Annual report pursuant to Section 13 and 15(d)

ACQUISITIONS

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ACQUISITIONS
12 Months Ended
Dec. 31, 2016
Notes to Financial Statements  
Note 4. ACQUISITIONS

Therapeutics Medical

 

On March 10, 2016, we acquired finished goods inventory, trademarks, a patent, and a customer list along with vendor numbers from Therapeutics Medical, a company which had previously been engaged in the research, development, and marketing of nutraceutical supplements. The assets were acquired at auction and were selected from among a group of assets held for sale by Therapeutics Medical. The total consideration transferred in connection with the acquisition was $1,250,000. The Company acquired the finished goods inventory, which was valued at replacement cost in the amount of $58,622. The trademarks of certain brands were valued at $300,000 based on an estimated royalty approach. The patent was valued at $3,078. The customer list with vendor numbers was valued at $888,300 based on an estimate of the cost to enter into such relationships. The Company complied with ASC 350 and accounted for the Therapeutics Medical transaction as an asset purchase. As consideration for the asset purchase, we issued a $1,250,000 principal amount convertible promissory note due September 10, 2017, which accrues interest at the rate of one percent per annum, and is convertible into shares of the Company’s common stock at a conversion price equal to 90% of the average of the lowest three volume-weighted average prices of one share of common stock for the five consecutive trading days prior to the conversion date. During October 2016, the convertible promissory note was converted into 2,837,899 shares of common stock at a weighted-average price of $0.44 per share.

 

The Company determined that the trademarks, patent, and customer list with vendor numbers have a definite useful life because of legal, regulatory, or contractual provisions that limit the useful life of the assets and therefore, the assets will be amortized over the estimated useful life as follows:

 

  · Customer List with Vendor Numbers – Management has determined that the asset will be amortized over a five-year life based on its estimate of customer life of the relationship.
     
  · Trademarks of the Brands – Management determined that the life of the brand can last on average from eight to twelve years. Management determined that the life of the brands shall be ten years from the date of the brand launch. The Company has classified the trademarks of the brands in three categories based on the estimated remaining lives. Category I was the newest brand launched. Management determined that it has eight years remaining. Therefore, they will be amortized over the remaining years. Category II was the second newest brand launched. Management has determined that it has four years remaining. Therefore, they will be amortized over the remaining years. Category III was the oldest brand launched. Management has determined that it has two years remaining.
     
  · Patent – The process patent acquired is directly associated with the Category III brands and should have the same amortization life as the brand. Management determined that it has two years remaining. Therefore, they will be amortized over the remaining years.

 

The following table summarizes the allocation of a purchase price of $1,250,000:

 

Finished Goods Inventory   $ 58,622  
Brands     300,000  
Patent     3,078  
Customer Relationships     888,300  
         
Total Assets Acquired   $ 1,250,000  

 

Refer to “Note 10 – Contingent Consideration (Therapeutics Medical)” for further information.

 

Black Oak Gallery

 

On April 1, 2016, we acquired all of the assets of Black Oak. The acquisition of Black Oak was accounted for in accordance with ASC 805-10, “Business Combinations.” The assets consisted primarily of the intellectual property and established marketing associated with the brand name “Blüm,” including its website, www.blumoak.com, the medical marijuana dispensary license, and customer relationships.

 

The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending the finalization of a third-party valuation, which was obtained in December 2016.

 

The table below represents the allocation of the preliminary purchase price to the assets acquired and liabilities assumed that were recognized at the closing date, the adjustments made as a result of purchase price adjustments during the second and third quarters of 2016, and the final purchase price amounts based on the final third-party valuations:

 

    Preliminary           Final  
    as of           as of  
    04/01/16     Adjustments     12/31/16        
                         
Current Assets (Inclusive of Cash of $163,566)   $ 792,447     $ –     $ 792,447        
Property, Plant and Equipment     681,896       –       681,896        
Customer Relationships     7,480,800       379,200       7,860,000 *      
Trade Name     4,280,000       1,040,000       5,320,000 *      
Dispensary License     8,214,700       2,055,300       10,270,000 *      
Liabilities     (2,355,938 )     –       (2,355,938 )      
                               
Total Identifiable Net Assets     19,093,905       3,474,500       22,568,405        
Goodwill     32,395,760       (3,474,500 )     28,921,260        
                               
Net Assets   $ 51,489,665     $ –     $ 51,489,665        

________________

* The Company relied on an independent third-party expert appraiser valuation report in valuing certain assets which included Customer Relationships, Trade Name and Dispensary License.

 

The estimated purchase price of Black Oak (for accounting purposes) was $51,489,665. The purchase price was determined based on the value of the shares of our common stock issuable upon conversion of the various series of preferred stock issued in connection with the acquisition, or $0.2620 per share of common stock, which was the closing sales price of our common stock on April 1, 2016, as quoted on the OTC Market Group Inc.’s OTCQX tier.

