeds we may receive if and when we sell additional securities.

 

 
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With respect to IVXX, we anticipate requiring $400,000 for working capital, inventories, salaries for sales personnel, and software. This amount is in addition to any proceeds we may receive if and when we sell additional securities.

 

We intend to raise additional capital through equity and debt financing as needed, although there cannot be any assurance that such funds will be available to us on acceptable terms, on an acceptable schedule, or at all.

 

We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenues to a point of positive cash flow. We believe our existing and available capital resources will be sufficient to satisfy our funding requirements through the third quarter of 2016. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling common stock. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support its operations.

 

The issuance of additional securities may result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.

 

Due to the uncertainty of our ability to meet our current operating and capital expenses, our independent auditors included a note to our financial statements for the year ended December 31, 2014 regarding concerns about our ability to continue as a going concern. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and achieving a profitable level of operations. The consolidated condensed financial statements do not include any adjustments relating to the recoverability or classification of recorded assets and liabilities that might result should the Company be unable to continue as a going concern.

 

Promissory Notes

 

Fiscal 2015

 

On February 27, 2015, we entered into a Securities Purchase Agreement with certain purchasers relating to the issuance and sale of (i) 12% Convertible Promissory Notes in the aggregate principal amount of Three Million Dollars ($3,000,000), that are convertible into shares of our common stock, and (ii) warrants to acquire shares of our common stock. The purchase of the notes is expected to occur in six (6) tranches, with the first tranche of $750,000 closing simultaneously with the execution of the agreement. The second tranche of $450,000 closed on April 6, 2015 and the third tranche of $450,000 closed on May 12, 2015. We agreed to reimburse the purchasers $15,000 for legal fees incurred in connection with the offering that was paid at the closing of the first tranche. Aegis Capital Corp. ("Aegis"), the placement agent, was paid approximately $68,000 at the closing of the first, second and third tranches and will be paid additional compensation at each subsequent closing.

 

Each note accrues interest at 12% per annum, of which twelve months interest is guaranteed, payable on each conversion date for the principal amount being converted and on the maturity date in either cash or, at the holder's option, in shares of common stock. All principal and interest due and owing under each note is convertible into shares of our common stock, at any time at the election of the holder, at a conversion price equal to 75% of the lowest VWAP in the prior 20-trading days immediately before the conversion date. We also agreed to issue to the purchasers a series of warrants to purchase up to that number of shares of common stock equal to 25% of the principal amount of the note issuable to the purchasers at the applicable closing divided by the conversion price of the note.

 

Fiscal 2014

 

During the year ended December 31, 2014, we issued secured promissory notes, which supplied the funds that we needed to finance our operations during the reporting period. Such new borrowings resulted in the receipt by us of $7,344,737. The proceeds received by us include the sale of an aggregate of $6,550,000, net of a five percent original issue discount ("OID"), of promissory notes to Dominion Capital, LLC ("Dominion"). The OID, aggregated, is approximately $344,737. All principal and interest due and owing under each such note is convertible into shares of common stock at a conversion price equal to approximately $0.30753 per share, subject to adjustment. Each such note accrues interest at a rate of 12% per annum and has a maturity date of 18 months after issuance. The notes were sold to Dominion at various times from February 2014 through July 2014. In connection with the issuance of the notes to Dominion, we also issued to Dominion warrants to purchase up to that number of shares of common stock equal to 50% of the principal amount of the notes issuable divided by the conversion price. As of February 5, 2014, the date we entered into the purchase agreement with Dominion, the warrants were exercisable for a total of 11,491,228 shares of common stock.

 

 
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In addition, related parties contributed $102,500 in fiscal year 2011 in exchange for unsecured non-convertible note payables. We repaid these notes in March of 2014, and therefore have no further obligations.

 

We have advanced Palm Creek approximately $36,788. Palm Creek is repaying this on a monthly basis. This advance will be repaid by Palm Creek by offsetting each shipment of herbs, which we anticipate will equal between $20,000 and $24,000 per month.