 

The purchase price represents the sum of:

 

  (i) the issuance of approximately 1,176 shares of our Series Z Preferred Stock (or, upon conversion, 11,759,242 shares of our common stock), approximately 1,248,300 shares of our Series B Preferred Stock (or, upon conversion, 6,721,254 shares of our common stock), and approximately 3,696 shares of our Series Q Preferred Stock (or, upon conversion, 18,480,493 shares of our common stock), which collectively, were converted into 36,960,989 shares of our common stock (the “Closing Consideration”); and
     
  (ii) the issuance of approximately 4,210 shares of our Series Z Preferred Stock (or, upon conversion, 42,098,295 shares of our common stock), approximately 4,468,872 shares of our Series B Preferred Stock (or, upon conversion, 24,061,862 shares of our common stock), and approximately 8,945 shares of our Series Q Preferred Stock (or, upon conversion, 44,722,796 shares of our common stock), which collectively, were converted into approximately 110,882,953 shares of our common stock (the “Lockup Consideration”); and

 

 

  (iii) the issuance of approximately 2,781 shares of our Series Z Preferred Stock (or, upon conversion, 27,804,112 shares of our common stock), approximately 2,951,528 shares of our Series B Preferred Stock (or, upon conversion, 15,891,988 shares of our common stock), and approximately 8,739 shares of our Series Q Preferred Stock (or, upon conversion, 43,696,102 shares of our common stock), which collectively, were converted into approximately 87,392,202 shares of our common stock (the “Holdback Consideration”); and
     
  (iv) the contingent cash consideration of up to $2,088,000 pursuant to certain earn-out provisions set forth in the Merger Agreement, payable to the Group B Shareholders (the “Performance-Based Cash Consideration”).

 

Closing Consideration – Pursuant to the Merger Agreement, the Closing Consideration was issued and paid on April 1, 2016, the closing date.

 

Lockup Consideration – Pursuant to the Merger Agreement, the Lockup Consideration was issued on April 1, 2016, the closing date; however, such shares will be held in an escrow account for a period of one year.

 

Holdback Consideration – Pursuant to the Merger Agreement, Holdback Consideration was issued on April 1, 2016, the closing date; however, such shares will be held in an escrow account for a period of one year as security for the satisfaction of any post-closing adjustments or indemnification claims as provided for in the Merger Agreement.

 

Performance-Based Cash Consideration – Pursuant to the Merger Agreement, the Performance-Based Cash Consideration is to be paid in cash on approximately the one-year anniversary date of the Merger Agreement and is subject to certain holdback provisions. Accordingly, the Performance-Based Cash Consideration is unpaid and recorded as contingent consideration as security for the satisfaction of any post-closing adjustments or indemnification claims as provided for in the Merger Agreement.

 

The below chart outlines a summary of the purchase price:

 

Purchase Price Detail  

Series B

Preferred Stock

   

Series Q

Preferred Stock

   

Series Z

Preferred Stock

    Preferred Stock Converted into Common Stock    

Total

Consideration

 
                               
Closing Consideration     1,248,300       3,696       1,176       36,960,989     $ 9,683,779  
Lockup Consideration     4,468,872       8,945       4,210       110,882,953       29,051,334  
Holdback Consideration     2,951,528       8,739       2,781       87,392,202       11,324,969  
Performance-Based Cash Consideration     –       –       –       –       1,429,583  
                                         
Totals     8,668,700       21,380       8,167       235,236,144     $ 51,489,665  

 

The Series Q Preferred Stock was converted into 106,890,000 shares of common stock in September 2016. The Series Z Preferred Stock was converted into 15,164,262 shares of Series B Preferred Stock in September 2016.

 

Refer to “Note 10 – Contingent Consideration (Black Oak Gallery)” for further information.

 

The supplemental pro forma information below is based on estimates and assumptions that we believe are reasonable. The pro forma information presented is not necessarily indicative of the consolidated results of operations in future periods or the results that actually would have been realized had the acquisition occurred on January 1, 2015. The supplemental pro forma results below exclude any benefits that may result from the acquisition due to synergies that are expected to be derived from the elimination of any duplicative costs

  

The supplemental pro forma information, as if the acquisition had occurred on January 1, 2015 is as follows:

    

    Pro Forma Results of Operations  
   

For the Years Ended

December 31,

(Unaudited)

 
    2016     2015  
Revenues   $ 28,700,238     $ 22,934,825  
                 
Net Loss Attributable to Terra Tech Corp.   $ (27,398,237 )   $ (11,189,033 )
                 
Net Loss per Common Share Attributable to Terra Tech Corp. Common Stockholders - Basic and Diluted   $ (0.07 )   $ (0.05 )