 

Operating Activities

 

Cash used in operations for the nine months ended September 30, 2015 was approximately $3.4 million, compared to approximately $5.9 million for the nine months ended September 30, 2014.The decrease in the cash used in operations was primarily due to: (i) an improvement in net loss for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014; (ii) an approximately $1.8 million gain on the fair market value of derivatives for the nine months ended September 30, 2015, compared to an approximately $817,700 gain on the fair market value of derivatives for the nine months ended September 30, 2014; (iii) the increase in the amortization of debt discount of approximately $524,100 for the nine months ended September 30, 2015 versus $0 for the nine months ended September 30, 2014; (iv) the reduction of warrant expense of approximately $1.1 million for the nine months ended September 30, 2015, compared to approximately $5.0 million for the nine months ended September 30, 2014; (v) a reduction in stock issued for compensation and services in the amount of approximately $1.3 million for the nine months ended September 30, 2015, compared to approximately $4.6 million for the nine months ended September 30, 2014; (vi) a reduction from the equity instruments issued with debt greater than debt carrying value in the amount of $561,000 for the nine months ended September 30, 2015, compared to approximately $4.1 million for the nine months ended September 30, 2014; and (vii) an approximately $1.1 million increase in accounts payable.

 

Investing Activities

 

Cash used in investing activities for the nine months ended September 30, 2015 was approximately $590,200, compared to cash used by investing activities of approximately $2.0 million for the nine months ended September 30, 2014. During the first nine months of fiscal 2014, cash used in investing activities was primarily comprised of expenditures related to the construction of Edible Garden's greenhouse facility and related equipment.

 

Financing Activities

 

Cash provided by financing activities for the nine months ended September 30, 2015 was approximately $4.5 million, compared to $11.3 million for the nine months ended September 30, 2014, a decrease of approximately $6.8 million. The cash provided by financing activities in the first nine months of fiscal 2015 was primarily due to approximately $1.7 million received in connection with the issuance of secured promissory notes and approximately $3.0 million from the sale of common stock.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by this Item 3.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Under the supervision and with the participation of our management, our principal executive officer and our principal financial officer are responsible for conducting an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the fiscal year covered by this report. Disclosure controls and procedures means that the material information required to be included in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were not effective as of September 30, 2015.

 

There were no changes in our internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We are not currently subject to any legal proceedings. From time to time, we may become subject to litigation or proceedings in connection with our business, as either a plaintiff or defendant. There are no such pending legal proceedings to which we are a party that, in the opinion of management, is likely to have a material adverse effect on our business, financial condition or results of operations.

 

ITEM 1A. RISK FACTORS.

 

There have been no material changes to the risk factors disclosed in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for our fiscal Year ended December 31, 2014. Please refer to that section for disclosures regarding the risk and uncertainties relating to our business.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

None.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 
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ITEM 6. Exhibits

 

(a)

 

10.26

Form of Independent Director Agreement *

 

 

10.27

Form of Indemnification Agreement *

 

 

31.1Certification of Derek Peterson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

31.2Certification of Michael C. James, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

 

32.1 Certification of Derek Peterson, Chief Executive Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *

 

 

32.2Certification of Michael C. James, Chief Financial Officer, pursuant to Sections 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. *

 

 

101.INS

XBRL Instance Document *

 

 

101.SCH

XBRL Taxonomy Extension Schema Document *

 

 

101.CAL

XBRL Taxonomy Extension Calculations Linkbase Document *

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document *

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document *

 

 

101.PRE

XBRL Taxonomy Presentation Linkbase Document *

 ______________

* filed herewith

 

 
31
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TERRA TECH CORP.

 

    
Date: November 9, 2015By:/s/ Michael C. James

 

 

 

Michael C. James

 

 

 

Chief Financial Officer

 

 

 

Chief Accounting Officer

 

 

 

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